Concept

Capex

What it is

Capex is capital expenditures. On a rental, it’s the category for big infrequent repairs that replace major systems — roofs, HVAC units, water heaters, sewer lines, windows, major plumbing and electrical. Anything with a useful life measured in years. This is separate from maintenance, which is the steady drip of small recurring repairs.

The distinction matters because they behave differently. Maintenance is smooth — faucets, garbage disposals, door hinges, cracked outlets. Capex is lumpy. A roof does nothing for 15 years, then costs thousands in one weekend. An HVAC runs fine until it doesn’t, then it’s a same-day replacement.

Why it matters

When you’re looking at a rental, figuring out whether it’s actually going to work, you’ve got to figure in vacancy, maintenance, capex, and property management. Those four things together eat about 31% of your gross rent. That’s the 31 percent rule — 7% vacancy, 8% maintenance, 8% capex, 8% property management.

On $1,800 rent against a $200K property, real cash flow after the 31% haircut and debt service is about $42 per month. That number scares beginners. But that’s what actually running a portfolio looks like. And when the HVAC dies, you write the check out of the capex bucket, not out of your grocery money.

The operators who skip the capex reserve are the ones calling rentals unprofitable after the first big system failure. They weren’t running a rental — they were running a countdown.

How it shows up

When you’re buying a rental — or deciding whether a potential flip should become a rental instead — note the age of every major system in the house. A $200K rental with a 22-year-old roof and a 14-year-old HVAC is not the same deal as one with new versions of both. The 8% capex reserve is an average; a house with old systems needs more set aside sooner.

Pull capex dollars off the top every month and put them in a separate account. Treat them as already spent. When the roof goes, it’s not a surprise — it’s just the clock running out on something you already knew was going to happen.

31 percent rule, cash flow, property management, wealth engines, cash on cash