When substantial repairs or renovations to your investment property are required, careful planning and budgeting for capital expenses for rentals will save you time, money, and stress in the long run. Before you’ve spent more than necessary, learn how to be prepared. Real estate capital expenditures are a crucial aspect of every professional venture. Understanding rental property capital expenses, how they’re taxed, and how to budget for them can help you to increase your real estate earnings significantly.
What Are Real Estate Capital Expenditures?
Capital expenses for rentals are funds spent to enhance or upgrade a property, in addition to accounting for routine repairs and upkeep.
Investment buildings, technology, and other fixed company assets are generally capital expenditures. “Capex on rental properties” is a term that many people use to refer to capital expenditures or capital expenses for rentals.
Because the expense of these modifications can be significant, many long-term property investors set aside money from their monthly income to put into reserves.
When a substantial repair or renovation is required, having reserves in place saves investors from having a huge, unexpected hit to the budget. It’s critical to have enough cash on hand to pay for real estate capital expenditures as they arise.
What’s Included in Capex on Rental Property?
Improvements to the property, such as upgrades and significant repairs, are common real estate capital expenditures. When things like the roof, siding, or windows are replaced, it is a standard part of upgrading and maintaining the property in a habitable, usable condition.
A CAPEX on a rental property is made to bring a feature back to like-new condition or to extend the asset’s life.
In reality, a capital expenditure is viewed as an investment in the company rather than a cash-flow draining cost. Any monies spent on capital expenditures will be shown as an investment on a cash flow statement. The depreciation from that capex on rentals will be shown as a cost on the financial statements.
Some of the most common capital expenses for rentals include:
- New appliances
- HVAC maintenance
- Paving a parking lot or driveway
If you’re putting money into something to improve the property, consider its real estate capital expenditure.
How to Break Costs Down by Month to Determine Rent
There are a variety of factors to consider when you’re determining how much rent to charge. Finding out how your investment property is currently valued in the market is a solid first step. It’s possible that the sum will be different from what you paid for it when you first bought it.
The easiest way to achieve this is to hire a real estate agent to conduct a comparative market analysis, which is often provided as a free service. It’s generally best to work with an agent who is familiar with investment properties like multi-family properties. Alternatively, you can work with an appraiser.
Once you have a base price, you can break down items such as renovations or repairs to account for them in your monthly rent collection.
Factor in the age of things like the roof, siding, appliances, and other capital expenses for rentals. Consider how many useful years each of these items currently have left, as well as the estimated overall cost of replacing them. This is a straightforward approach to generating a reserve budget.
For example, let’s say that you spend $5,000 on a new parking lot. Knowing that parking lots last about 10 years, you can determine it will cost you about $500 per year. If you divide this into months, that’s $41.67 a month.
If you have a multi-tenant unit, charging $50 more per month would cover the CAPEX on rental property for a new parking lot.
When deciding how much to set aside for capital expenses for rentals, be cautious. When things come up, failing to budget enough might leave you digging deep into your wallet.
It’s doubtful that you’ll strike the ideal balance for real estate capital expenditures on your first try. Over time, you’ll grow better at calculating how much money you should set aside. Just like anything else in real estate investing, you can learn from experience or seek out the assistance of skilled professionals to help along the way.