Dilemma: Accounting for CapEx

[Miles Stanley]

OK, I know this has been beaten to death on multiple posts and podcasts but I'm still having trouble figuring out the best way to account for CapEx figure. Don't pounce just yet..hear me out! This is probably analysis paralysis no doubt...

I have heard of the method where you estimate the total replacement cost of the items and divide that by their useful life to get an approx. monthly cost and add them all up to arrive at a monthly CapEx expense figure. I don't like this method bc 1) i think its too idealized and 2) it assumes everything will last that long and cost that much to replace. Who knows what the future holds?

I know some people just apply a certain percentage to their rent to get a $$ amount...but again, without historical CapEx/repair expense data for your own portfolio, I don't see how this method can be correct since CapEx expenses aren't necessarily in proportion to the rent.

I have thought that the best way would be to just have a cash reserve account of $X.XX (TBD) that would be ready at a moments notice to be used for repairs.  As a backup, perhaps have a line of credit to cover repairs in a pinch.  This account would need to be replenished as it is depleted and would obviously have to grow as the portfolio grows.  So that gets back to "how much do you save each month?"

My biggest concern is that in analyzing rental properties, I don't want what could be a great deal be made bad 'on paper' because of an errant CapEx/repair expense that is determined based on faulty assumptions/methods.

What do you guys do??

Thanks,

[Jacob Pereira]

I get the sense that a lot of people who are commenting either don't understand your question or are actively avoiding answering it. Personally, I like to keep the equivalent of my insurance premium in reserves at all times just in case, regardless of my access to credit; but I don't think that's what you're asking.

If I understand you correctly, you're not at that stage yet. You're still just trying to analyze a deal and see if it makes sense, and your CapEx calculation is a big part of that. You're right that all the methods suggested are imperfect, but real estate investing is not a static mathematic equation, but rather an educated guess combined with creative thinking, flexible action, and a bit of luck. I'm not suggesting that you don't do the math, I'm just saying that you're just looking to get within 10% of actuality, rather than hit the exact mark.

Stop being afraid and just go with a method that you feel comfortable with. If it helps, read a lot of the posts here, and you'll see that this isn't rocket surgery. Heck, I've been doing this for a few years now and I'm still surprised at some of the morons that are making good money at this; and remember, pretty much all of us who have been doing this for more than a few years are at least low-level millionaires, and many of us can't even agree on basic formulas. Just find something that's in the ballpark of your criteria, and you'll be fine.