What are Capital Expenditures?
Every good real estate investor knows that if you want to make money, you have to be willing to spend money. And it comes in the form of capital expenditures.
These expenses tend to be hefty and long-term but can improve the value of real estate and the overall value of a portfolio when used properly.
Let’s take a closer look at what capital expenditures are and how you can properly manage them.
What are Capital Expenditures?
Capital expenditures are found in the accounting of any business – including those involved in real estate. In fact, commercial property, multi-family property, rental property, and more will all encounter these expenses.
Capital expenditures include the money used to acquire, make repairs, upgrade, or otherwise tackle the wear and tear of a property. Most of these are large expenses that will impact the property’s value for an extended period of time. Consider it as making an additional investment into the property.
Capital expenditures include:
- The purchase price that was spent to acquire the property initially.
- Major renovations that add to the value and functionality of the property.
- Major repairs that solve wear-and-tear issues and lengthen the life of the property.
- The purchase of equipment, machines, and appliances for the property.
More specifically, this may mean replacing the roof, adding gutters, replacing the AC, remodeling the kitchen or bathroom, replacing appliances, painting the exterior, installing new windows, and so forth.
With capital expenditures, real estate investors can make a property look more desirable. This can lead to an opportunity to increase rent or, if selling is the goal, it can boost the property value and ultimately the sale price.
Types of Capital Expenditures
While capital expenditures can play a major role in business, they can also come at a high cost. For instance, replacing the roof of your commercial property is not a cheap task – even if you go with the lowest roofing bid. Investors have to choose how to spend this money wisely in order to reap the greatest reward. In other words, will the extra expense really increase the property’s value? And, by how much?
Two primary types of capital expenditures include operating and strategic.
There are certain repairs and routine maintenance that are necessary in order to safely and properly maintain a property. This is considered operating capital. In order to continue operating your investment, it will need these expenses.
Investments into a property that will enhance its look, increase its value, and maybe appeal to a new level of tenants are not necessary but can be part of a plan to improve the bottom line. This is strategic capital – expenses that are part of a bigger growth strategy.
Capital expenditures have to be handled appropriately if you don’t want to find yourself upside down in your investments. For this reason, you will find that operating capital is commonly used – and strategic capital is used more sparingly.
How to Manage Capital Expenditures
It is easy to see how capital expenditures can get out of hand if you let them. This is why successful real estate investors work through a plan to properly manage their expenses.
Create a budget. You simply cannot continuously spend money and call it capital expenditures without looking at the bigger picture or else you could cause serious damage to your bottom line. Instead, have a budget and a plan so that you can be prepared for what may require your attention now and in the future – both operating and strategic.
Rank your project. Assess your projects. Those that need to be done right away as part of maintenance and repair should take precedence over remodels. When looking to do improvements to the property, take a look at what will make the greatest impact.
Find the best deal. To make the most of your expenses, get quotes and find the best deal from local contractors. Just make sure that you thoroughly vet them first so you don’t waste your money.
If you want to find success in your real estate investments, take the time to learn how to make the most of your capital expenditures and protect your bottom line.
Roach & Lin is a real estate law firm in Long Island, NY, specializing in foreclosure, bankruptcy, evictions, REO/real estate, loss mitigation, and litigation.