What Are Capital Expenditures (CapEx)?
Capital expenditures (CapEx) are major, non-recurring expenses that add value to or extend the life of a property. Unlike routine maintenance and repairs (replacing a broken faucet, patching drywall), CapEx involves replacing or significantly upgrading major building systems and components: a new roof, HVAC replacement, new plumbing, window replacement, parking lot repaving, or exterior siding.
CapEx vs repairs
CapEx: New roof ($8,000-$15,000), HVAC system ($5,000-$10,000), water heater ($1,500-$3,000), exterior paint ($3,000-$8,000), driveway ($3,000-$7,000), kitchen renovation ($15,000-$40,000).
Repairs: Fixing a roof leak ($200-$500), HVAC service call ($100-$300), faucet replacement ($100-$200), drywall patch ($100-$300), toilet repair ($100-$200).
CapEx reserves
Smart rental investors budget a monthly CapEx reserve — typically 5-10% of gross rent — set aside to fund future capital expenditures. A property renting for $1,500/month might budget $150/month ($1,800/year) for CapEx reserves. Over 10 years, that builds $18,000 — enough to handle a roof replacement or HVAC system without a financial emergency.
CapEx in deal analysis
When analyzing a rental property, subtract CapEx reserves from gross rent along with operating expenses to get true NOI. A property that looks cash-flow positive without CapEx reserves may actually be break-even when reserves are accounted for. Omitting CapEx is one of the most common mistakes in rental property analysis.
For wholesalers
When marketing rental deals, be transparent about the property's major systems and their remaining life. A 20-year-old roof, 15-year-old HVAC, and original plumbing represent near-term CapEx needs that your buyer must factor in. Identifying these items in your repair estimate builds credibility.