CapEx Reserve: Budgeting for the Expensive Things
Money set aside for the big, expensive stuff: a new roof, a new HVAC system, a new water heater. Different from regular maintenance, which covers small routine repairs. Both matter, they are not the same pool of money.
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A CapEx reserve is money set aside each month for capital expenditures: the big, infrequent replacements a house inevitably needs. A roof, a furnace, a water heater, windows, a kitchen. It is not the same pool as maintenance, which covers small routine repairs.
How much to reserve
Most investors budget 5% to 10% of gross rent. On US$1,450 a month, that is US$73 to US$145 set aside monthly.
A more precise method is to price each major component and divide by its remaining life:
| Component | Replacement cost | Life | Per year |
|---|---|---|---|
| Roof | US$9,000 | 25 yrs | US$360 |
| HVAC | US$7,000 | 18 yrs | US$389 |
| Water heater | US$1,400 | 12 yrs | US$117 |
| Windows | US$8,000 | 30 yrs | US$267 |
| Kitchen | US$12,000 | 25 yrs | US$480 |
| Flooring | US$5,000 | 12 yrs | US$417 |
| Exterior paint | US$4,000 | 10 yrs | US$400 |
That totals about US$2,430 a year, or US$202 a month, around 14% of a US$1,450 rent. Higher than the rule of thumb, which is usually the honest answer on an older house.
Why it isn't maintenance
Maintenance is the US$180 plumber visit and the US$60 garbage disposal. CapEx is the US$9,000 roof. Both are real, they are not interchangeable, and a deal that only budgets for one of them is under-budgeted.
Age is what matters
A house with a two-year-old roof and a new furnace genuinely needs a smaller reserve for the next several years than an identical house where both are twenty years old. This is what the inspection is for: get the age of every major system, not just a pass/fail.
A deal that only works if you assume nothing breaks is not a deal that works.
Related reading
The calculator includes a CapEx reserve in its defaults. Before you buy, the property walkthrough checklist and working with an inspector cover what to establish about each system's age. For the cash side, see how much cash do you need.
Longer reads on this
Related terms
Run the number on a real listing
The free calculator works out cash-on-cash return, cap rate and DSCR from a price and a rent.