Capital expenses (also known as CapEx) are a necessary responsibility to property ownership.
Referring to the use of funds to improve upon an asset, CapEx maintains your investment’s value, attracts and retains tenants, and prevents the property from falling under a building-code violation.
CapEx in multifamily ownership can range from new paint and carpeting to installing a rooftop swimming pool or constructing a new building.
As you can see, the term covers a broad range of expenses and project scopes.
That said, while it may be tempting to embark on lots of improvement projects—or one giant, expensive one—to make your property the best one on the block, going too far with CapEx can prove detrimental to your investment and end up sabotaging your ROI.
The way to avoid this is to have a plan and a budget—and stick to them.
In a perfect world, the due diligence you perform on the apartment asset before you purchase it would generate a list of all the necessary CapEx that needs to be made on it, as well as a few wish list items.
From those lists, you would create a CapEx budget and schedule and begin to tackle the items, from most urgent to least (i.e., replacing a faulty roof would come before renovating the leasing office).
You would shop around for the best vetted products and services available within your budget, and would follow the schedule you created.
This all works great until you learn about a hot new multifamily amenity trend like an outdoor putting green, or something unexpected happens—like the washing machines in the laundry room break and need replacing.
First, make sure your eyes aren’t bigger than your budget.
Before you abandon any necessary CapEx like upgrading in-unit stoves or replacing broken windows, ask yourself how important that putting green is to your tenants and your bottom line.
Are they likely to use it or would the existing dog run get more use?
Would installing the putting green blow your budget out of the water?
If the CapEx is something you didn’t plan for but feel you absolutely must have, what item or items on your wish list can you either abandon or move down the list so you stay within your budget?
Staying on Track
Unexpected CapEx like replacing the broken washing machines should be paid for with your emergency fund—which of course you planned for before you purchased the property, right?
If not, put that wish list away for another rainy day and start that emergency fund now.
Understanding what your CapEx will be and planning for the unexpected will help keep you out of hot water and keep your budget on track while allowing your investment to prosper and your ROI to grow.