CapEx, short for Capital Expenditures, refers to the funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment. CapEx could be significant repairs or improvements that increase the property’s value or extend its life, such as replacing the roof, installing a new HVAC system, or major renovations and upgrades.

These are different from operational expenses, or OpEx, which are the costs associated with running the property on a day-to-day basis, such as utilities, property management, and routine maintenance. While OpEx is fully tax-deductible in the year they are incurred, CapEx must be capitalized, meaning their cost is spread out over their useful life (as defined by the IRS) and they are deducted over several years in the form of depreciation.

Knowing the potential CapEx of a property is crucial for investors as it significantly impacts the profitability and cash flow of a real estate investment. It’s typically accounted for in the due diligence process before making a purchase, or in the long-term budget for property owned.