What reserves should you save for future capital costs? If you were buying a new 16 unit multifamily rental property today, what would these reserves need to be? “Capital costs” usually pay for replacing “long-lived” items such as asphalt, concrete, underground piping, roofs, doors/windows, gutters/downspouts, HVAC equipment, appliances, flooring, fixtures, etc.
We prepared the example analysis shown below to answer these questions.
Circa 2010-2015, a lot of folks in the Multifamily (MF) world would assume $750/unit/year for capital costs. It was assumed that this $750 figure ignored turn costs. We have heard of recent figures being used of between $1,400-$1,900, which include turn costs. Were these figures accurate?
The Basic Assumptions of our Example Analysis are as follows:
-16 Units
-4 Buildings
-Units: 2 bed / 2 full bath / 824 square feet
-4% annual inflation on capital costs
-Asphalt parking lot
-Allowance for interior flooring, kitchen and bathroom redecoration (turn capital spending)
If you purchased this (new construction) property today, we found that you would need to start saving about $2,000 per year, per unit ($2,000/year/unit). Each year thereafter you would need to increase this savings by 4% ($2,080 next year, $2,163 the next, etc.).
This approach would allow you to have enough funds to cover the general capital cost needs at the property over the next 30 years. Variation in materials choices, contractor availability, cost inflation changes, and several other factors can play a role in modifying these numbers.
It is important to perform a capital needs assessment before you purchase the property and to update this assessment every 3-5 years to recalculate your savings rate. Each of these analysis can incorporate your preferences, plans, and access to contractor pricing related to the property.