Capital expenditures is as much a part of doing business as changing diapers is a part of being a parent.
Capex, short for Capital Expenditures, are expenditures made are required to improve a property or maintain its useful life. They are different from operating expenses, which include maintenance and repairs. Whereas operating expenses can be things such as replacing plumbing, repairing walls and fixing broken windows, capital expenditures can be any of the following:
- Replacing a roof
- Adding units
- Renovating units
- Expanding property
- Adding a dog park
- Upgrading the amenities
- Adding a laundry facility
The list goes on….Capital expenditures are great ways to create value as well as prevent operating expenses, especially in older B and C class properties.
Capital expenditures are “below the line” items, meaning they are not taken into account when calculating net operating income (NOI) and valuation of the property. Unfortunately, many owners confuse capex items with operating expenses and include these items in their reports used for due diligence during the acquisition stage. Understanding the difference between operating expenses and capital expenditures is critical and looking for potential capex items such as deferred maintenance and improvement opportunities are essential to creating and executing a great business plan.
In order to ensure solid underwriting and that the deal makes sense, as passive investors, it is important to understand ask your sponsor about the planned capex items in your next apartment investment.
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