Don’t Forget! Capital Expenses “Cap-Ex”

Podcast Version

Capital Expenses (Cap-Ex) are the large items on your expense list that are not repairs or maintenance. I repeat, this is in addition (account another 10-20%) to your normal repairs/maintenance for minor components.  Cap-Ex is for example roof, water heater, HVAC, flooring, paint, cabinets, landscaping, windows, etc.

Here are three ways to calculate it:
1) Just use 1 months rent (this was what my unsophisticated 1st Property Manager said)
2) Use 10-15% of income (this is what I do now – although when I purchase a property I try to repair all these big components up front so I don’t have to worry about Cap-Ex for the first few years. Pro-Tip: I so this so I can finance the upfront improvements.
3) Spend a few minutes and build your own spreadsheet with the general Life Cycle estimates shown below (I think this is a bit waste of time but it proves the concept and allows you to learn and do your own sensitivity analysis):

cap ex normal life

Typical Life Expectancies of Home Components

cap ex chart

Sample spreadsheet that calculates expected costs per month to save for that inevitable day.

If you are lazy or don’t know how to build a Life-Cycle Cost Analysis spreadsheet email me because I am almost a Licenced (PE) Industrial Engineer.

Original BiggerPockets Post: Link

SPC GET ‘ER DONE PLAN:

  1. Figure out the way you like to calculate Cap-ex and ensure your property analysis spreadsheet accurately reflects it.
  2. If you overlooked Cap-Ex in your existing properties you might want to shuffle the portfolio. Check out the ROE article.
  3. Download this Cap-Ex Spreadsheet

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5 Comments

  1. […] per month after expenses. Please note: Make sure you are saving 30-50% at least in reserves for cap ex, expenses, repairs, vacancy. I have had good luck these first 18 months however the law of averages […]

    Reply
  2. Brian
    June 15, 2016

    Hey Lane, thanks for this informative post. If most turnkey properties net about $200/month in positive cashflow, after reading your article, I’m wondering if that is now completely negated after taking CAP-EX into consideration. Now, one would by a fully rehabbed property (new HVAC, electrical, roof, etc.), but still, it seems to me that turnkey might not be such a great deal when you subtract $183/month for future repairs.

    How do you see it?

    Thanks for your great blog. Really helpful.

    Reply
    1. Lane
      June 16, 2016

      You need to include the Cap ex into your underwriting. So if your rent is 1000. minus Property Management, Cap-Ex, Repairs, there is a slim margin. So its not great but its still a lot better than the stock market. Also did you see the article on the hidden ways you are making money?

      Reply
      1. Brian
        June 16, 2016

        Thanks Lane. I did indeed read your article on the hidden ways one is making money on real estate. However, one of the big ones, Depreciation, I can’t account for as I make too much to be able to claim it. If a rent is $1000, and I subtract expenses (mortgage, vacancy, repairs, property management, insurance,etc.) it seems as if turnkey real estate nets about $200 on average of monthly cash flow. None of the turnkey companies or providers ever figured in CapEx on their proformas, so it was something that I haven’t seriously considered. I’ve done really well with index funds and single security investments in the stock market over the last 15 years. I’m afraid that once CapEx is considered and the fact that I can’t claim depreciation, investing in the turnkey route might not offer a better return than I’m already getting. Does that make sense. Am I missing anything else?

        Thanks for the reply! Looking forward to being an active participant here. Great blog.

        Reply
        1. Lane
          June 17, 2016

          Even if you cannot take the depreciation today… it goes in a bucket. Perhaps you can marry a real estate agent and then you can claim it. But that not be practical advice… but anyway the depreciation will cancel out the income on the rentals and as you can see it’s small potatoes anyway. Let me know if you still have questions?

          Reply

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