How to budget for repairs and capex

Question

How do you guys budget for repairs and capex expenses when estimating cash flow. I have heard people recommend using a percentage of rent but that method doesn't seem practical to me for a variety of reasons. Are there other methods like a fixed dollar amount based on the size of the house, age of the house, etc that you use instead of a percentage of rent?

Tesho Akindele · Answer

@Nathan G. I like the idea of going through all the major items in the house one by one and estimating the remaining life span. I also understand how 10% of the rent is a good starting point, but some houses rent for $2500 and others for $500. Most capex expenses are going to be a similar price in both of those houses, so using 10% of rent might be a little bit less accurate.

Nathan Gesner · Answer

No, you can't always use a percentage, but it's a starting point and it's generally accurate enough to avoid disaster. For example, 10% of rent in LA may be $400 while 10% of a similar home in my market may be $150. However, I probably have lower taxes, lower turnover costs, and other variables. In most single family investments, 50% of rent should be allocated to expenses (taxes, insurance, maintenance, capex, PM, vacancy, etc). If you prefer, you can really crunch the numbers and come up with a more specific calculation for each situation, but I think you'll find 50% is sufficient most of the time.

Tesho Akindele · Answer

@David A. It seems like the most accurate method would be to estimate the remaining life of each item in the house and budget based on that. The problem is that takes a lot of work and probably isn’t something you can do before making an offer in most cases.

Do you have any methods you use that are more accurate than a percentage, but quicker than going item by other?

Nathan Gesner · Answer

Generally speaking, 10% of rent income for each. However, it depends on the situation. If you're buying a brand new house, your capex requirements should be 10 - 20 years away. If you buy an older home, it may have a roof with only ten years of life span left. Do you have a driveway that will be used by two vehicles or is it a multi-family parking lot that will be used by 20 vehicles and guests?

Look at your property to make a list of capex needs. Estimate the remaining life span of each item and the cost of repair or replacement. If you determine the life span of your roof is ten years and it will take $10,000 to replace it, then you know you'll need about $1,000 a year set aside to pay for the replacement roof.