Investors: Think It’s OK to Skimp on CapEx? Here’s Why That Could Cost You BIG.


If there is one metric that is more difficult to understand than the rest, it’s CapEx. I certainly did not have enough appreciation for CapEx 10 years ago, and from the forums and many posts on the blog, it is painfully apparent to me that most people lack understanding and respect for CapEx and what it can (and does) do!

Back Story

Many of you know that I am relocating my family from Ohio to Arizona. I remember exactly how it happened. Patrisha and I were crossing the street, on our way from a coffee shop to pick up kids from school. All of a sudden, right there in the middle of the street, she says to me, “We have to move. Kids need more opportunity than Lima can offer. We need more opportunity than Lima can offer. And I’m tired of driving for an hour to get anywhere. So figure it out!”

Nice, I thought to myself. Easy for you to say, I thought to myself. But at the end of the day, I am as tired of the damn snow, sleet, and dirt as the next guy. I am tired of declining population and stagnant incomes. I am tired of fighting tooth and nail for every $10,000 on the balance sheet because the market never goes anywhere. And finally, you just don’t argue with the boss, and that’s just the end of that.

So, we are moving to Arizona, where the kids are number 10 and 11 on the waiting list at what I figure is one of the best schools in the country, and you can’t spit on a map without hitting a Kumon center, an organic farm, or a Whole Foods. What I do with real estate is beside the point — I’ll figure it out.


Related: How to Estimate Future CapEx Expenses on a Rental Property

Selling Assets

As part of this relocation, I put my primary on the market, and I am selling one of the buildings — a six-plex. I bought the building distressed about five years ago. Two units were vacant. One of the roofs needed replacing immediately. One of the baths needed to be completely gutted. Appliances, flooring, paint — lots of work.

Having done the work, however, this has been a very stable building. There has been very little turnover. People in the building are “home,” and while there is regular maintenance (naturally), there has been little economic loss. Not a single eviction in 5 years.


Considering the amount of delayed maintenance that I had to tackle when I bought this thing, some items were put on the back burner. I knew they would need to be done with time, but I would rather take the hit out of the cash flow than up front.

Some of the biggest items are sliding patio doors and windows. And this building has big bay windows in four out of the six units, which are special order items.

I’ve been fixing a few things every year. And slated for this year were one sliding door and one more big window. I suppose these are choice items because you can caulk, and caulk, and caulk. But the thing about CapEx is that it is directly related to economic losses. Why? Because nicer units attract nicer tenants, and nicer tenants don’t typically need to be evicted; they don’t trash your place at move-out, and they pay on time.

So, while I could keep caulking the old wood windows, at the end of the day, the cost of replacing them is less in the long run than trying to collect rent from tenants who are OK with crappy apartments. CapEx, my friends, is a necessary expense just like paying property taxes, and it is important to understand this!


So, I am selling this building. It is a 40-minute drive from Lima, and as such, it is less than ideal for my Lima infrastructure. Everything else in my portfolio is within a five-mile radius and easy for my handyman to get to, but this six-unit is sort of an outlier.

Related: Raising Rent (& Risking Tenant Turnover) vs. Playing it Safe (& Missing Out on Rent): Which Wins Out?

Interestingly — and this illustrates the power of real estate — the portfolio note on this asset is adjusting down by about 2% this month after five years. If I were to keep this building, I have the option of pushing the amortization back to 20 years, and in combination with a lower interest rate, this would free up about $5,000 of cash flow.

So, either I get $5,000 more cash flow, or I sell the building and get some capital gains, which I could to AZ with me. It’s not whether I win or lose, but which way I win. And that is the power of real estate — even in the armpit of the world that is Lima, Ohio. In the words of one Brian Burke, “If you can do this in Lima, imagine what you could do in a real market.”

I am under contract, and here is a list of CapEx that is happening. Some of this was planned, and some just came up unplanned. I had my team inspect the property ahead of seller’s inspection, and this was what they found:

  1. Bay window replacement (planned)
  2. Sliding patio door replacement (planned)
  3. Refrigerator replacement (unplanned)
  4. Stove replacement (unplanned)
  5. Two screen doors (unplanned)
  6. Carpet re-stretch (unplanned)

Whether I remain as the owner of the building or I sell, these items need done. Some of the items are definitely CapEx. Other items are better thought of as tenant retention program. But who cares what classification? Stuff needs to get done!

And interestingly, the refrigerator and stove are in the apartment that I remodeled immediately upon acquisition. With all of the money I had to spend, I remember looking at those appliance and noting that it’s just a matter of time. That time is now.



Property is made up of physical components. Those physical components get old and eventually reach the end of their useful life — the moment in time when spending money trying to fix the thing is either not possible or is prohibitive. All components eventually get there and need replaced.

So, you better be setting money aside out of your cash flow! The difficult part about this is that when you are new, you wouldn’t know how much this stuff costs. That’s when you read this article — ’cause we’ve done the numbers for you!

Investors: Do you agree with this assessment on CapEx? Have you ever been burned by deferring maintenance for too long?

Leave your comments below!

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.


  1. Hi Ben,
    Nice article. Was wondering what % per year over the 5 years of ownership you should have set aside for CapEx based on the repair costs you incurred.


  2. You’ve been doing this a long time. So there’s no doubt that you have capex set aside. And the three unplanned items shouldn’t cost more than a few $k. Which of course you’l get back equal or slightly more when you sell.
    The question is, is 10% capex reasonable for most folks? If you set a higher or lower %, why? And thanks for the great tips and good luck on your move.

    • Ben Leybovich

      Paying is not a problem. IRR is impacted, which is a problem. Answer – no. 10% is not reasonable. These are fixed costs. An HVAC system costs the same in an 800 sq.ft unit renting for $425 as it does in one renting for $2,500. But % is different – fixed costs 🙂

  3. @Karen O. A % for cap ex is too broad for me and I feel it needs to be calculated for each property separately based on the individual building components for that property. For example, one property may need a roof in five years and another won’t need one for fifteen years. You can take the estimated cost of the new roof (and all the other components) and divide them by their remaining lives to get an estimate of cap ex for that property. It’s one of my least favorite due diligence exercises but also one of the most important. It also helps take the sting out of the cap ex once it occurs because you have already planned and budgeted for it.

  4. Alex Craig

    You are right, items like roofs, HVAC, windows, fences, carpet (which you should pull anyways and replace with vinyl plank in high traffic areas) should be considered when purchasing a home. Here is the difference between buying TK and non-TK. Non-TK, these deferred maintenance items typically come quicker and are a reason why the home is priced and acquired where it is. TK these cap-ex expenditures should be so far down the road that a investor could refinance around year 20 and pull some equity out to do the capital expenditures (maybe take 10 to 15k out). If you are using leverage, one must consider what type of investor they want to be. Do you want equity with less cash flow or little equity and more cash flow.

    • Ben Leybovich

      You are tired of stupidity, in other words, Leo LOL

      Me too

      CapEx replaces mechanicals. So, the up-front is a function of condition, and the reserve is a function of type of systems, and the amortization of life span. These are $$ – never %.

      Good luck!

  5. Paul Ewing

    Ben when you replace the sliding doors, are you just putting in new ones or changing them? I have been changing all mine to French doors. Sure it costs about $500 each to have my do it, but they make a better presentation, are more energy efficient, and less maintenance hassle.

  6. DL Martin

    Ben, Please say that you are relocating to Prescott (One of my favorite places on Earth) or even Flagstaff.

    I’ve been to Phoenix a couple dozen times and while I’ve never visited Tucson, I can’t imagine that it is any better than the brown, dry, Hades that is “The Valley of the Sun.” There is not one single shade tree in all of Maricopa County. Really.

    “But it’s not the heat, It’s the humidity that gets you.”

    I just checked the Weather Channel 10 day forecast… Tomorrow 112, Friday 110, Saturday 110, Sunday 112, Monday 111, Tue 110, Wed 109, Thu 106, Fri 109. LOL!!!

    Several of my heathen SoCal police officer buddies have houses, trailers and of course, boats (and watercraft) in Havasu and Parker, and all I can say is… “It’s hot out there.”

    The temperature in Lima, Ohio RIGHT NOW is 75 degrees. Humidity is 69%.

    Prescott is 93 with 15% humidity.

    Phoenix is 110 with 11% humidity.

    Tucson is 108 with 11% humidity.

    There is a huge difference between 93 degrees and 110 degrees. And of course 75 degrees (Lima) and 110 degrees. ; )


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