What are Capital Expenditures (CapEx)?
Capital Expenditures
CapEx Meaning
Capital expenditures, usually shortened to CapEx, are typically large investments in a property that will extend its economic life. For example, replacing the windows in a building or installing a new heater would usually be considered CapEx, as these building elements may need to be replaced someday. Funds that are used to upgrade the property to make it more valuable also count as CapEx. This could include adding new equipment to an industrial facility to make it more attractive to potential tenants or to induce current tenants to extend their lease. Other common capital expenditures include spending money to replace or significantly repair flooring, electrical systems, plumbing systems, and ductwork.
CapEx Vs. OpEx
In an effort to organize the costs of owning an apartment building or other commercial property, businesses organize their costs under into different categories. The two most common categories of business costs are capital expenditures (CAPEX) and operating expenses (OPEX). While they may seem similar at first glance, capital expenditures are usually much larger purchases an entity makes to be used and provide value over the long term. Operating expenses (OPEX), conversely, include the day-to-day expenses a property incurs to keep it operational.
Some examples of CAPEX include physical assets, like buildings, equipment, machinery, and vehicles. These expenditures also include improvements to buildings and assets that will create longterm value or protect standing value.
Examples of OPEX include more consistent recurring costs like rent, employee salaries, utilities, taxes, etc. Accounting and legal fees factor into operating expenditures as well, and so does interest paid on debts.
A key difference between capital expenditures and operating expenditures is that CapEx cannot be deducted from income for tax purposes while OpEx costs can be deducted.
CapEx and Rent Pricing
Commercial and Multifamily Investors Should Factor CapEx Into Rent Pricing. One of the most common and unfortunate mistakes made by less experienced commercial and multifamily real estate investors is failing to incorporate capital expenditure costs into their rent pricing. Inexperienced 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 in the event of unforeseen damages or building component failures (i.e. a leaking roof or a failed AC system).
Accounting for Capital Expenditures
As the name implies, capital expenditures must be capitalized, meaning they must spread the cost of the asset out over its estimated economic life. Despite this, if a capital expenditure only maintains a portion of a building in its current condition (i.e. roof repairs that only fix a specific problem and don’t extend the roof’s economic life), the expenditure can be deducted in the year in which it is made. In this way, certain types of capital expenditures appear more like operational expenditures, or OpEx, which generally refers to any expenses involving smaller repairs, payroll, and maintenance.
Related Questions
What is the difference between CapEx and operating expenses?
The main difference between CapEx and operating expenses (OpEx) is that CapEx are usually much larger purchases an entity makes to be used and provide value over the long term, while OpEx include the day-to-day expenses a property incurs to keep it operational. Examples of CapEx include physical assets, like buildings, equipment, machinery, and vehicles, as well as improvements to buildings and assets that will create longterm value or protect standing value. Examples of OpEx include more consistent recurring costs like rent, employee salaries, utilities, taxes, etc. Accounting and legal fees factor into operating expenditures as well, and so does interest paid on debts. A key difference between capital expenditures and operating expenditures is that CapEx cannot be deducted from income for tax purposes while OpEx costs can be deducted.
Sources:
What are the most common types of CapEx for apartment buildings?
The most common types of CapEx for apartment buildings 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.
Common CapEx purchases include:
- Buildings
- Land
- Equipment and machinery
- Computers/servers
- Software
- Furniture
- Vehicles
- Patents
Source: www.multifamily.loans/capex and www.commercialrealestate.loans/commercial-real-estate-glossary/capital-expenditure
What are the benefits of CapEx for apartment buildings?
The benefits of CapEx for apartment buildings are numerous. CapEx investments can help to extend the economic life of a building, improve its value, and make it more attractive to potential tenants. Additionally, CapEx investments can help to reduce operating costs, as they can help to reduce energy costs, improve the building's efficiency, and reduce maintenance costs. Finally, CapEx investments can help to increase the rent that a building can charge, as tenants are often willing to pay more for a building that is well-maintained and up-to-date.
To learn more about your multifamily loan options, fill out the form here to speak to a specialist.
How can apartment owners finance CapEx?
Apartment owners can finance CapEx through a loan or line of credit. Loans are typically best for larger projects, such as replacing windows, flooring, and appliances across a property. Lines of credit are better for smaller projects, such as fixing holes in the roof and doing some new landscaping work. To learn more about your multifamily loan options, fill out the form on this page to speak to a specialist.
What are the risks associated with CapEx for apartment buildings?
The risks associated with CapEx for apartment buildings include construction costs rising dramatically, construction delays, and the possibility that the renovation work may not be enough to get the desired investment outcome. Construction costs have risen significantly over the past few years, and construction delays can be caused by supply chain issues. Additionally, the renovation work may not be enough to attract potential renters if they are looking for a newer building.
For more information, see How to Renovate Your Apartment Complex and What are Capital Expenditures (CapEx)?.