Capital expenses are the big budget items that you have to consider when you’re analyzing a potential rental. These heavy ticket items can dramatically alter your great deal and turn it into a dud really quickly.
Capital expenses (or improvements) can be:
- New Roof
- Replacing Boilers, Furnaces, or AC units
- Major Electrical or Plumbing Work
- Repaving or Concrete Work
- Replacing or Repairing Sewer Lines or Mains
- Appliance Replacements
These big ticket items might not necessarily be repairs that you’re intending to make when you purchase the property. They’re not recurring, but with their large sticker prices, they effectively raise your cost of acquisition, even if they occur a couple years after you buy the property.
Holding property to rent is a completely different animal than flipping property short term, so consider your initial purchase price to extend into the future for as long as you are planning to keep the property.
It’s always best to overestimate the cost of these repairs, and underestimate the amount of time it will take before they’re necessary.
If you plan to hold onto a property for 10 years before you sell it, and you assume it will need a new roof in 12 years, cut that estimation in half. If it was me, I would adjust that roof’s life expectancy to 6 years. That would put it right in the middle of my ownership, and therefore it’d be my problem. I would add that into my analysis before putting an offer in.
It won’t always be that things end up worst case scenario, but when you’re making serious investments, I’m always most comfortable erring on the side of caution. Why not?