Capital expenditures, often abbreviated as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment. This type of financial outlay is made by companies to increase the scope of their operations or to maintain their current level of operation.
Capital expenditures refer to funds that are used for significant physical improvements and upgrades to the property. This could include replacing a roof, updating the HVAC system, repainting and refurbishing a property, replacing major appliances, and similar activities.
Capital expenditures are important to real estate investors because these costs can significantly affect the profitability and cash flow of an investment. Unlike ordinary maintenance costs, which are typically smaller and occur more frequently, capital expenditures usually represent substantial, infrequent costs. It’s also important to note that CapEx is often used in calculating the Net Operating Income (NOI) of a property, which is a key metric in evaluating the performance of real estate investments. CapEx is typically not deducted from the gross operating income when calculating NOI, which distinguishes it from operating expenses.
However, capital expenditures could be tax-deductible in some cases, as they add to the cost basis of the property and can be depreciated over the useful life of the property according to local tax laws. It’s always important for investors to consult with a qualified tax professional to understand how capital expenditures affect their specific situation.