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):
Typical Life Expectancies of Home Components
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:
- Figure out the way you like to calculate Cap-ex and ensure your property analysis spreadsheet accurately reflects it.
- If you overlooked Cap-Ex in your existing properties you might want to shuffle the portfolio. Check out the ROE article.
- Download this Cap-Ex Spreadsheet