Episode 55: Roof, HVAC, and Major Systems

Building Passive Income

00:00 / 00:20:13

Episode Description

Roof, HVAC, and major building systems are some of the largest expenses in commercial real estate.

In this episode of Building Passive Income, CREI Collin explains how to inspect these systems, estimate their remaining useful life, and build a capital expenditure plan.

Learn how to avoid unexpected costs, plan ahead for major replacements, and protect your returns through disciplined CapEx planning.

What You’ll Learn

Why major systems like roof and HVAC matter
How to inspect roofs and estimate remaining life
How to evaluate HVAC systems and replacement costs
Key risks in plumbing, electrical, and structural systems
What capital expenditures (CapEx) are and how they differ from expenses
How to build a CapEx plan step by step
How CapEx impacts underwriting and returns
Red flags to watch for in major systems

Key Takeaways

Why Major Systems Matter

Replacement costs can be significant
System failures impact tenant experience and operations
Buyers factor these costs into property value

The Roof

Common Roof Types

Flat roofs: TPO, EPDM, or built-up roofing
Pitched roofs: asphalt shingles, metal, or tile

How to Inspect

Check age and material type
Look for visible damage or ponding water
Inspect interior for water intrusion
Review maintenance history

Remaining Useful Life
Compare current age to expected lifespan.
If less than 3 to 5 years remain, plan for replacement.

Estimated Costs

Flat roofs: approximately $5 to $10 per square foot
Asphalt shingles: approximately $3 to $7 per square foot
Metal roofs: approximately $7 to $12 per square foot

HVAC Systems

Types

Individual unit systems
Central systems
Package units
Split systems

How to Inspect

Review system age and maintenance records
Test performance
Look for rust, leaks, or poor airflow

Remaining Useful Life
Typically 15 to 20 years depending on maintenance and usage.

Estimated Costs

Individual systems: $3,000 to $5,000 per unit
Package units: $4,000 to $7,000 per unit
Central systems: $50,000+ depending on size

Other Major Systems

Plumbing

Watch for aging pipes, leaks, or low pressure
Water heaters typically last 10 to 15 years

Electrical

Check for outdated wiring and overloaded circuits
Look for code compliance issues

Foundation and Structure

Look for cracks, settling, or shifting

Parking and Pavement

Evaluate cracks, drainage, and overall condition

Exterior and Landscaping

Inspect siding, paint, gutters, and overall curb appeal

What is CapEx?

Capital expenditures are large investments that extend the life of a property or improve its value.

They are different from operating expenses, which are ongoing day-to-day costs.

Some CapEx is planned. Some results from deferred maintenance.

How to Create a CapEx Plan

Step 1: Identify Major Systems
List all major systems across the property.

Step 2: Determine Age and Remaining Life
Estimate how long each system will last.

Step 3: Estimate Costs
Use PCA data and contractor quotes.

Step 4: Build a Timeline
Map out when each system will require replacement.

Step 5: Set Aside Reserves
Many investors set aside $250 to $500 per unit annually, with higher reserves for older assets.

Step 6: Update Annually
Adjust your plan based on actual performance and inspections.

How CapEx Impacts Underwriting

Reduces available cash flow
Impacts projected returns
Must be included in financial modeling

Ignoring CapEx can lead to overstated returns and poor investment decisions.

Red Flags in Major Systems

Systems near or past expected lifespan
Lack of maintenance records
Multiple systems failing at once
Significant issues identified in PCA reports
Seller unwilling to provide documentation

Episode Highlights

[00:00] Why major systems impact returns
[02:30] Roof types, inspection, and cost estimates
[05:30] HVAC systems and replacement planning
[08:30] Other major systems to evaluate
[10:30] Building a CapEx plan step by step
[13:00] How CapEx impacts underwriting

Resources Mentioned

Episode 52: Property Condition Assessments (PCA)
Episode 53: Phase I Environmental Reports
Episode 54: Deferred Maintenance

Let’s Talk

Have questions about capital expenditures or property analysis? Connect with our team today: https://calendly.com/shelbi-creipartners/30min

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Next Episode

Next week: Financing strategies for commercial real estate

Disclaimer

This podcast is for informational purposes only and should not be considered financial, legal, or tax advice. Always consult with qualified professionals before making investment decisions.