The topics we will cover:
- What is CAPEX in Real Estate?
- What is included in CAPEX?
- How do I calculate Capital Expenditures?
- Is there a simple way to work out how much capital expenditures will be?
- Should I include CAPEX when assessing my next rental property investment?
These questions represent frequently asked questions about CAPEX in Real Estate.
Over time, I will add more questions and answers.
I invite you to leave comments and questions below. I will 100% find the best answers for you. I will respond to each question one at a time.
CAPEX, or Capital Expenditures, is the money used to improve a property beyond the day to day repairs and maintenance common in real estate.
Repairing a leaking toilet IS NOT a Capital Expenditure.
Replacing the roof of the house IS a Capital Expenditure.
We highlight some more examples below.
Some of the items that are included in Real Estate Capital Expenditures are, but not limited too:
- Roof replacement
- Window replacement
- Siding Replacement
- Purchase of new appliances
- Replacement of flooring inside a rental property
Notice these are typically replacement, not repair. Repairing a window or siding generally falls into the category of Repairs and Maintenance.
Repairs and maintenance are costs incurred for routine upkeep of your property. For example, if you have to replace the kitchen faucet, this would be considered a repair or maintenance charge.
Capital Expenditures, also known as capital Improvements, are things that increase your property beyond that original state when you bought it.
For example, let’s say you bought a rental property with a 20 years old roof. After 10 years, the roof started leaking. It was decided that you had to replace the roof entirely. This expense would be a capital expenditure.
They are treated differently in how you can write them off.
Is there a simple way to work out how much capital expenditures will be?
YES. You should include CAPEX when assessing your next rental property investment.
You should absolutely include capital expenditures for every real estate investment you do. As the name suggests, it is an expense. It is something you will have to pay for eventually. If you ignore it, you will not have a true accounting of what your return will be.
In the worst-case scenario, it could lead you to have an uninhabitable property. This is no longer an asset but a huge liability.
SO MANY INVESTORS CHOOSE TO IGNORE CAPITAL EXPENDITURES BUT I 100% AFFECTS YOUR INVESTMENT RETURN.
There is a clearly defined way to come up with a multiplier you can use across your properties. I am sure it is well documented in Bigger Pockets, but I am still repeatedly coming across investors, new and seasoned, who leave out of their calculations. Theirs is not a definitive guide. Please add more. If nothing else, I want you all to know: 100% understand you can not ignore CAPEX!!! It would be best if you spent a little time understanding how much various items cost, such as:
- roof replacement
- water heater
- furnace replacement
- AC replacement
- gutter replacement
Among other things. Take these numbers, and the industry standard for the expected life of said items cost them in against purchase price of property rent, etc.– and SHAZAAM!!!! You have a number for your CAPEX. It may not be exact, but hell– it’s a million ties better than ignoring it. If you ignore it, you will run the chance of failing in your real estate business. Now more than ever, with a potential changing of the tides… That said– what do you see happening in the greater real estate cycle over the coming days, weeks, months, and years?
Find a house for us to buy, and when we close, we give you $1000 CASH.