Am I estimating CapEx and repairs too high?

Question

When evaluating deals for those 80k-100k SFRs in Indy, I allocate 10% of the rent for maintenance/repairs, and additional 180$/month for CapEx, per the computation at: https://www.biggerpockets.com/.... On the one hand, I think evaluation CapEx in the way explained in the link makes sense. On the other hand, for a 1000$/month rental, I allocate in total 280$/month for fixing thing in the house (100 repairs + 180 capex), which sounds excessive.

I want to hear from actual landlords, what is a fair estimation here? Do you really need 1200$/year for small repairs? Do you really need to paint the entire house and replace flooring for a total of ~5k every 5-6 years? How much do you actually spend on those things?

Sean McCluskey · Answer

Hi @Gil Keren, I know exactly where you're coming from. When I started underwriting deals I was doing a direct capex calc including the estimated remaining useful life of the major systems, etc.

But in a hot market like Indy (which is now much hotter), it was hard to find deals that priced low enough to make that work.

What I decided was to have a moderate allocation and take a portfolio approach. If you have 5+ houses, you can reserve less from the rent from each, and keep an emergency fund via a HELOC etc. So when the water heater goes out a 1, you can pay for that from that months cash flow (or worst case, from the emergency fund) and not have any issues making your mortgage payments.

Jeremy Johnson · Answer

I agree with most everyone here.  Your expenses are based on the age of the systems, the age of the home, and what quality of renovation was done.  We do spend a bit more on more durable systems when we renovate properties, but most go with the cheapest and it shows down the road.  I have actually started a book with discussions from inspectors and property managers about determining the risks levels in a home for cap-ex, keeping tenants etc based on the listing of a property.  The amount held for cap-ex really does depend on a number of factors.  I also agree that once you hold a few you can relax the total amount held per property.  Early on with my first property I took every dollar of "profit" and held it until I had enough in reserve to feel like I could then call it actual profit.  Over estimate costs, under estimate income and hold all money for the first year at a minimum, that would be my advice.

Matt M. · Answer

@Gil Keren

I’m guessing you are new to investing? There is really no way to judge how long cosmetic items will last, paint/flooring/etc.

you can have a tenant destroy a house in 6 months or less.

One of my properties I rehabbed in January 2016. I’ve painted the interior twice since then.

Best to be safe and save $, especially if you plan on being OOS.

Mike D'Arrigo · Answer

@Gil Keren are you also accounting for the depreciation tax benefit? You can't count CAP Ex if you don't also count the offsetting depreciation tax deduction. The IRS allows properties to be depreciated specifically for repairs and replacement over the life of an asset. You'll get an inaccurate picture if you don't account for both.

Krystal Maldonado · Answer

@Gil Keren, I think it depends on the year of the house you bought and the strength of the systems you have in place. I live in Indy. A lot of the houses like that have a lot of little things go wrong until you have them fixed properly not the cheapest, throw a bandaid way. If the house is newer, less expenses. Built in 1920? Have a higher limit. I've also seen homes owned by landlords v private owners have much more issues due to the bandaid thing. Have a good PM and realtor who can help you spot things. I like to over estimate repairs/capex the first year of a home and then adjust later.

Steve K. · Answer

I was half joking. But $560/month actually sounds reasonable. Do yourself a favor and calculate an actual budget for the property, don’t use a simple percentage-based system. I would look at all the major expenses you’re likely to have during your hold period, (Roof, water heater, driveway, Sewer line, furnace/HVAC, paint and carpet/floors every turnover, appliances, etc. depending on how old each of those items are and how long you plan to hold, plus few thousand here an there for that nightmare tenant who ruins everything, the hail storm, the plumbing leak that happens when your tenant is out of town and turns into major flood damage, etc. it adds up quick) total those up and divide by the number of months in your hold period, there’s your monthly budget. percentages are garbage on these low rent properties, easy to get in trouble thinking any percentage of a low gross number will be adequate. I’ve been hit with $30k surprises more than a few times owning rentals. It happens. How many years of cash flow would that swallow up on a property like this? Owning property can be expensive that’s why it’s important to have a lot of money coming in to cover your nut. $1,000/mo is simply not enough gross income to maintain positive cash flow long term typically in my experience. Most houses cost more than that just to maintain even before mortgage, capex, tenant issues, black swans, etc. come into play.

Gil Keren · Answer

@Steve K.

Double it means 560$ every month. Can you explain why is that realistic?

Gil Keren · Answer

Repaint: what if a tenant leaves every 1-2 years? Isn't repainting the entire interior every 1-2 sounds excessive?

Flooring: You mean replace carpeting every 5-7 years? If you have tiles for example, or pvc can't it last like 30 years or more?

Steve K. · Answer

@Gil Keren no you’re not estimating too high, I think you should double it.

Ben Strackany · Answer

@Gil Keren

I took on some rehabbed SFH rentals and each one was averaging about $400/month in various repairs for the first six months. If a house has been vacant or it’s old or recently gut remodeled, you might have a bunch of misc repairs and QOL issues you have to deal with for a while. That’s excluding big ticket items like HVAC, etc.

If you’re fixing things yourself you’ll spend less, and AFAIK over time your expenses will start to normalize. YMMV.

Am I estimating CapEx and repairs too high?

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