Home / Glossary / Capital Expenditures (CapEx)
Capital Expenditures (CapEx)
Major, infrequent expenses for replacing or upgrading property components like roofs, HVAC, and appliances.
Definition
Capital expenditures are significant, non-recurring costs for replacing major building systems and components. Examples include a new roof ($8,000-$15,000), HVAC replacement ($5,000-$10,000), water heater, flooring, and appliance packages. Smart investors reserve a percentage of monthly rent (typically 5-10%) in a CapEx reserve fund to avoid being caught off guard by large expenses. CapEx is distinct from routine maintenance and repairs. For tax purposes, capital improvements are depreciated over their useful life rather than deducted in the year they occur. Properly budgeting CapEx prevents cash flow surprises and keeps the property in rentable condition.
Related Terms
Operating Expenses
The ongoing costs of running a rental property, excluding mortgage payments and capital improvements.
Cash Flow
The net money remaining after all income is collected and all expenses and debt payments are made.
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
After Repair Value (ARV)
The estimated market value of a property after planned renovations and improvements are completed.
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