Rental Property Capital Expenses

Rental Property Capital Expenses or Cap Ex Definition

Capital expenses or CapEx and how they relate to rental properties. CapEx are those items that we anticipate that we already know will mechanically fail. We know that a central air unit had a life expectancy of 20 years, now it's a little bit closer to 15. We know a roof has a life expectancy of 20 years. We know the hot water heater has life expectancy of eight years.

So when you're collecting your rent, let's say it's $1000. It's not fair to actually take that $1000 as your own, as your profit; not when in eight years we know you're going to have to spend $1,200 to replace the hot water heater. So all this time, you should have been mentally taking some of that money and putting it aside for that eventual repair that you're going to have to have.

Now, a lot of investors seem to do a percentage, and I don't really understand why. I think actually if you're investing into a lot of properties, it makes it more efficient to do a percentage. And it's true, a more expensive property is going to have a tendency to be a little more expensive. You're going to have a higher quality central air unit, you're certainly going to have higher quality finished materials like tile and things of that nature. Ultimately, it's really not going to be that much higher of an expense.

I prefer to actually distribute a dollar amount, even though I know some investors will put away crazy numbers, like 20% of the property's income. The rents that they're actually collecting, they'll put aside for capital expenses. I've heard 10%, but a very common one is like 5.7%. I simply just do a dollar amount.

I live in Philadelphia and I manage [unclear] Homes and we own [unclear] Homes, so our expenses are far less expensive. Our roofs, for example, are really a $4,000 to $5,000 expense, compared to the suburbs that's a fraction of the cost. Based on calculation, that's $120 a month, pretty much covers any expense that we're going to face in a Philadelphia property. I understand that's not consistent with what most folks and most investors are dealing with in other are areas. But I personally would more accurately come up with a dollar amount, rather than to do a percentage.

Now, there's additional expense that that's really going to be covered under capital expenses. And this doesn't come up as much, but if you have poor quality tenants, so if you're investing in lower quality rentals, then you're going to have to come up with a dollar amount for tenant nonsense. So the eventuality of having to perhaps evicted tenant, which in a better quality homes, you don't tend to have to do, or the tenant caused damage. So the tenants aren't going to damage the hot water heater, they're not going to damage the roof, they're not going to damage things of that nature. Those are mechanical failures. But if the tenants tend to be a little bit more full of nonsense because of the price point you're at, then you would want to put aside an additional amount of money, at least mentally, to cover that.

So if every four years you're going to get a bad tenant that you're going to have to evict all that time, you should have been putting aside money again, at least mentally, where the missed months of rent, and obviously expense to evict them. So capital expenses - definitely put some money aside. Most investors do it by percentage, but I prefer to do it by a dollar amount. Good luck with your real estate investing.


Joe White

Joe White is a Philadelphia Property Manager and Real Estate Broker. He is the owner of Grow Property Management and has been involved in the management, sales and purchases of Philadelphia area rental investment properties since 2008. He is an author and works as a real estate investment consultant and construction manager.

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