An old roof and furnace turn this rental’s $420 a month into a $97 loss

A rental needs money set aside for two kinds of work. Repairs are the small jobs that turn up every year. Replacements are the big items that wear out, like the roof and the furnace, and investors call spending on them capex, short for capital expenditures. Leaving them out accounts for two of the seven mistakes that make a rental look better on paper. Putting them in leaves the real question: how much goes in each?

What’s the difference between repairs and capex?

Repairs are the jobs you can’t predict one by one: a dripping faucet, a clogged drain, a broken disposal, a window that sticks. Some come up most years. What they cost depends on the house’s age and condition, and on how many of them you fix yourself.

Replacements are the parts of a house with a working life: the roof, the furnace, the central air, the water heater, the appliances and the flooring. They don’t fail every year, but each one is a big bill when it does. HUD publishes a table of the average useful life it recommends for each part of a building, for use in its multifamily housing programs. For family housing, it gives an asphalt shingle roof 20 years, a gas furnace 20, a central air conditioning condenser 15 and a water heater 12.

How much does each percentage cost on one house?

Take a $250,000 house that rents for $2,750 a month, bought with 20% down on a 30-year loan at 7%, plus 3% in closing costs. Property taxes are $3,000 a year, insurance is $1,400, a property manager takes 8% of the rent, and 5% of the rent covers the weeks it sits empty. Here it is with three levels of repair and replacement budgets, each a share of the rent.

These are example figures, not a forecast for any market.

Raising both budgets by one point of rent costs this house $55 a month.

How do you size the replacement budget item by item?

List each big item, what it would cost to replace today, and how many years it has left. Divide the cost by the months left. That’s what to set aside each month so the money is there when the item gives out.

The years left come from the house, not from a chart. Ask the inspector to estimate each item’s remaining life, and ask the seller how old each one is, as the pre-offer checklist suggests. Even HUD’s table lets the person assessing a building estimate an item’s remaining life independently of the standard figure.

Here’s the same house twice. In the first version, the roof has 12 years left and the furnace 10. In the second, the roof has 3 and the furnace 2, which is what HUD’s 20-year lives would leave on a 17-year-old roof and an 18-year-old furnace. In both, the central air has 8 years left and the water heater 6. The replacement prices are this example’s placeholders, not quotes.

The newer version needs $222 a month, a little over 8% of the rent. The old roof and furnace push it to $655, almost 24%, until both are replaced.

This is also where a percentage misleads. It rises and falls with the rent, but a furnace costs the same whatever the house rents for. The same $222 a month would be about 15% of a $1,500 rent.

What does an old roof or furnace do to cash flow?

An old roof or furnace can turn a rental that pays into one that loses money. Here’s the first table’s house, with repairs still at 5% and each replacement budget in place of the flat 5%.

With the old roof and furnace, the house that looked like $420 a month loses $97 a month until both are replaced. Somebody pays the $17,500. The choice is who, and when.

You can pay out of the rent over the next few years. That’s the loss in the table: $655 set aside each month, with your own money filling the gap.

You can pay up front, replacing both before the first tenant moves in. That adds $17,500 to the cash you put in, and the monthly set-aside drops to $166, using HUD’s 20-year lives for the new roof and furnace. The house then makes $392 a month on $75,000, a cash-on-cash return of 6.3%. That’s a year’s cash flow divided by the cash you put in, explained here beside cap rate. The 5% version promised 8.8% on $57,500, but it never paid for the roof.

Or you can take the inspector’s estimates back to the seller and ask for a lower price.

Does the IRS treat repairs and replacements differently?

The IRS treats the two differently, one more reason to keep separate budgets. Its Publication 527 (the edition for 2025 returns, current as of September 2026) says the cost of repairing or maintaining a rental can generally be deducted, unless you’re required to capitalize it. Improvements must be capitalized, which generally means they’re depreciated: deducted a slice at a time over a number of years instead of all at once. An expense is an improvement if it results in a betterment to the property, restores it, or adapts it to a new or different use. The publication’s examples include a new roof, a furnace, central air conditioning and a water heater. Where a particular job falls depends on its details, so ask a tax professional before counting on a deduction.

Where do the two budgets go in the calculator?

In the rental calculator, repairs go in the Maintenance field and replacements in the CapEx reserve field, both as a percentage of the rent. For repairs, pick the percentage from the house’s age and condition. For replacements, work out the item-by-item figure and divide it by the rent: $655 on $2,750 is 23.8%.

Keep the money where it won’t be spent as income. It’s a separate pile from the reserves a lender wants to see before you close, which this $250,000 example adds up. Then set both fields and see whether the deal still pays once the roof is in it.