How to figure the CapEX field within the Rental Property formula

Question

How do you figure out what percentage for the CapEX block within the Rental Property formula? For instance if I know the property will need a new roof in 2 years...if gross income is $2000, would I put 20% in the CapEX field? Meaning that I will be holding back $400/mo for the new roof in 2 years? How does that affect the rental property formula?   Thanks.

Danny Soileau · Answer

Thanks Mike.  We are looking at a 4plex. It needs a new roof now. Seller just had a roofer patch some missing tabs. Says may not have to change for another 2 years.  I think it needs to be changed now.  Seller is asking 145500.  $2000. gross income. Other issues are the dryer vents are venting into the attic! Has been that way for years.  I know that is a no no.  Not sure how that needs to be fixed.  Electrical panels are Fed Douglas, has not been any issues thus far...but that may be a big ticket item if it has to be replaced. Each unit has 1 window unit for HVAC. I also know the sink cabinets need to be replaced as tenants move out...COC is 13.94 with CapEx at 6%.  Netting us $394 total/mo.  that's if we can get the seller down to $135500 and we add the $10k for roof into the financing...thoughts?

Mike McCarthy · Answer

@Danny Soileau there are two schools of thought on capex projections.

Some use a percentage to get a rough idea, usually around 6-8%

The other option is to list out all the major systems in the house, roof, furnace, appliances, etc. Then give each a cost to replace and the number of years left in each items lifespan. Divide out the costs over that many years and you get your yearly/monthly capex costs.

Both are just estimates of course, that roof replacement you need might need to be done in 6 months, or might hold out 5+ years.

Danny Soileau · Answer

I only had 1 roofer look at it and that's what he quoted me.  Still wondering how to decide what percentage to put in the CapEx field. Is it an arbitrary number or what's the method to accurately know what percentage to put down.  Thanks.

Jaysen Medhurst · Answer

@Danny Soileau, I usually figure ~7.5% during my initial analysis. Then plan out the specifics with more detail. That said, $9600 sounds like a lot for a new roof.