How To Budget For Capital Expenditures
Capital Expenditures- Property Management Services
We get tons of questions on capital expenditures. When we get a call for property management services in Grand Rapids, we also get questions on capital expenditures. Want to learn about capital expenditures? Read below!
What are capital expenditures?
Capital expenditures are items that cost you money, but are not typically in the budget. When you purchase a property, of course you do a budget. Capital expenditures are items that you may forget to budget for. These are larger ticket items that are not replaced every month.
Parking lot/driveway (A parking lot is going to deteriorate faster in Grand Rapids MI because of the snow/salt)
New water heater
And many more
Let’s say you make $500 a year on a house for 10 years. You’ve profited $5,000 on the house in 10 years. Your property management services company calls you and the furnace is out. You need to install a new furnace. The water heater is also old so you have them install a new one at the same time. The cost is $5,000 and that profit for the last 10 years goes out the window. You may be getting appreciation, but most investors don’t bank ONLY on the appreciation.
There is not a specific “one size fits all” monthly budget for these items since they are all different. When buying the property, take a look at the items and guesstimate how long the items have until they will need to be replaced.
For example, if a roof lasts 25 years, but you only have 10 years left on it and the cost is $5,000, then the math looks like this- 5,000/10= $500 year for the roof. Take $500 divided by 12 and the budget is $41.67 per month for roof replacement.
Go down the list and create a spreadsheet to figure out your monthly budget for CapEx (capital expenditures). You will end up with two spreadsheets. One will be for the current lifespan of the items, and one for the lifespan when they are new. The roof we just put on is going to last longer than 10 years, so the monthly budget will lower a bit once a new roof is put on. You will probably have to budget a little more on the front end for CapEx.
If you are using a company for property management services in Grand Rapids, they should be able to help you with this. These numbers are made up numbers and every property is different. A larger multi-family property may have different items for their CapEx.
According to a blog by Bigger Pockets, the author figures $200/MO for capital expenses on a single family property. On multi family properties, 8% of gross rent is what they budget.
Check out our article on other things to budget for HERE!
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