#474: Unexpected CapEx RUINS Cash Flow (How to Avoid It)

A lot of investors think the finish line is simple. You buy enough rental properties, collect the cash flow, and then you're able to quit your job. But here's the problem. Most rental cash flow isn't stable enough to replace your paycheck. One roof, one HVAC, one surprise expense can wipe out months or years of progress. These big expenses are called capital expenses or capex. And in this episode I'm breaking down why they make rental income feel so risky. Plus I'm going to show how experienced rental investors plan for those big expenses so that they can depend on their rental cash flow and use it for financial freedom. If we haven't met yet, my name is Chad Carson. You could also call me Coach Carson. And on this channel I teach you how to use real estate investing to achieve financial freedom. So you can spend your time doing more of what matters. I'm joined in this episode by Austin Yorgo Lescu. He's a 15 year real estate investor. He's a member of my rental property mastery community. And he's someone who's done an excellent job of building real systems and a spreadsheet as you'll see around capex planning for small and mighty real estate investors. So, Austin, you and I over the years have had a lot of situations where we had capital expenses, big huge expenses, many times more multiple and a row expenses. And I want to get into some of those stories. I'm going to talk about how we both do some planning to deal with that. But I thought it might be good to start. Can you for those who aren't that familiar with it? Can you just talk about what capital expenses are, how they're different from maintenance? That might be a good place to start. So capital expenses are different from repairs and maintenance or incidental repairs. And I'm not I think they are described as anything under the one year. It's in the repair and maintenance category. Everything else that has more than one year lifetime. It's capital expense. They are usually big items. Basically, you have to if it's like a replacement, I think it falls into the capital expense. Roof, HVAC system, flooring, painting, that kind of stuff. And they are not deductible. They're not consumer deductible expenses. They go on a depreciable basis. So you'll have to take that and depreciate over a number of years, depending on what kind of component it is. Yeah, just this week, I had an example. I had three hot water heaters on one fourplex go out at the same time. I guess they were all installed at the same time. So another another example. I'm thinking about like when people are brand new, especially this happens to be one of the expenses that people forget about a lot. You know, they ignore it or they underestimate it. You know, it might be hard to speak for everybody out there. But why do you think that capital expenses in particular or something that people don't account for as well as other expenses like taxes and insurance and things like that? One, it's when you start, you only have a property or a couple properties. So it's kind of like not that big of a deal. You kind of know when you need to paint, you kind of know when even appliance dies and you need to change it, it's just, you know, 300 to 600 dollars appliance. If something big happens, like a H back, it is a big expense, but it's only one. It can happen only one in a few years. So it's not that the impact and the urgency might not be that big. But once if you start building up a portfolio and you start having three, four, five, ten properties, this expenses can accumulate very fast. And if you get hit with multiple of them in a short period of time, many, even in the same year, it can make a big impact. And if you're not planning for that, if you're not aware that you're not tracking them, not aware that there are many of them are past their lifetime expectancy and likely to fail on you, you can get surprised big time. You're no longer dealing with hundreds of dollars. You're getting thousands of dollars. Yeah, I found for myself, like I think early in my career, especially before I started tracking this, is almost like I was deceiving myself as an investor. And I said, here I have, I have a property and I'm making $300 of my think cash flow, at least on the spreadsheet I was, right? And then, but if I wasn't accounting for the fact that the heating and air that needs to be replaced in five years, you know, it's a ticking time bomb. Like that it's going to be replaced. It might cost $10,000 five years from now, but because it's five years out in the future, and I'm not really thinking about that or I'm not accounting for it properly, then that $300 a month seems like I'm really making 300 a month. But in reality, I should be setting aside some money or at least in a big picture. I should be accounting for the fact that there's going to be some expense coming. So I see it is almost like a way of like pulling kind of wall over our eyes. Like we're kind of, so we're kind of ignoring the reality and the risk could be if you get a lot of properties that you're saying, you could have a bunch of those things happen at one time and you don't have enough money to pay for them. Or you just start buying properties that you think are good deals and they aren't that good at deals. So those are a couple, a couple things I've found to be the case. Like you can either have a property, this actually a good property, but you just didn't save enough cash. So it's not actually working out and you're spending a lot of money that you didn't think you had or be, you might have a deal that is not really a good deal. Like it looks like it's making a lot of cash flow, but when you really account for all the cat bags and the deferred maintenance and things like that, it might be actually like a negative cash flow property in the big picture. There are many places where this can surprise you and things can go wrong. It can be right from the beginning when you look at the property and you basically run your numbers. The thing that I recommend, the recommended percentage for capital expenses is like 5%. But that's kind of like more of a rule of thumb and depends very much if what's the state of the property. If it's in a good shape or not or after you buy it, are you gonna replace the mechanicals and have everything new or you're gonna go and keep whatever is there till it dies completely. Because that 5% is kind of like a middle ground and if it's an old property and pretty much everything, it's it's old in it. You need more than 5%. And even if you remodel and you put change all the mechanicals and all that, I would not go to zero. Maybe I'll drop it to 3%, but I will still keep that rule of thumb in place. So that's one place. The rule of thumb itself, whatever 3%, 5%, 10%, whatever you're using, it's not necessarily reflecting the true state of capital expenses, the scale of it, how much you have, nor it tells you when they might come and when they might hit you. Because yeah, you can say 5% and spread of the 10 years or let's say 15 years lifetime of the roof. Yeah, you'll think you're good, but if the roof has only five years left in its lifetime and you're gonna get hit in five years, saving 5%, is no gonna be nowhere near the amount of money needed to replace that roof. Yeah, that makes it and just to be clear, some people might set aside 5% of the rent. So the rent's $2,000. Yeah, they're gonna set aside 100 bucks a month and just over there, at least they're gonna count for that. When they're running their numbers and they're beginning when they buy the property, they're like, all right, this is the risk of me 2,000. I'm gonna have taxes, insurance, management, maintenance, and I'm gonna have probably 100 bucks a month in cat bucks. That's sort of what you're talking about. If it's if it's a property is really, really old and you didn't fix it up in the first place, which I'm thinking of a mill house that I used to have, I eventually sold. I bought it and I was like, oh, the house is rentable, you know, it's or at least a seller told me, yeah, you could rent it just like it is, but there is the roof was old, electrical was old, the plumbing was old, the trees were overhanging over the property and they were falling down, the sewer line was old, like all these things were working, but who know they're like a ticking time bomb, like who knows when they're gonna go out and I didn't account for any of those and I had this property that looked like a cash flip property, it was like a $800 rental that I bought for 30,000 bucks, $800 a month, 30,000 bucks, great deal, right? Well, wrong, like what I should have done to your point, if I really would have fixed all that stuff up front, I might have spent 50 or 60,000 bucks to remodel everything and I didn't do that. Therefore, that 50 to 60,000 bucks I should have spent up front was just spread out over the next five to 10 years and I had a bunch of negative cash flow. That was that that's a pretty common occurrence for old properties. Yeah, and the same idea, the first property, it's kind of manageable, you kind of, I know that roof was not that in the good of a shape, I kind of know that it's gonna need to be replaced, I know that the HVAC was old, it needs repair, needs to be replaced, but the moment you're gonna have multiple properties, you're not gonna be able to remember and mentally track all that, so you need something a little bit more robust. Yeah, well let's talk about that. Let's transfer. One of the reasons I wanted to have you on in cost and is that in our rental property mastery community, we had a training session where you and I talked about how we each plan for capital expenses and I feel like you were kind of at the higher level, like I'm gonna, I'm gonna share what I do kind of the level one. I think you do a really good job of taking to the next level where you actually forecast and think about things and plan it. So let me unpack a little bit about what I do or what I've done over the years and it's worked more or less for 22 years. So there's nothing, people can kind of see this as a level one, maybe there's something to, this is better than nothing, like it's better than not doing anything, but then I really want to share what you're doing as a sort of as an aspiration because that's actually what I'm trying to move towards as well. So I'll share what I did. I actually do this in 2007 and eight whenever the great recession happened and actually helped me get through that time so it was is really important. I do two basic things. Number one, as we just talked about when I underwrite a deal, I set aside a certain amount in my spreadsheet and my math saying, I think there's going to be this much set, I'm going to spend every month on capital expenses. So for me, on an older property, on my set aside, like 10% of the rent, and often my rents are pretty low compared to other places, like 1,000 bucks a month, 900 a month. So 10% might be like 100 bucks a month or $1,200 per year, for example. It is a brand new property out of a couple of brand new ones or remodel ones, I might be 5% kind of where you are. But the bottom line is I have a budget for capital expenses on every property. So I'm assuming that out of the operating income of the property, when I collect rent, I'm going to be spending something on capital expenses ongoing. That's just my assumption. But the other thing, and this is really where then the rubber meets the road, like I have a reserve fund, then for me, it's typically at least three months of all my expenses on all my properties. So if you take your taxes and insurance, your mortgage payment, your maintenance, your capital expenses, all these things that you'd be really good at, especially to look historically what you're spending on your rental properties. But let's say that number is 5,000 bucks. I would at least want to have 15,000 bucks set aside in a cash reserve fund, not a line of credit, not like a borrowed money, like actually want to have actual cash savings in the bank. And for me, because we had 60 plus properties in 2007, we had more like 100 to 120,000 bucks set aside in an account. And so those two things combined, the fact that we were budgeting for CapEx, and that we had a reserve fund, the way it practically worked, is like, some months I had almost no capital expenses, maybe two or three months in a row. Some months I have about what I thought, the 10% or 5%, but then some months, everything hits it once. And I'm way over budget and I have negative cash flow. And so I kind of fill those gaps with the reserve fund. And so if I have negative 5,000 dollars in cash flow one month, I'm actually using the reserve fund to put it into the operating account. And then for the next two or three months, if I have positive cash flow, I'm putting money back into the reserve fund to fill it back up, almost like a bucket of water, like that full bucket of water. I pour it into the account whenever I need it. And then I fill that bucket back up. And as long as you have a whole lot of cash, this allowed me to not be, I could be kind of lazy on my numbers. I wasn't super precise with how much I was actually spent. I knew historically how much I spent on CapEx, but I wasn't forecasting in the future saying, this property's gonna have this much and this property's gonna have this much. It was kind of a lazy way to do it. But and I just had a bunch of cash essentially set aside. So that worked for me, that was work, but there's some risk there because in 2008 in particular, it was like month after month after month, vacancy expense and capital expense. And so it got a little more dicey. I really drew on those reserves a lot. It made me nervous. We had to sell some properties. So can work, it's kind of a good level one, but it's got some downsides. And I think it's not optimal in the long run. It's better than nothing. But you have any comments on that kind of basic level one just before we go to another question. - So I have a question first. Was that like a CapEx only reserve fund? Or was it for vacancies and repairs and all of it? - Whatever else. Okay, so that's, that might be a problem itself because if you get the vacancies going and then some insurance policies renewing and CapEx come hitting you all at the same time, you can make a perfect storm even with a substantial reserve put aside. - Exactly. - So that's one problem. And you can go the fixed percentage or the fixed amount. And you might be good or you might be well under the needed expenses or also you might be well over the needed expenses and basically a block, a lot of money that could work for you otherwise. And there is a whole discussion, okay, just on the where should you keep all these reserves and how should you keep them? 'Cause they kind of, they need to be liquid on one hand, on the other hand, they can amount to a large amount of money. And it will be better to just stay and not work for you. So that's a whole different conversation on where to park it and have it accessible and yet produce for you. Because some of these reasons, because I want to know a little bit more or a little bit more precise what my properties needs are. And that's why I changed and I started tracking a little bit more detailed the capital expenses. You can do it with a percentage. You can do it linear, basically assuming that it's just a simple division of the cost by the number of years left. But then I discovered that every time you have a night and that you need to be replaced and something that has a longer lifetime, like a water heater that you installed 12 years ago for eight hundred bucks. I cannot install it anymore for less than 1,800. It's almost, you know, almost double. So why? Because inflation. So then I had to adjust and put an inflation factor in there. And again, all that changes. I want to quickly tell you about Turbo tenant, a landlord and a sponsor of this show that has also made managing my rentals a lot easier. I recently switched one of my self-managed rentals over to Turbo tenant, a set up with simple, my tenant moved over without a hitch and I've already received several months of rent payment through the platform. What I like most is that it's designed specifically for hands-on landlords like us. With Turbo tenant, you can list your property, screen tenants with credit and background checks, collect rent automatically, and even track your maintenance and expenses for tax time. And the best part, a lot of the core features are totally free. So if you're managing your own rentals or even thinking about it, check it out at coachcarsin.com/turbo tenant. That link also helps support the podcast. So thank you. Again, this coachcarsin.com/turbo tenant. I'll also have a link in the podcast description below. Now let's get back to the show. (upbeat music) - Yeah, well, let's break down your system. So I think I wanted to share what I have done and imperfect system. It's got problems as you pointed out. It's got multiple problems, especially when a perfect storm hits. Like you're kind of in a raft and you're getting hit from all sides. And that can be better than not having a raft, but not perfect. But let's talk about what you do. And I'll ask you some questions, maybe to clarify. But first and foremost, you have a spreadsheet, which as we're talking, we'll put some B-rolls and videos just to show kind of what your spreadsheet looks like. But let's just start with the basics. I think you just make a list of the major components of the property that are included. Can you talk about what that list, some of the highlights of what that list includes? And then we'll go kind of step by step with what the other parts of the spreadsheet are. - If you want to track the capics, you should take an inventory of all the components, all the major components. And not having by that, it's basically all the roof, the fence, maybe the driveway, interior painting, exterior painting, all the mechanicals, HVAC system, water heater, appliances. I'm even doing the fire extinguishers because they have a lifetime too. Maybe even smoke detectors, carpet if you have carpet. So all those items that are considered capital expense items, you should have an inventory of that. I usually track some details. I might track notes on model number, serial number. So when there is a warranty or repair or replacement question, makes it easier. You should have an idea of how much it costs. For example, an HVAC system. Normally you can go and look at the label and see when was manufactured. So that'll give you an idea of both in terms of lifetime expectancy and how much is left. And also should give you an idea of a price. If I install it, I know exactly what was the price. If I don't have that information and I buy a house, if I cannot figure out a manufacturing date or installation date or anything like that, then I assume that it's as old as the house. Most of them have a, you can get a list or an idea of expected lifetime based on what kind of component it is. And also based on where it is, where is your property? Because things change based on climate, hot climate, freezing temperatures, humidity, and stuff like that. So you should have adept the lifetimes based on that. Quick question. So like, as we're going through your spreadsheet, list of inventory items, that's in one column. Another column is the age or the origin, that the year it was installed, either you installed it or somebody else, right? So that's an important date. Sometimes you're estimating that, like if you bought the property, it was built in 1990, you bought it in 2010. You just got to say, all right, this heating and air has been there in the old time. I think it's 20 years old, I'm just going to assume it, right? Either there is a, like age of existence, have labels, water heater, have a label, usually just go and look, it should tell you when, when was installed, when it was manufactured, and you can assume that it's been installed close to that date. So that will give you the age. For a roof, you usually, either you, somebody tells you that hey, this was changed in 2015 or whatever. If not, you can hire a rougher to come and tell you, usually they're going to tell you how much lifetime it's left in the roof. And you can start from there. But if I don't have that information, I'm assuming it's as old as the property. I think an important point to make here is, it's pretty tempting, especially those of us who are spreadsheet nerds, which I'll put myself in that category. You're definitely in that category too cost. It's easy to try to do. be like so precise that you're like, I gotta get this exactly right. But the main point here is not that you don't have to be exactly right. You can be approximately right. Like the roof 15 years old or 10 years old, let's just assume 15 will go a bit longer because the point is just to be able to understand roughly when this thing's going to go out and you're going to set aside money based on that. So don't get too caught up on this. You can use AI, you can use a roof. I mean, I use AI a lot for this cat, for like lifespan kind of details. Do you use that same kind of thing just to get a rough idea? You can ask, you can ask, you can ask, give me, you can provide the list of components and ask and specify, hey, this property is in Texas or this property is in Florida. Give me the expected lifetime for this set of components. And there is no guarantee whatsoever. I mean, you can install something brand new. And if it has manufacturing defects, you can fail in year, in the first year and the year second year well before they expect a lifetime. And same time, if it's something good quality, it can go well beyond the expected lifetime. Or if it's something that's been maintained, been carefully maintained, also it can go well. I have age of existence that have 35 years and still working, but they've been maintained and like the exterior unit, I pretty much everything has been changed inside little by little. By the way, there is the question, because when you do this kind of stuff, there is the question of when you should replace the item, which again becomes a depreciable expense versus should you try and repair it. And that's the case, it can be deductible expense for that year. So generally speaking, if you end up repairing it every, you know, every year, every three, four months, then you better off replacing it. This is a little bit of a segue, but I'm curious what I was actually thinking about this yesterday when I was planning for this cat-x conversation. I was trying to think about like the math of preventative maintenance and how much that makes you. And I think, I don't know, we might be getting a little nerdy on this, but like I was kind of roughly thinking like if you spend a thousand bucks, for example, changing something in a heating and air system. And if you could be pretty confident, that would get you another five years out of that, for example. There's no guarantees. It's probably a good investment. It's basically a time value of money kind of thing, because it costs you 10,000 to replace the entire heating and air unit. And you could spend a thousand bucks now. You basically can discount that $10,000 to today. You could invest that 10,000 of somewhere else. And maybe that's worth, you know, you're saving a thousand, two thousand bucks because you're kicking the can like five years. The math is roughly like that is how you think about that too. It matters also how all it is. If it's really, if it's still in the lifetime, probably it'll be better, you'll be better off repairing it. If you're close to the lifetime, you'll, and if it's two, three, five hundred dollars on a eight thousand dollar to replace HVAC system, then you're still better with the five hundred dollars repair, because it's a deductible expense. But if you, if it's your well-past double the lifetime of that system, and then you start every year, you have to put five hundred five hundred five hundred. You have to take in consideration, okay, there is the, there is the expense itself, but there is the disturbance to the property. Right, there's the inconvenience to the tenants, every, especially if you have long term tenants, every summer you have to go and whatever, two, three days, they'll be inconvenienced by not having that system or having vendors in the house repairing the system. So it's becomes a different trade off. Yeah, I think early in my career, when I was very, I was much more cash type, you know, I appreciate this to the people there that I would try to keep nursing things along a lot longer than I probably should have. And instead of just these days, even those it hurts, you know, had two heating and air units that were really old, their faster lifespan, instead of like spending three or four thousand bucks to try to repair something, I'm just like spend the 20 grand on the two units and just get it done. But early in my career, that would have been like super, super painful to have to do that. So I think I might have made a different decision. Yeah, so there are other consideration when you do that balance, repair versus replace, you know, I can complicate things a little bit and talk about partial asset distribution if you're done. We better hold up on our aggregation. Cost and we'll go down and grab a hole as well. So let's hold off because I want to go back to your spreadsheet. And that's a advanced concept. Yeah, it's a good thing to think about. But if we go back to the main point of your spreadsheet, like we were, we had the list of inventory, we had the year they were installed or what we guessed, we had their original cost or at least a guess on the original cost. Yeah. And then we have a life span. So let's say a heating in the air, we take us 15 years. So your spreadsheet basically takes the original life. It adds 15 years and it tells you a year that's the expected end date for this thing. And that's really useful because then you can extrapolate and say, all right, if it costs 5,000 bucks, 10 years ago, you can apply, you can apply an inflation rate and say, and the year, the year I think it's going to be need to be replaced at $5,000 expense or likely cost 10,000 bucks at 3% inflation or something. Is that how you think about it? In the simplest forum is just the year when it was installed, the say 2010 is the lifetime, let's say 20 years. So basically it's going to expire or it's, it's going to finish the expected lifetime in 2030, 20 years. And let's say it's the cost of the system, let's say $10,000, right? So you basically you have 20 years to accumulate the replacement amount for that 10,000 dollars. So it comes to what $500 a year and it comes to whatever divided by 12 about 40 something dollars per month. So that will be the simple math, the simple, the simplest forum, the linear estimation of the cost per year, per month, and then at the bottom you have the totals for the whole property, especially those totals. You can see how close they are to your, if you use a percentage of the rental income, and if it's 5%, let's say I don't know, let's say you have $12,000 rental income and you have, you put the 5%, it'll be like what, $600. If you end up with your total in that spreadsheet tracking, if you end up with 700, you're pretty close to the 600 that you allocate, right? But you might have the surprise that my allocation, it's $900 and I'm saving only $600. And you might want to adjust things and supplement. The next level is what I discovered, like I said, it's, yeah, it's wishful thinking that you'll be able to install to replace something with the original cost. Most of the time by the time you get to replacement, if I were to guesstimate a, a, a, a, easy replacement value, it's sort of 1.5, what was the original cost? If you're lucky, if not more, right? So then I added, I enhanced the, the spreadsheet and I added a column for inflation adjusted. I have a column for inflation factor and then a calculation for the inflation adjusted amount. And that gets applied to, to the initial cost and tells you, okay, what you install with a thousand bucks, 10 years ago, you're going to need 1500, five years from now. And again, the, the, the, it calculates, it gives you the total and that total is, it's usually bigger than the linear amount and might surprise you because it's going to be bigger than the 5% allocation on. Yeah. So the first thing, I think this, this, this whole process of having a spreadsheet and forecasting like you're doing, I think does two big things. But number one, I think for almost all of us, there's a reality check where you look at what you estimated that the, the catpex to be and what it actually, what you actually should be underwriting. Those are almost always very different and they're almost always different in that you're underestimating on the front end. Yeah. And I know this because I've, I've looked at hundreds or maybe thousands of students, spreadsheets and actual, actual numbers of the years. And I've looked at my own, I keep my own books very closely and my actual maintenance and catpex fence when you combine those is much higher than most people are allocating. I see people saying, oh, it's $50 a month and $50 a month for this and was really like to, a couple of under bucks a month or $250 a month when you, a 300 bucks a month on older properties in particular. And that's a, that's an, that's an advantage. Almost always on the negative side. He's never always. Oh, I'm saying a lot more money that I need. No, it's always, I'm under a, a lot more of things. So, so the first thing this does that helps you hopefully underwrite your deals a little bit better. You need to like, you think about two things. One, if you buy an older property, it probably, it convinces you why you should fix more things on the front end or just pass on the deal. Like to say, all right, if I have a deal with bad plumbing, bad sewer, all this stuff, I can't, I could just rent it out for the next five years, but I got a lot of surprises coming in the future and it's not going to be good surprises. So I either need to like buy that at a lower price and then do all the work or it's going to be good. I don't think I need to pass. So that's somebody else take on that alligator. And I'm, so it helps you recognize an alligator and avoid it instead of like taking on this property that look like cash flow on the spreadsheet, but they're really like actually losing money. There is no cash flow on those deals. When you look at the property, when you look at the deal, I use the 5% for capital expenses. I use 5% for repairs. So when you calculate the numbers, I use the 5% for both of them. Usually we get the, and again, depends on, you know, your style of investing, I guess. When we get the property, we make it nice and we try to reset as much as we can. So if something is old and it has problems. Obviously problems we replace it we don't we don't really wait. Especially if it's like a water heater on the second floor inside the house. Once you place a tenant, if that water heater goes, it's gonna be quite involved to replace it there. If it's in the garage, it's easier. It'll be less of a disturbance. So again, if it has a year or two left in the lifetime or it looks like it's in good shape, no problem, we'll ride as much as we can. But normally usually we we try to replace and reset the property on a good state going forward as much as it makes sense. And on the other end, when you sell or if you're looking to sell, you might want to do that a capex to know if you're selling one that has been stabilized, that has replaced most of the stuff. Capital expense wise, it's good for many years to come and not keep a good one. Sorry, one that appears as good, but next year is gonna have you know $20,000 in expected capital expense improvement and basically is gonna prove to be a rotten egg next. Yeah, because you're actually thinking a little bit in the future, you can see that all right, five years from now I'm gonna have heating and air is gonna go out. I'm probably gonna have to replace the driveway. You know, these things are starting to stack up. So as you're thinking about which properties I call this like pruning your portfolio. Like yeah, you might prune your portfolio based on the third capex plus this location is not quite as good or whatever. It helps you be strategic on the front end when you buy a property. It helps you be strategic and analysis of your current portfolio as well. This episode is sponsored by Brian Maddix, a trusted mortgage broker in the official financing partner of Coach Carson. Brian specializes in helping real estate investors qualify for the right loans, whether that's conventional, DSCR, Helox or other investor loans. So if you're self employed, have more than 10 properties or just want to make sure you get the best loan for your situation, Brian and his team can help. Brian is a real estate investor himself and I've known and trusted him for over 10 years. My community manager, Sean McCay put it best when he said, Brian's been my go to lender for 15 years. He's helped us with all kinds of loans, even complicated ones. And I trust them more than anyone in the business to connect with Brian and see what's possible. Go to coachcarson.com forward slash Brian or check the link in the show notes. Again, that's coachcarson.com forward slash Brian a spelled B R Y a N during and even after when you're preparing to to part with an investment. And if you make it new and you do a solid rehab, maybe this kind of detailed tracking might not be as important. But if you get a property and you'll try to squeeze everything out of it and you leave with the whole system in place, I would say you better be tracking this pretty tight. I agree. So you should be getting better and better each deal you do with this information you learn. That's that's one piece. The other piece that I want you to talk about though, Carson is like back to me in my 2007, 2008 and 2009, you know, just hold non-per-deer life with my reserves. It also helps you budget for actual, you know, in a dynamic budget. So my my process was 5% or 10% of my income. I'm going to make sure I'm, you know, I'm going to be spending that on CapEx and then anything that's over that, I'm just filling it up with my reserves. But what actually should happen is you should be looking, you know, and anticipating. So like at the beginning of every year, you can look at it and say, well, this year, I actually think I'm going to probably have this much in expenses because I have 10 properties and at three or four heating and ares that are due and over time, can you talk about how you sort of dynamically budget and how you think about how much cash you actually set aside because that's a pretty tough thing to figure out. I'll mention a few other things that I have in the spreadsheet because the spreadsheet that I have is I call it life because it's it's it's tracking the date, the installation date and lifetime. So it's going to calculate an end of lifetime and whenever that happens, it's going to tell you that this is past due, it's going to flag the whole row, it's going to make it red, it's going to move that replacement cost into a different column and it's going to give you a total of all the items that are already past due, all the amounts that you better have as a reserve because these are systems that are likely to go at any moment and you'll tell because in total let's say you might have 50,000 in total capital expense but that's not going to happen all at the same time. They have different lifetimes, expectances and all that but you might have two, three of those systems past due and you want to know the the amount and you want to know the amount per property and you want to know the amount per portfolio and again that changes now you might have one item past due but if you look at the spreadsheet three months from now you might have three items past due so basically wherever you open it you'll give you updated totals. That's one, the other one is you still have to open it right but what if you want to know what's coming your way? So there is a way to to calculate and to chart those expenses and you can see okay I'm good this year next year I'll have something small but two years from now I'll have three big ones do overdue and potentially subject to those expenses then I'll have another two years of smooth sailing and then the roof goes and so five years from now I'll have a major one coming and you can plan again and you're gonna have one a roof for a property another roof for another property you can make for a rough year but with something like this you'll know years in advance that oops three years from now I'll have it you know big dips. Yeah so I find that I think this is the stage that I'm really intrigued by Kostin like when you and I talked about this process I got you know I survived the cash flow crunches and they were okay but to me it was the biggest negative that I had and I think a lot of investors have is just the surprise of these things of not anticipating them and if we were a big corporation most of us are small and mighty investors we have a whole CFO and a team who does capital budgeting we would be saying all right here's our flows of capital budgets and here's where we have to spend and we would you know we would we wouldn't make that big purchase this year because we knew we had $50,000 worth of cap X coming or we might have to borrow extra money or we have to increase you know so there would be ways to anticipate it and you might even do things like what I'm thinking about is if I knew next year I had four heating and airs that were set to happen I might choose to do one of those early because I have some money this year and I don't want all of them to keep breaking at the same time I might do one a little early I might do two next year or one next year I might do I might kind of start spreading them out and not just wait for them to go out I would actually you know maybe do a not everyone of them but I might start doing a little bit of ahead of time that way I'm not like surprised at all at once and having to spend a bunch of money all one time I that's a personal decision but that's the kind of thing you can do when you're actually planning and forecasting like this I didn't even consider that aspect because yeah if you if you end up with this kind of big expenses it might start your tax planning you might factor that in in the tax planning and like I said do it now versus next year or postpone it for next year yeah a little bit another thing that I've done because once you get to this level of tracking you get to actual numbers and I was like to discuss you're gonna be surprised you might not like the answer when you do the real tracking you can get to substantial amounts of money on one hand it doesn't mean that the system is gonna fail you know if if he has a 15 year expectancy it doesn't necessarily mean he's gonna fail in year 15 he can very well go to another two years he can very all go for another 10 years and he can very well fail before the 15 years but at least you can have to blame surprise if it fails and all I don't have the reserves for it it's a surprise but then again you need to have to have that reserves allocated and you can get to big amounts and they have different failure probability and they have a different impact so you can go and put all that money aside or you can be a little bit smarter and try and have a bit of an engineered approach to okay do I really need all this money all available and waiting or there is a little bit of flexibility so I have applied some engineering principle and and and weighted probability of failure on known items to determine okay how much do I really need to put aside let's say a dishwasher a 400 dollars dishwasher the even if it sales the impact on all your operation is not gonna be major so if you don't have the full amount or if you have 300 out of the 400 the impact is gonna be minor but a $15,000 roof is gonna impact differently your reserves and so there is some some probability factors that I apply to figure out okay it shows me that I need to have 20,000 set in the reserves but based on what the items are and probability of failure I actually need to hold about 12,000 yeah I think that's really useful I think that it's an imprecise science which all engineering is a. you're taking forces of nature or the forces of the economy and you're trying to like make some predictions as the probabilities, but I really like your spreadsheet for that reason because it takes the facts we know it uses reasonable projections and then it also just helps you make decisions. That's ultimately what we're trying to do here. We're trying to make strategic decisions about ensuring we're not going to fail and run out of money, ensuring that we are treating our property well and being keeping it at a quality level. It's just, it's using a more thoughtful approach to managing your the big items of your property and I think it's super useful for that. And by the way, whenever I listen to this, they're going to be seeing like images of the spreadsheet and everything, but we're going to talk a little bit more about it, but if you actually want to get a get a copy of that and download it, this is something cost has been a lot of time put in together and so he's been really generous sharing it letting people use it, but you can actually get a copy and pay for it at a small price down in the link. So I'll have a link below. It should be coachcarsin.com/capexplanning and you can check that out. We're going to keep keep talking about a little bit more, but causes or anything else you would say about implementing the spreadsheet. Like I've been thinking about it for myself. Like I have a lot a lot more properties than I'm having to like piece by piece put these in here and I've even been thinking about maybe doing like a version 1.0 of my spreadsheet where I say I'm just going to do like the big four. I'm going to do he getting heating and air roof appliances and maybe hot water heaters like it's just to start because I know I eventually I wanted to drive ways and all the other stuff, but it's a pretty overwhelming prospect for me just to get it all done at one time. So I'm thinking about just like doing it in pieces like saying all right let's just get the big four to start off. I'll add the other ones later on and just like knock it out one weekend or something like that. I don't know do you have any thoughts on how you implement it yourself and kind of took the you take it in steps or you just go sit on the weekend and just do the whole thing at one time. Whenever we take on a property we get a new deal and we close one of the first thing we do we have kind of like an intake form for the property maybe we should post that one too for the benefit of listeners. So I use this intake form that gathers a bunch of details about the property and many of them are these type of components. I like to know like I said the model of the HVAC system the year when it was manufactured big and I wanted I take a picture of that label I take a picture of the let's say the dishwasher because why two years from now it's gonna it's gonna die and you're gonna have to look for repair or for replacement and you just I just go in those initial intake form in inventory pictures and I just look and I know exactly what's the model I can try and find the it comes very much in handy without having to put the property and all that. So almost half of that you do it you should do it anyway it's information that you should have on the file. If you're doing a cost aggregation you'll do the other half also and I do cost aggregation on all my properties. So just with those two items that I think will be best practices I would recommend them you cover a lot of this stuff and then it shouldn't take that much maybe the first one is gonna take you half an hour but the next one is gonna take you 10 minutes because it's basically same list of components and you're just gonna change the dates that's all it's gonna be and the rest of most of the stuff it's calculated and it's like I said life updated and yeah once you get once you get the initial data entered it's just a maintenance thing it's not that big of a deal but it's like everything else like getting your books in order getting your filing systems in order it's like it's like your kitchen was dirty and you've let all the dishes pile up and you just need to clean the dishes and get it done but after you get them to clean you know then it's just like a maintenance thing it's not a big deal. And the thing is again when you have one property it's one dishwasher one roof one inch back it's gonna be easy but once you get to a number of properties you can no longer operate by you know by remembering things you need to be a little more more organized you you're pretty much entering the kind of enterprise or organization or business level you need to have this this in place. So I want to talk we've talked about the details of how you do that planning level one kind of what I've been doing for years level two what cost is doing with the spreadsheet I want to talk more cost and now by just the benefits of this like for a small mighty investor we sort of painted the negative picture in the beginning we said you're you have a bunch of surprises you have negative cash flow and you thought there was positive cash flow maybe you have to go borrow money to pay for these repairs like just sort of like running your business reactively and with a lot of stress what I think like if you can implement a system like this and get it done I think there's a lot of peace of mind that comes I just think you can sleep a little bit better at night knowing that all right I've got my major expenses under control the other thing I would say is like you have you actually have a business now you have a predictable business like if you if you want to go borrow money from some from a bank or from a private lender if you want to live off your cash flow like that's one of the biggest deals you talk about it's like I want to I want to leave my job and use rental income is either all or a big chunk of my living expenses and pay for them if you don't have a predictable way of knowing is roughly how much cash flow you're going to have and this is the reason must be we don't have that then you can't you can't reliably and confidently live off your rental income but if you have you know a pretty good idea like here's my rent roll here's my normal vacancy rate here's here's how much catpex I can expect you're actually taking a lot of the uncertainty away so that you can anticipate the ups and downs and you can actually live off your rental income I don't I don't know if you want to speak to that a little bit because I know you're you're more recently doing that you're you're you're you're you're you're a full-time investor these days so talk to me about how that's kind of changed your crop. It's it's very important if you if you rely on that because it can reveal the the reality of a I call piglet property that seems to pre-producing a lot of cash flow and seem to have low expenses but because the components are old and they have to be replaced regularly that they're going to eat your that nice cash flow on a regular basis and the end result is you're not going to have profit versus property that it's stabilized and it's producing regular nice cash flow and the problem is this expenses do not come with that allocation we like to think in okay I need to put whatever 26 dollars per month for my HVAC system yeah the HVAC system one is going to come is it's not going to be 26 dollar per month it's going to be $7,000 $8,000 $10,000 chunk that you have to to put it down and if you don't realize that that your system you're going to think oh I put 26 dollars when the HVAC system should last 10 years and don't realize that my HVAC system is pretty much already 12 years old is basically past dual already it can die at any moment that 26 is not going to is going to not going to save you if it dies next year you know your rate of saving more should be more like 800 bucks a month just for the HVAC system so it prevents it prevents big surprises if you if you rely on that cash flow on a monthly basis and again you should and we track that not only the capital expenses but we track the we track the big the big expenses like the one the insurance policies renew as per example I have three policies they're renewing summer it's a big deep and usually coin size with vacancies you have a couple vacancies and that happen in summer the equal coin size it's going to make you pick a big deep takes us you get an HVAC or two failing then you have again three three big ones they're going to hit at a perfect time if you don't have those reserves properly properly guess what you're not going to have cash flow and if you try to make your living on that cash flow guess what you'll you'll be dieting those couple months yeah yeah you have any money to pay the bills or and you also then if you if you don't if you don't spend the money on those things you're either your tenders going to be upset with you and leave and asking me a problem or you're going to have to borrow the money on a credit card which is a problem so there's just there's nothing positive about running out of money and having this blindside you it's a big negative especially when you're living off your cash flow they're they're big and obvious immediate impacts and they're all those secondary ones that cascade out of it if you don't have the reserves if you don't maintain it if you don't if you're not able to replace it and all that so yeah they didn't even consider the fact that yeah if you cannot replace the issue that gets what's going to happen you can end up with a vacancy because the 10 is going to move out and all that so yeah so lots of reasons to work on this we know of all the details your spreadsheet I want to give a couple resources that we've talked about one is cost and spreadsheet so if you look in you look in the podcast description the YouTube description in the comments on YouTube I'll have a link to that you can go that I highly recommend it is something I'm borrowing and using and I'm borrowing I'm using all his his details so check it out take a look at that I've also put together a cheat sheet for this whole episode so if you're you know we kind of talked about level one system level two system I gave an outline of what how that works just if you'd rather read what we would whenever you can download that cheat sheet for free and kind of understand what we are over today and then cost and I know people might want to connect with you I know you hang out at your one of our number one contributors and rental property mastery so people are wanting to discuss things and talk about it and they're in rental property mastery that's a great place to connect with you is there anywhere else you think people should that you like to hang out online or is that the best place for people to connect with you? I'm fairly private in that regard. I don't have a social media. I mean, I have a Facebook plate, but not really posting. I have that rental calculator app that I published can put by a bit. We can post my email and if anybody has questions, they can contact me and I'll gladly answer. One thing I wanted to mention, one thing that I see is especially in performance with new properties. Quite often, there are advertisers that are very little or no capital expense per cent each. Basically, you buy a new property and the idea is you're not going to need to put a capital expense or build a capital expense reserve. That's not true. Items will, yes, you're not going to, hopefully, you're not going to have three pairs in capital expenses for a couple of years or a few years at the beginning, but guess what? The age back require maintenance and it will degrade. The roof is going to degrade and you do need to put money aside pretty much at the same rate. So you have those reserves five years from now, eight years from now, 15 years from now. So I think it's a fake improvement of the numbers by considering a cap X as zero. It's never zero. Yeah, that is a, I used the word taking time, Bob. If you ignore that, you're just pushing off that in the future and you're either going to deal with it when you try to sell it, you're going to deal with it when you have a renter down the road, but it's a true expense. It's just a delayed expense. That's all right. I think it's one of the biggest points that we're trying to make. I call it the Ulster strategy, hiding in the head in the sand. Stick your head in the sand and hope it is okay. I hope you can sell it to somebody else who doesn't understand and doesn't take that into account. Exactly. Yeah. Well, Austin, thank you for your time. Thanks for sharing this. I know everybody's going to get a lot of benefit from this. I'll leave everyone with if you like this topic of kind of planning for capital expenses and using spreadsheets. My next video that I want to recommend to you the next episode is all about estimating how much tax you pay whenever you sell a property. And actually, I have a spreadsheet I use to do that. And so if you're interested in knowing how much if I sold this property, how much tax would I pay? What's the implication of that? Check that out. If you're watching on YouTube, you can click on the thumbnail above me here or if you're listening on the podcast, you can also click on the link or in the podcast description below or the YouTube description below and check that out. I think you'll really like that video. See you next time.