July 23, 2015
CapEx, OpEx & You
The physical condition of an income property (multi-residential or otherwise) is one of the most important factors of operating performance and, ultimately, market value.
When considering a capital expenditure, real estate owners must have a plan in place to maximize the return or support a rebranding strategy for the property.
Defining CapEx & OpEx
Two key terms are capital expenditure —CapEx for short—and operating expenditure, also known as OpEx.
A capital expenditure is usually a one-time major expense. Typically, a CapEx investment is a fixed asset that can be capitalized on over a certain time period. It adds to or upgrades a property, adding value and investment/buyer appeal.
An example of a capital expenditure could include new balcony doors for the entire apartment building or a new HVAC system.
Routine, everyday maintenance – such as fixing a leak in a unit is considered OpEx. The cost of these repairs comes out of the annual operating budget. However, extensive plumbing across a portfolio of properties as an upgrade would fall under the CapEx umbrella, and would be covered from the capital expenditure reserve.
Generally, if a repair or Work Order for maintenance is reoccurring, it tends to be OpEx.
Creating Your Plan
When a property is purchased, typically a 5- to 10-year capital expenditure property improvement plan is created. The owner or property management firm needs to consider everything from roof, plumbing stacks, balconies, elevators, to common area renovations.
An effective plan supports the primary goals of:
- Increased market share
- Higher resident retention
- Better revenue performance
- Enhanced profitability
In order to achieve these goals, capital expenditures that show a good return on investment must be timed within an asset’s life cycle.
Where & When to Spend
Determining where and when to draw from your capital expense reserve is a matter of finding the sweet spot between property-critical fixed assets and value-enhancing upgrades.
Some CapEx expenditures show very little value in increasing market share but are necessary. Roof replacements would be an example of a mandatory CapEx investment. These are the meat-and-potatoes fixed assets that keep your properties running smoothly. Owners or property management companies must examine the expected life cycle of major fixed assets, from floor coverings to parking lots, and determine where their asset (e.g. the boiler) falls within its life cycle.
Other upgrades are sexier — a sleek new lobby renovation with stone tiles and designer-style chairs and sofas. These aren’t always necessary but go a long way in attracting increasing market share, improving the resident experience and higher rental rates, for enhanced profitability.
The key, of course, is to make sure that everything gets addressed over time without any surprises.
Sometimes, for reasons of cash flow and budgeting, it can be desirable to move items from CapEx to OpEx. This can include leasing computers rather than investing in the hardware, or moving to a cloud-based property management solution instead of investing in IT infrastructure and upkeep.
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