What amount are you putting into your capital expenditure reserves?
I'm not sure of what to put into capital expenditures yet. Everything in the house is pretty new, the owners just had everything replaced.
@James Devoe How long do you plan to hold the property?
I plan on holding the property as a long-term investment. I'm using the BRRRR strategy.
@James Devoe Okay, the most accurate way to calculate it is fairly complicated. It requires research into each systems useful life and future value calculations.
The last reply wasn’t very helpful, so I will go into a bit more detail. Let’s say you want to find out how much you need to save for a roof due in 15 years. If the roof costs $8,000 today, then how much would the roof cost in 15 years, given that construction costs increase at 4% per year? Haha, definitely a traditional finance exam question.
The answer is $14,408. (Formula: $8,000 x (1+ 4%) ^(15)). Then you divide the $14,408 by the remaining months until replacement, in this case its 180 months (15 x 12 = 180). So, $14,408 divided by 180 equals $80 per month. You would do this for every system in your investment (siding, concrete, doors, sinks, cabinets, etc.) and it would come out to be $X per month required “replacement” reserves.
There are quite a bit of analysis you can do to make sure your calculations aren’t way off. Unfortunately, most analysis that doesn’t come with professional judgement isn’t going to be very helpful. That’s why having someone trusted that can check your work, that also understands cash flow analysis and can help coach you through some things you may have missed is recommended.
I hope this helps!
@James Devoe undefined
Thank you for your advice. That was helpful.