Tag: ROI

Real Estate Investment 101: Differentiating CapEx from Maintenance

Posted on by Will Sing

Are you diving into the world of real estate investment? If so, understanding the crucial difference between capital expenditures (CapEx) and maintenance is key to your success. In this comprehensive guide, we’ll break down these terms, show you how to calculate them, and teach you how to forecast them when analyzing potential deals. Let’s get started!

What Are Capital Expenditures and Maintenance?

Capital Expenditures (CapEx)

CapEx refers to significant, long-term investments made to improve or increase the value of a rental property. These are typically big-ticket items such as:

  • Roof replacement
  • HVAC system upgrades
  • Major plumbing or electrical renovations

Maintenance

Maintenance involves routine tasks that keep the property in optimal condition. These are usually more frequent and less costly expenses, including:

  • Regular lawn care and landscaping
  • Exterior cleaning and power washing
  • Appliance repairs (e.g., fixing a leaky dishwasher)

How to Factor CapEx and Maintenance into Your Deal Analysis

When evaluating potential real estate investments, it’s crucial to distinguish between CapEx and maintenance. Here’s a step-by-step approach:

Analyzing Capital Expenditures

  1. Assess Major Systems: Thoroughly inspect the roof, water heater, HVAC system, plumbing, and electrical components. Evaluate their current condition and estimated remaining lifespan.
  2. Calculate Costs: As a rule of thumb, CapEx should account for 2-7% of the property’s value. For properties requiring significant updates, lean towards the higher end of this range.
  3. Forecast Future Needs: For properties in excellent condition or those recently renovated, you can reasonably budget a lower CapEx percentage.

Estimating Maintenance Costs

  1. Evaluate Property Condition: Look for signs of wear and tear, older appliances, and the overall state of the property.
  2. Estimate Monthly Expenses: Maintenance costs typically range from 2-5% of the gross rent. Larger properties with extensive landscaping or amenities might incur higher maintenance costs.

Building Your Reserve Funds: How Much Should You Set Aside?

The amount you allocate to reserve funds depends on your risk tolerance:

  • Conservative Investors: Aim for 6-12 months of reserve funds to cover potential expenses.
  • More Aggressive Investors: A 3-month reserve fund may suffice if you have additional income streams or savings to cover unexpected costs.

Mastering CapEx Calculations

For a detailed understanding of CapEx, create a spreadsheet using this formula:

Monthly Cost = Replacement Cost / Lifespan (in years) x 12
This formula helps you determine the monthly amount to set aside for each major expense. For more accurate estimates, consult with a general contractor or your real estate agent.

Pro Tips for Savvy Real Estate Investors

  1. Patience Pays Off: It typically takes 3-5 years for a rental property to stabilize, allowing you to understand its true maintenance costs.
  2. Avoid Analysis Paralysis: While it’s important to dive into details, remember to step back and view the big picture. Ensure your investments align with your long-term financial goals.
  3. Organize Your Finances: Initially, you can combine CapEx and maintenance funds into one account. As your portfolio grows, consider consulting a CPA for a more sophisticated accounting system.

Wrapping Up: The Key to Successful Real Estate Investing

Understanding the nuances between CapEx and maintenance is crucial for effective property management and investment planning. By accurately forecasting these expenses, you’ll make more informed decisions and build a robust real estate portfolio that stands the test of time.

If you have any questions about buying a home or need more personalized advice, feel free to reach out to me. Connect with me on YouTube, Instagram, or Facebook.

For a more detailed consultation or to get started on your home buying journey, schedule a free strategy session here. You can also access my Free Buyer’s Guide to help you through every step of the process here.

Upgrades that Add the Most Value to Your Home

Posted on by Living Room Realty

In the world of residential real estate, not all home upgrades are created equal. Whether you’re getting your house ready to sell or you’re planning to stay put for a while and want to know which projects to tackle first – this post is for you!

I often talk with my clients about which home upgrades are best for resale value, or provide the best Return on Investment (ROI). This info is relevant for both home buyers and sellers, as savvy buyers want to know which upgrades are worth the most when they’re searching through listings for their next home.

The most effective strategy to find out this information is to reach out to your trusted real estate professional. Experienced Real Estate Agents will use detailed knowledge of your house and the local housing market to personalize their recommendations for the type of home upgrades that will add the most value to your specific home.

Upgrade vs. Update: this blog post concerns Home Upgrades, not updates. The difference for the purpose of this article is fairly important: while updating your home with fresh paint, clean floors and crisp landscaping will help your home sell for top dollar, they generally won’t affect the starting value of your home as much as larger remodeling projects.

For a more general idea of the types of Home Upgrades that give the best return on investment ROI, consider the following:

Exterior projects – according to the Remodeling 2022 Cost vs. Value Report (www.costvsvalue.com), improvements to the exterior of the home have consistently ranked highest in terms of Return on Investment for homeowners. Projects that increase your home’s curb appeal and add value include: garage and front door replacement as well as new siding and windows.

Modest Kitchen Remodel – the key here is to bring the kitchen up to a standard that MOST buyers will appreciate, without going overboard. The reason is fairly straightforward: not every buyer has the same aesthetic as you. Make the kitchen “workable” for most buyers and let them do their own reimagining after they purchase it from you!

Systems Upgrades – upgrades to the systems of the home (including adding or installing new HVAC, overhauling old plumbing and electrical) are less exciting, but I always point these out to my buyers. In the Portland Metro Area, you’ll see homes listed with the Home Energy Score (HES) which helps buyers estimate the monthly utility costs of the home. Energy efficient upgrades should improve the HES score of your home. While the ROI might not be as high for these upgrades, they can provide immediate benefits to you as the homeowner AND should appeal to buyers when you decide to sell.

Structural Upgrades – the structure of the home will sometimes need to be upgraded and can help with resale value. In the rainy Pacific NW, a new tear-off roof, water drainage system and/or seismic upgrades are worth a lot to my buyers! These upgrades are hard to quantify in terms of ROI, but the peace of mind these upgrades provide can be worth their high price tag.

ADU/Additional Structures –  adding an additional structure or creating a legal ADU in your home can provide additional income opportunities to you as a homeowner, and in some cases can be used to help a buyer qualify for the loan to purchase your home. If you’re considering this type of home upgrade, be prepared to do your homework by researching your local laws and guidelines for building permits, finding multiple bids for construction costs and be sure to seek advice from your Real Estate Agent throughout the process.

Disclaimer – while the information in this post is meant to be helpful to homeowners, these are mostly my opinions. Ultimately, these opinions can’t be applied to every home in every situation, so it’s best to consult with a Real Estate professional when you’re ready to pick up the sledgehammer!

 

Sources:

https://www.remodeling.hw.net/cost-vs-value/2022/

Market Ready Transformation

Posted on by Andy Meeks

This was a fun project in that I was able to put on my project management hat to help prep this house for market. My clients (and friends) moved away from Oregon to the east coast a few years ago and their first-ever home in Portsmouth became a rental property. When they decided last year to consolidate and sell this home, they reached out to me to assist. 

There was a lot of work that was needed to bring it to market looking its best. I evaluated the home with them through several video meetings and offered a list of suggested upgrades and improvements that would help maximize its resale value. We started the rehab process in early December, and we finally finished that process at the end of February, just in time for our early March listing date goal.

The scope of work included all new interior paint, new flooring throughout the home, new first-floor light fixtures, and new countertops in the kitchen. I worked with trusted industry professionals to provide my clients various finish options and price points, and they trusted me to make the final decisions.

Other work included roof cleaning, furnace servicing, front door paint, exterior powerwash of the house and concrete, exterior window cleaning, landscaping, and a deep interior clean. These are the less sexy items, but really do make a huge difference in how the house is received, and perceived, by potential homebuyers. (Of course, we had it professionally staged and photographed as the key finishing touches.)

In the end, the goal is to get as many eyes on the house and people inside to get a feel for the home and encourage as many offers as possible. We went pending in just four days and sold above the listing price, which was already above our original goal from December. And my clients never had to set foot in Oregon.

I love the trust and teamwork that I develop with my clients and, as Hannibal Smith of A-Team fame always said, “I love it when a plan comes together!”