Question regarding projected maintenance, repairs, and Cap Ex. I've heard and read opinions on the anticipated expense percentages when evaluating a property (10% property manager, 10% repairs, 50% rule, etc.). For new construction, do you use a lower repair and cap ex projection? It seems obvious that repairs and maintenance would be significantly less. But from an investing/risk reduction standpoint, it seems unwise to budget zero or 1% for these categories. Any thoughts on this topic? Success stories or brutal experiences with new construction?
Thank you in advance!
I wouldn't go to zero percent, but you can definitely reduce by a significant amount - especially cap ex.
depends on your holding timeframe. the 10% capex rule comes from the idea that in the long run, your repair costs will average 10%. maybe you have no repairs for ten years, then in the tenth year you have repairs equal to 100%, your average is 10% per year. if you plan on selling in your fifth year, no harm in factoring in slightly less. if you keep it forever, will you start at 5% and raise it over the years? that could artificially increase your cash flow in the early years, and then you may realize later on your property isn't cashflowing.
the best way to do it is to calculate the effective life of every product in the house, then divide the replacement cost by the number of years it'll take to fail. that's a lot of work, but it is your true capex reserve.
how you choose to do it is your decision, just make sure your property cashflows at the actual capex amount.
@Travis Cripps I don’t know that I’d adjust the “maintenance” allotment at all. From my experience, a lot of maintenance issues are tenant-related. If it doesn’t happen, great, but I’d still plan for it. And certain things like quarterly preventive pest control (just picking one item) doesn’t go away because you bought new construction. As for cap-ex, maybe you don’t need a massive reserves fund but over the looooooong term, the bill comes due :) If you gross rent is $1,000 and the cap-ex holdback is $100/month and a re-roof is $8K in 25 years then 6.7 years of that cap-ex holdback will go to that.
So the bottom line is that you do need to save for cap-ex from day one unless: a.) you have a short timeline for holding, b.) have a great W2 that can pay for something like an HVAC out-of-pocket, or c.) you’re on property 7 (just making it up) and already have substantial reserves fun set up.
But really, at the end of the day, the above 3 scenarios are all variations of “rob Peter to pay Paul” 🤷🏻♂️
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