Help Analyzing Capital Expense

9 Replies

Let me first say how blessed I feel with the Bigger Pockets forum. I mean everyone has been so helpful and generous with sharing their knowledge. I am just learning so much as a newbie to real estate investing!

I am finally getting a better handle of real estate analysis. Based on the excellent article Introduction to Real Estate Investment Deal Analysis by J Scott, I was able to set up my own spreadsheet.

One thing I still don't have a good handle on is how to analyze Capital Expenses (CapEx). So I hope you can walk me through possible the possible capital expenses of a property so I can learn how to do it. Can you show me how you would do the CapEx for this property?


Property: Cherry Field Drive

Sq Ft: 1750

Year Built: 2000

Features
  • Attic
  • Cable Ready
  • Ceiling Fan
  • Flooring: Carpet, Hardwood, Linoleum / Vinyl, Tile
  • Parking: Garage - Attached, 2 spaces, 72 sqft
  • Patio
  • Porch
  • Security System
  • Sprinkler System
Appliances Included
  • Dishwasher
  • Dryer
  • Garbage disposal
  • Microwave
  • Range / Oven
  • Refrigerator
Room Types
  • Dining room
Construction
  • Exterior material: Vinyl
  • Roof type: Other
  • Room count: 8
  • # Stories: 2.0
  • Structure type: Other
  • Unit count: 1
Other
  • Floor size: 1,750 sqft
  • Last remodel year: 2000
  • Laundry: In Unit

I saw the house a few days ago and it was really well taken care of. It was newly painted. The floor looks nice. The carpet looks new. The dishwasher and fridge looks decent. Even the lawn did not have much weeds and was tell tended.

Here are the most common capital expenses associated with the rental properties I've owned:

-  Roof Replacement

-  HVAC Replacement

-  Hot Water Heater Replacement

-  Replace All Windows

-  Replace Appliances

-  Replace Flooring

If I were to try to determine the cost of capital expenses for a rental, I would use that list and assign a life span and replacement cost to each item based on the specifics of the property.

For example, it might look like this:

-  Roof - Every 20 Years - $5000

-  HVAC - Every 20 Years - $5000

-  Hot Water Heater - Every 8 Years - $800

-  Windows - Every 20 Years - $5000

-  Appliances - Every 10 Years - $2000

-  Flooring - Every 5 Years - $2000

So, for that particular property, every 20 years I would spend about $29,000.  That averages to about $1500/year over those 20 years, or about $125/month.

You can now add $125/month to your list of costs for this particular unit.

Now, there are longer-term expenses as well that are very infrequent -- new siding, upgrading electrical, upgrading plumbing, etc.  So, you want to round up and say $150/month to be safe.

@J Scott 

This is great! Thank you so much for your answer. This is so helpful! So for this property, I'll add $150 x 12 = $1800 per year to my expenses. Now how do I adjust this when I look at other properties? Or should I just use this $1,800 figure for most properties below $200,000.

What if the property is a little bit smaller, say 1,200 sq ft? Should I budget less? Thanks in advance!

Originally posted by @Christopher R.:

Now how do I adjust this when I look at other properties?

 The best way is to be able to accurately assess how much the above items will actually cost for the house you're looking at.  For example, my $5000 number for a new roof may actually be $3000 (or $8000) for the particular house you're looking at.  Instead of relying on the example number I threw out, it would be better to have a reasonable estimate of what you would actually pay.

Of course, an exact number isn't required, as prices will change over time and things will never happen on an exact schedule like that.  It's just about getting some averages so that you can get close.

@J Scott 

Thank you for explaining this. Should I just buy a roofer and a flooring guy coffee to know how to adjust the price of a roof based on the house or is there an easier way to do it? Does your book on estimating rehab cost explain this?

How do you normally estimate maintenance and repairs? Do you just calculate it as a percentage of the rent? Or is there another way to do it?

@Christopher R.

Welcome to BP.

I agree with @J Scott a 100% that it is hard to just come up with one number. If you analyze quite a few properties individually and add them up and divide them with the total number of properties, you will be get an average number. 

Again, your funded reserve (cap ex) will fluctuate if the property is 5 years old vs 50 years. 

Hope it helps.

CapEx is a whole basket of potential topics. @Christopher R.  

If you're capitalizing your property and claiming depreciation credits, your property has a "usable lifespan", during which it depreciates at a fixed rate. Every time you spend money on one of these CapEx items, you add to the value of the property and extend it's usable life, so you can begin depreciating the value of the CapEx item on a different depreciation schedule.

It's a wonderful way to help reduce taxes.  Corporations do this all the time. 

Originally posted by @Christopher R.:

@J Scott 

Thank you for explaining this. Should I just buy a roofer and a flooring guy coffee to know how to adjust the price of a roof based on the house or is there an easier way to do it? Does your book on estimating rehab cost explain this?

How do you normally estimate maintenance and repairs? Do you just calculate it as a percentage of the rent? Or is there another way to do it?

 I don't like promoting the book here on the forums, but I think you might find it useful...

@Christopher R.   the spreadsheet titled "Property Reserves Spreadsheet" uploaded to FilePlace by @Kyle Meyers should help you to identify and estimate capital expenses. If you are looking to purchase any property, at least buy&hold, it's definitely worthwhile completing a spreadsheet like this so you can have a game plan for these future improvements.

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