Planning for Capital Expenditures as an Investor
When you purchase a new investment property you’ve probably run the numbers to account for maintenance, vacancies, taxes, insurance, and other expenses in order to project your lease rate, but have you thought about capital expenditures (CapEx)? Before you purchase your next commercial real estate property, make sure you fully analyze the property and prepare a budget that includes CapEx.
Capital expenditures are large investments that extend the life of the property. Examples of Capex include replacing the roof or HVAC system, adding new flooring or expanding the size of the building. For tax purposes, CapEx must be capitalized, meaning the expense is spread out over a period of several years. In addition to keeping a reserve account for regular maintenance expenses, money should be set aside for “big-ticket” items that will inevitably be in need of replacement at your investment property.
When purchasing a new property, do your due diligence; inquire about every system and appliance included with the sale and request a record of when each one was last updated or replaced. With that knowledge you’ll be able to project the average lifespan and the cost of replacement. Once you have hard numbers you can divide the total cost by the estimated life of each CapEx item and add that dollar amount to your replacement reserves.
Performing research upfront will help you to build these expenses into your lease rate, or you may realize that the property you were considering buying isn’t a winner after all…if that’s the case, move on and pursue another opportunity to add to your cash-flowing investment portfolio.
Don’t shortchange yourself – work with a qualified and experienced Commercial Real Estate Advisor who can help guide you to your best investment.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.