Modeling Irregular Capital Expenses

[Systems101]

This is (another?) shot at modeling irregular expenses.  What I'm really attempting to model here are the major capital expenses (of owning a home).

Past threads I've found have brought out a number of points:
   - Measure the past
   - A FIRE individual can work (or will do work) in one of various ways and still have some income to address these issues

While I respect these opinions, I believe they miss the central point of trying to build a capital-aware FIRE model.  In some cases, they don't work... for someone with a newer home, there isn't capital maintenance to actually measure.  I also want to be put in the "go work" situation only if it's NOT a predictable situation.  Ignoring that a roof will eventually need to be replaced is not a "black swan" it's "lack of planning".

There is also an apparent "rule" of 1-4% (of home value) expected maintenance cost.  Lots of web sites say this, but I've never actually seen the model to know how relevant this is to a frugal mentality (nor have I been a landlord to have that experience).  It also ignores the "value of dirt" (is a furnace in San Francisco really 10X one in the Midwest?- I doubt it), so I have low trust in this rule of thumb (but see below).

So the net is, I don't want to be on a path to (or at) FIRE and all of a sudden discover significant expenses that have never been in my model.  An effective 10% increase in expense (as an example) would just stink, and with a little bit of homework, shouldn't be a risk I have to take.  This is a shot at that "homework".

Here are the rules (and limits/weakness) of the model:
- Does not cover the general-level periodic expenses like sealing a driveway, fence/trim/siding/inside painting, or HVAC/AC Servicing
- Does not cover (for the moment anyway) unusual items (pools, irrigation systems, retaining walls, sandblasting/redoing mortar on bricks)
- Attempts to only cover capital items of significant value (>$500 new), so does not cover Sump Pump, Dish Disposal, Faucets, Broken Windows, Smoke Detectors
- Does not cover contents (Furniture) or non-house capital (Automobile)
- Does not cover non-periodic "black swan" expenses: tree removal, termite damage, water/gas pipe issues, foundation issues, regrading
- Assumes certain items are beyond the necessary modeling life (50+ year life): Kitchen Cabinets, Closet structures, Walls/Structure itself, Electrical Wiring, Showers, Doors, Windows*
   *Windows here is probably a weakness, but there seems to be significant variation in expected life on different sites, and I've lived in enough houses with windows so far beyond those expected lives that I don't know what to believe

Special thanks to: http://www.atdhomeinspection.com/advice/average-product-life/ for many of these product lives.  (Many I verified on other sites).

Items without prices are too variable for me to model for others.  Fencing depends on type & length, appliances could be debated of new vs craigslist, etc.  Others are shown in the mid range of products/costs in the US based on various searches, but you may want to research for costs in your area.

Useful Life - Item (Cost)
25 - Fence
20 - Asphalt Roof ($6.50/sq ft)
20 - Gutters/Downspouts ($5/linear ft)
30 - Siding ($5/sq ft)
20 - Pave Driveway ($6/sq ft)
25 - Deck Replacement ($15/sq ft)
15 - Garage Door
15 - HVAC
11 - Refrigerator
15 - Stove
9 - Dishwasher
10 - Clothes Washer
13 - Clothes Dryer
10 - Water Heater
10 - Carpeting ($4/sq ft)
10 - Laminate/Vinyl ($10/ sq ft)
15 - Refinish hardwood flooring ($3.50/sq ft)

Anyone see any major items I'm missing?  Right now I'm thinking of just modeling this as a flat ratio of per year cost and treating that as an annuity cost/sinking fund type model.

Interestingly, this is about 1.5% for my house with new mid-range appliances, so it starts to rationalize the rule of thumb, which is at least moderately comforting that it isn't completely made-up.  (I'm in an average COL area.)

[lukebuz]

Holy overthinking, batman.  2%.  Done.

[rachael talcott]

I own rental property, and I make a ballpark deferred maintenance calculation when I'm considering buying a property.  It really has nothing to do with the value of the property, so you're right that just taking 2% is something of an oversimplification.  The square footage matters for flooring and the size of the HVAC, but there is also the issue that split HVAC units are more expensive than single package ones.  Kitchen appliances are pretty much the same cost no matter the size of the house, though.  I don't go through the work that you do, as I've found that there are many things that are unpredictable.  My reasonably priced plumber retired and now I'm stuck paying much higher rates because that's all that's available now.  My strategy is to just get a rough estimate and then have a buffer/emergency fund in the budget for unexpected things.

Many of the things on your list are "flexible."  That is, if the market is down, you might want to wait to replace your worn carpet. 

[Prairie Stash]

if you want to use the rule of thumb 1-4% its 1-4% of the replacement value of your house. That adjusts to local costs of contractors; in HCOL areas a contractor costs more than LCOL areas. People often confuse the replacement cost with the purchase cost.

Replacement cost of my house is $240,000 but It would sell for over $300K. 10 years ago the replacement was $180K but the purchase price was $140K, it works for areas with deflated house prices too.

[mousebandit]

If you're going to delineate things, I would also consider plumbing issues - particularly problems with sewer hookups.  That can cost a lot to diagnose and dig up and remedy.  If you're outside city limits, then also consider well and septic costs, and costs of any power line repairs / maintenance that would be homeowners responsibility.  Driveway costs outside city limits will be higher and more frequent, and depend on the distance of your driveway/ roads from public-maintained roads.  Also consider adding in repair, maintenance, and upgrades to outbuildings - even in the city you may have or want garden sheds, storage sheds, detached garages, etc.  If your home has a basement, absolutely factor in costs for basement issues as things age or in particularly wet years. 

[Systems101]

I had tried the one minute version, as a starting point.  When the 1-4% of value estimate was a 13-50% increase in required savings to FIRE, it failed the sniff test.  A few hours of investment are worth it to ensure the years worked is appropriate, because the estimate showed this can be a big challenge.

Many of the things on your list are "flexible."  That is, if the market is down, you might want to wait to replace your worn carpet. 

Thanks for the info and agree on flexibility. 

if you want to use the rule of thumb 1-4% its 1-4% of the replacement value of your house.

Ah, thanks, that makes a bit more sense.  Still nice to know the quick estimate relative to my own behavior vs an "average" behavior

I would also consider plumbing issues - particularly problems with sewer hookups.  That can cost a lot to diagnose and dig up and remedy.

Lots of good items, this one especially could be an issue for me.  Again, I suffer from lack of financial context here - current home has a slab, everywhere else I've lived has always had a basement.

[Monkey Uncle]

I'm all in favor of running reasonable numbers to get an estimate of costs, but you guys are totally overthinking this.  You'll always miss something if you try to model every last detail.  Track your total expenses for a few years.  If those numbers don't include a few irregularly occurring big ticket items, tack a few thousand $ buffer on to your annual spending estimate.  Most years you won't need it, but the accumulated buffer will cover you in those rare years when irregular expenses exceed your annual buffer.