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CapEx: Capital Expenditures in Real Estate
Capital expenditures, also known as CapEx, are the funds that investors use to make large repairs or replace essential parts of their property. Learn more on our commercial mortgage quick reference guide.
What Are Capital Expenditures (CapEx) in Multifamily Financing?
Capital expenditures, more commonly referred to as CapEx, are typically large investments put into a commercial property that are meant to extend its economic life. For instance, structural investments such as replacing the windows in a building or installing a new heater are usually considered as CapEx — these building elements may need to be replaced someday, but do not typically need replacement for significant periods of time.
Some common capital expenditures include spending money to replace or significantly repair flooring, electrical systems, plumbing systems, and ductwork. Funds that are put towards upgrading the property to make it more valuable also count under CapEx. These kinds of investments include expenses like adding new equipment to an industrial facility in order to make it more attractive to potential tenants or to induce current tenants to extend their lease.
Capital Expenditures and Accounting
In accounting terms, capital expenditures must be “capitalized” — which means the cost of the asset or investment will be spread out over its estimated economic life. Despite this, if a capital expenditure only maintains a part of a building in its current condition (i.e. expensive roof repairs that only fix a problem but don’t extend the roof’s economic life), the expenditure can be tax deductible in the year in which it is made. In this way, certain types of capital expenditures can be treated like operational expenditures (OpEx), which generally refers to any expenses involving smaller repairs, payroll, and maintenance.
Multifamily Investors Should Factor CapEx Into Rent Pricing
One of the biggest mistakes made by less experienced multifamily and commercial real estate investors is failing to incorporate capital expenditure costs into their rent pricing. Investors may believe that they will benefit by charging rent prices significantly lower than their competitors, but often, they are shortchanging themselves, as they may not be able to afford to make significant repairs if part of an important building component fails or needs unexpected repairs (i.e. a leaking roof or a failed AC system).
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