Operating expenses keep a property running; capital expenditures (CapEx) keep a property alive. Roofs, boilers, and sewer lines do not appear in any month's budget — they arrive as $8,000-$25,000 surprises. On pre-1980 buildings, the difference between a cash-flowing duplex and a money pit is almost always the quality of your CapEx reserve planning.
CapEx vs. Repairs: The Line
- Repair (expense): restores an item to working order — fix a leaking faucet, patch drywall, replace a broken window pane. Deductible this year.
- Capital improvement (CapEx): replaces or substantially improves an asset with a useful life beyond one year — new roof, new boiler, new windows. Depreciated over time (see our depreciation guide).
Component Lifespans in Pre-1980 Buildings
| Component | Typical Remaining Life | Replacement Cost (duplex) |
|---|---|---|
| Asphalt shingle roof | 5-15 yrs remaining | $9,000-$16,000 |
| Boiler / furnace | 5-20 yrs | $8,000-$15,000 |
| Original galvanized plumbing | 0-10 yrs | $10,000-$20,000 (repipe) |
| Knob-and-tube or old panel | 0-10 yrs | $4,000-$12,000 |
| Original windows | 5-15 yrs | $12,000-$25,000 |
| Sewer lateral (clay/cast iron) | 0-25 yrs | $6,000-$15,000 |
| Water heater (each) | 3-8 yrs | $1,200-$2,500 |
| Exterior paint/tuckpointing | 5-10 yrs | $5,000-$12,000 |
Three Budgeting Methods
Method 1: Percentage of Gross Income (Simple)
Reserve 8-12% of gross scheduled income for buildings over 40 years old; 5-8% for newer stock. A duplex grossing $38,400 reserves $3,000-$4,600/year. Easy to apply, blind to the building's actual components.
Method 2: Per-Unit Per-Year (Quick)
Reserve $250-$400 per unit per year for pre-1980 buildings ($600-$1,600/year for a fourplex). Better than nothing; ignores component age.
Method 3: Component-Based Reserve Study (Accurate)
List each major component, its remaining life, and cost — then fund the annual equivalent:
Worked example — 1920s duplex, $38,400 gross income:
| Component | Cost | Remaining Life | Annual Funding |
|---|---|---|---|
| Roof | $12,000 | 8 yrs | $1,500 |
| Boiler | $11,000 | 6 yrs | $1,833 |
| Sewer lateral | $9,000 | 12 yrs | $750 |
| Electrical panel upgrade ×2 | $6,000 | 5 yrs | $1,200 |
| Water heaters ×2 | $3,000 | 4 yrs | $750 |
| Exterior tuckpointing | $8,000 | 10 yrs | $800 |
| Total | $49,000 | — | $6,833/year |
That is 17.8% of gross income — far above the 8-12% rule of thumb, and it is the honest number for this building. This is precisely why "1% rule" buildings with original mechanicals underperform: the CapEx load eats the margin.
The Pre-Offer CapEx Inspection Checklist
Before buying any pre-1980 2-4 unit property, get answers on:
- Roof age (permit records or seller disclosure) and any active leaks
- Heating system age — serial numbers date most boilers
- Electrical service: panel amperage, knob-and-tube presence, aluminum wiring
- Plumbing material: galvanized supply lines are near end-of-life
- Sewer scope: a $250 camera inspection can reveal a $12,000 lateral problem
- Foundation and tuckpointing condition
- Windows: original single-pane windows drive both CapEx and utility costs
Every item found is either a price reduction, a seller credit, or a line in your reserve plan.
Where to Hold the Money
Keep reserves in a high-yield savings account or money market fund — liquid and safe. Do not invest CapEx reserves in the stock market: roofs do not wait for bull markets to end. A separate account per property keeps multi-property accounting clean.
Model It Properly
The Multifamily Cash Flow & NOI Calculator includes a dedicated CapEx reserve percentage input, so your NOI, cash flow, and cash-on-cash return reflect the true cost of owning an older building — not the fantasy version the seller's pro forma shows.