Routine Repairs vs. Capital Expenditures (CapEx)

For some residential investors, capital expenditure terminology — CapEx for short — is unfamiliar.  Capital expenditure reserves are common in the commercial real estate sector but lesser known in the residential real estate space.

CAPITAL EXPENDITURES

A capital expenditure is something you can capitalize over a certain time period.  It adds to or upgrades a property’s physical assets.  It is typically a one-time major expense.

Examples of capital expenditures include a new roof, appliance or flooring. Capital expenditures can be identified as:

1. Improvements that “put” property in a better operating condition

2. Restores the property to a “like new” condition

3. Addition of new or replacement components or material sub-components to property

4. Addition of upgrades or modifications to property

5. Enhances the value of the property in the nature of a betterment

6. Extends the useful life of the property

7. Improves the efficiency of the property

8. Improves the quality of the property

9. Increases the strength of the property

10. Increases the capacity of the property

11. Ameliorates a material condition or defect

12. Adapts the property to a new use

MAINTENANCE AND REPAIRS

Repairs such as move-out painting, touch-up painting, or patching a wall or floor fall into the routine category.  The cost of routine maintenance is typically covered by an investor’s annual operating budget, not from the capital expenditure reserve.

The easiest way to identify routine maintenance is to ask yourself if the repair is something that tends to be reoccurring.  Examples include repair of existing appliances, cleaning the carpets or patching a worn section of flooring.

Repairs can be identified as:

1. Improvements that “keep” property in efficient operating condition

2. Restores the property to its previous condition

3. Protects the underlying property through routine maintenance

4. Incidental repair to property

Hopefully these examples give investors a clear idea of the difference between capital expenditures and routine maintenance.