Landlords lose money on their rental properties for many reasons, but the most common is that they failed to factor in all the costs of owning, managing and maintaining the property before they bought it.
We recommend that you get an insurance and home warranty insurance. We also recommend holding back 10% of your rental as a CapEx reserve. CapEx is something you can capitalize over a specified period. It adds to or upgrades a property’s physical assets. It is typically a one-time major expense.
Examples of capital expenditures include a new roof, appliance or flooring. A capital expenditure could also include installing new heating and air conditioning system or doing a major overhaul of an existing HVAC system. The same goes for extensive new plumbing or significant electrical work.
If you are painting multiple properties, that could be classified as a capital expenditure, but routine painting upon move-out is just that, routine. You won’t be able to tap your capital expenditure reserve to pay for run-of-the-mill maintenance.
Repairs such as “move-out painting,” “touch-up painting,” “patching a wall,” and “floor” fall into the routine category. The cost of routine maintenance is typically covered by an investor’s annual operating budget, not from the capital expenditure reserve.
Many sellers list 5-10% repairs and maintenance fees under expenses but nothing for CapEx. Therefore, NOI gets manipulated. Remember NOI supposed to include all expenses? As a rule of thumb, expenses should be at least 40-65% of all income. When you first receive a rent roll and expense report, you should check if the expense is more than 50% of the income. If not, you need to be alerted. You may possibly be dealing with liars or crooks.
There isn’t too many C Class building with 40% or below expense. Even 50% is pushing. You check the expense list and check the percentage of repairs & maintenance takes. Also, must check if CapEx was considered in the calculation. If not, you know they are not a professional or trying to hide something from you. You can always ask what the expense to income ratio/percentage is. Follow with next question whether CapEx is included in the figure. If the answer is 50% or more and CapEx is included, you are dealing with an honest seller.