Budgeting for Major Repairs: How to Plan for Capital Expenses
By Kader Property Management — Investing Strategy Series
Every landlord has lived this scenario: it’s mid-winter, the furnace fails, and the repair bill wipes out months of cash flow. It feels like bad luck, but more often than not, it's simply a lack of capital planning.
Major repairs aren’t “surprises.” They’re predictable, cyclical expenses every property owner faces—and the owners who budget early feel the least pain.
Operating Expenses vs. Capital Expenses
Operating Expenses (OpEx):
Recurring, routine, predictable:
• Lawn care
• Minor plumbing fixes
• Cleaning and turnover supplies
Capital Expenses (CapEx):
Large, long-lifespan items that add value or extend the life of the property:
• Roof replacements
• HVAC systems
• Driveways and major concrete work
• Electrical or plumbing system upgrades
• Major renovations (kitchens, flooring, baths)
The IRS treats CapEx differently—these items must be depreciated over time, not deducted all at once.
What Counts as a Capital Expense?
Common CapEx items in typical Wisconsin rentals include:
Exterior: Roofs, siding, paint cycles
Mechanical: Furnaces, AC units, boilers, water heaters
Infrastructure: Driveways, sewer lines, electrical upgrades
Interior: Flooring replacements, kitchen updates, bathroom remodels
These projects are part of long-term property health—not emergencies.
How Much Should Owners Budget?
A simple rule of thumb:
Set aside 5–10% of annual rental income for capital expenses.
Single-family homes: typically 5–8%
Small multis: often 3–5% because systems are shared
Example:
$2,000 monthly rent → $24,000 annual income
5% CapEx reserve → $1,200/year ($100/mo)
This is how you avoid surprise bills that blow up cash flow.
Why Local Climate Matters
Wisconsin’s climate accelerates wear and tear:
Freeze–thaw cycles break down concrete and roofing.
Humidity stresses HVAC systems.
Older housing stock often means aging systems.
Planning for earlier-than-national-average replacement cycles protects your investment.
Plan Repairs Using Lifecycle Forecasting
A simple lifecycle plan includes:
- Inventory systems — roof, HVAC, water heater, electrical panels, etc.
- Estimate useful life — e.g., 15–20 years for roofs, 10–15 for furnaces.
- Assign replacement cost — use quotes or recent invoices.
- Set target year based on age and condition.
- Divide cost by remaining life to determine annual reserve amounts.
Example:
Roof: $12,000 cost ÷ 10 years = $1,200/year
HVAC: $6,000 cost ÷ 12 years = $500/year
Suddenly “unexpected repairs” become scheduled, manageable line items.
Three-Tier Reserve Strategy
Kader recommends owners maintain:
1. Emergency Reserve
$500–$1,000 per unit for urgent repairs.
2. Short-Term Reserve
3–6 months of rent for turnovers, appliances, or mid-sized projects.
3. Long-Term Capital Reserve
Dedicated savings for roofs, HVAC, exterior cycles, and major upgrades.
When these three layers are in place, repairs become investments—not emergencies.
The ROI of Proactive Capital Planning
Proactive owners enjoy:
Higher renewal rates
Lower vacancy
Reduced emergency repairs
Higher long-term property value
More predictable financial performance
Every dollar spent proactively saves multiple dollars in avoided damage, lost rent, and crisis repairs.
Planning ahead doesn’t just protect your cash flow—it grows it.
If you want help building a lifecycle plan for your properties, the Kader team can assist.
