How much should you set aside for CapEx on a rental property?

Ask ten landlords how much to set aside for capital expenditures and you'll hear "5% of rent," "10% of rent," "$100 a door," and "whatever's left." All of them can be right for someone. None of them is based on the thing that actually breaks: your building.

This post walks through why the rules of thumb drift, and how to get a monthly CapEx number from the systems you actually own.

What counts as CapEx

Capital expenditures are the big, occasional replacements that keep a property working: roof, HVAC, water heater, appliances, flooring, windows, siding, paving. They're different from repairs (fixing a leak, replacing a faucet), which come up all the time and usually belong in your maintenance budget.

The problem with CapEx isn't that it's unpredictable. You know a roof will need replacing. The problem is that it arrives in large, lumpy amounts, often years apart, and it's easy to spend the money in between.

Why percentage-of-rent rules drift

A percentage of rent is easy to use, and for a lot of small portfolios it's a reasonable first guess. But rent and replacement cost aren't connected:

• Two houses with the same rent can have very different CapEx. A 1960s house with an old roof and original windows needs far more than a five-year-old build renting for the same amount.
• Age matters more than rent. A 15-year-old furnace is closer to the end of its life than a 3-year-old one, whatever the tenant pays.
• Costs rise faster in some places than rents do. A percentage set years ago may no longer cover the jobs it was meant for.

So a percentage can leave you over-saving on a newer property and badly under-saving on an older one.

A better way: one line per system

Instead of starting from rent, start from the building. For each big system, you need three numbers:

1. What it costs to replace. A recent quote or invoice is best. A typical range is fine to start.
2. How long it lasts. Most components have a typical lifespan. A tank water heater might last around 8 to 12 years, an asphalt shingle roof around 20 to 30. See the component lifespan chart for common ranges.
3. How old yours is. The install date, or your best guess from an inspection report.

From those, the monthly amount for one system is roughly:

Replacement cost ÷ months until it's due

A worked example

Say a duplex has a water heater that cost $1,800 to replace, is expected to last 10 years, and is 6 years old. It's due in about 4 years, or 48 months.

$1,800 ÷ 48 months ≈ $38 a month

Now do the same for the roof, the furnace, the AC, the appliances and the flooring, and add the lines up. That total is your building's CapEx number, based on what's actually there.

The example numbers are just examples. Use your own costs, because local prices vary a lot.

Three things that trip people up

Systems that are already overdue. If a component is past its typical life, there are no months left to spread the cost over. Treat it as a near-term expense, and keep some cash ready, rather than pretending it will last another decade.

Everything coming due at once. Systems installed in the same year tend to wear out in the same few years. A building where the roof, HVAC and water heater were all replaced in 2012 can face a very expensive stretch around the same time. Lay your replacements out on a timeline so you can see the busy years coming.

Forgetting the small big things. Appliances, flooring and paint turnovers don't feel like CapEx, but across several units they add up. Give them a line too.

How to keep it simple

You don't need a perfect model. A list of your major systems with a cost, a lifespan and an age gets you most of the way. Revisit it once a year, update anything you replaced, and adjust costs when you get new quotes.

If you'd like a head start, the free CapEx calculator turns that list into a 10-year replacement forecast and one monthly reserve number, and the reserve calculator gives a quick estimate if you only have a few minutes.

The short answer

How much should you set aside? Enough to cover each system's replacement by the time it's due. Percentage rules are a fine place to start, but the number that will actually protect you comes from your own roof, HVAC and water heaters.