How I estimate Capex

When buying real estate -specially if you plan to hold on to it- an often missed item is capital expenditures. Capex is the money spent to upgrade/maintain a property. All items in a property have a lifespan and eventually would need to be repaired and/or replaced, things such as the HVAC, paint, roof and so forth.

As an investor you need to set aside money for those eventual expenses. Calculating them is not rocket science and I'm going to show you a simple way to do that. Of course the capex is not going to be the same for a 1000 sqft house built in 1960 than for a 3000 sqft house built in 2016. The older the house the more likely you will have to pay for things such as plumbing, electrical wiring and foundation. The bigger the house the more you will have to pay for painting, roof, flooring, etc. Another important key component is for how long you plan to hold the house, if you're only thinking on holding it for 1-2 years then your capex budget won't be as high as if you plan to hold it 30 years, less things can go wrong in 1-2 years than 30 years. I usually use a holding period of 15 years for my calculations.

Now let's get down to business... Let's say that a water heater's lifespan is 12 years on average, if you plan to hold the house for 15 years you know that it will eventually be replaced at least once. Also let's say the house was built in 2006 so the existent water heater already has 11 years in this case I'd also assume that the water heater will need to be replaced within the first few years. Now a water heater cost around $1000. During my holding period I need to set aside $1000 x 2 for the water heater alone. I can amortize that expense during my holding period (15 years), that is $2000/15yr or $133/yr or $11/mo. Some properties even though they are old you find out the owner has recently replaced some parts of it (roof, hvac, etc.) or all of it (flipped houses), so you can take that into account.

Pretty simple, uh!? Do the same thing for the other parts of the house and add up all those monthly payments and include it in your cash flow calculations. The biggest ticket items are: foundations, interior paint, flooring if you going to lease it you know every 5-7 years you would have to re-paint and change carpets), roof, HVAC, fences, appliances. Roof, paint, flooring and fences depend on the size of the property and the prices are expressed $/per sqft. You can quickly build an spreadsheet with: age, quantity, avg. lifespan, cost (either per unit or sqft) for each part of the house and quickly estimate the expenses given how old the house is, the size and your holding period; adjusting the age when the previous owner repaired or replaced an item.

Here you can find the average lifespan for most of the items in a house

Hope this helps!