Capital Expenditures in Commercial Real Estate: What Do Investors Need to Know?
Commercial Real Estate

Capital Expenditures in Commercial Real Estate: What Do Investors Need to Know?

Published At: Thu, 09/23/2021 - 11:26

When you are investing in a company, one of the most important things to consider is how much money it spends on capital expenditures. Capital Expenditures (CapEx) can be a confusing and intimidating topic, but it doesn't have to be. This article will walk through the basics of capital expenditures so that your investment dollars can go further with fewer surprises.

 

What Are Capital Expenditures in Commercial Real Estate?

Capital expenditures, commonly known as CapEx, are costs that go into improving an asset. They are used to keep an investment property functional, up to date, and appealing.

 

CapEx on assets include any expenses that are not operational. For instance, CapEx cost estimation includes any renovation or upgrade to a property since it increases the value of an investment property, making your asset more valuable overall.

 

Why Do Investors Need It?

The basic idea behind capital expenditures is to increase the resale potential and marketability of a real estate investment. It's best used when there is no other way around getting necessary renovations done on properties without incurring too much expenses. 

 

It might seem like a lot of money goes down the drain unless you know how to make use of these funds to improve imperative changes correctly. In that case, they can make your return on investment even more significant than before by giving you opportunities to sell property at higher prices quickly after new upgrades are done on the property.

 

What Is Included in Capital Expenditures for Commercial Real Estate?

Capital expenditures for real estate can be categorized into two different types:

 

Non-Cash Expenditures

Non-cash expenditures are the expenses during renovations. These include labor costs, supplies, and materials. They also take into account any fees or permits required for making major upgrades on a property. 

Don’t forget about overhead costs such as transportation during renovation projects, as these factors need to be considered as well.

 

Cash Expenditures

Cash expenditures include all hard cost items associated with an asset, which would increase its value. Landscaping work around the  property, exterior painting services, and new appliances added to the kitchen are all examples of cash expenditures. Those expenses must be taken into account when adding to the asset's value.

 

How Do Capital Expenditures Affect Profit?

It is essential to understand the effect that capital expenditures have on profit when it comes to selling a property. The more money you put into improving investment property, the more significant return you will see once it resells. 

 

The reason for this is that its added value and functionalities make properties faster to sell than others on the market that do not implement any renovations or upgrades.

 

Avoiding capital expenditures can also negatively affect profits regarding safety, accessibility, and the general stability of a property's value. Investing in properties that have not been maintained or updated for a long time can cause severe problems down the road if they are left unattended.

 

An outdated electrical system, exposed asbestos, leaky roofs can all significantly impact the value of an investment property. It is a moral and ethical obligation to maintain a property to be a safe environment for tenants and visitors. These could also lead to lawsuits and increased insurance rates, affecting the net income in the long run.

 

Capital Expenditures vs. Maintenance and Repairs

It is important to note that capital expenditures are not the same as maintenance and repairs. Capital expenditures involve upgrading, renovating, or modernizing a property to increase its value for future sales, whereas maintenance means making minor changes to an asset's structure over time.

Examples of capital expenditures:

  • Buying a new furnace
  • Installing a new sprinkler system
  • Buying new furniture

Examples of maintenance & repairs:

  • Replacing light fixtures
  • Replacing a cabinet door
  • Replacing a broken pipe

 

Capital Expenditures vs. Operating Expenses

Businesses have various expenses, from the base rent of a property, to the cost of raw materials for products and salaries of workers. People often confuse capital expenditures and operating expenses.

 

Operating expenses are the day-to-day costs associated with running a business. At the same time, capital expenditures refer to money spent on making changes or additions to an asset to increase its value for future sales.

 

It is essential to keep capital expenditure and operating expense ratios separate when it comes to making budgetary decisions about improving or maintaining your investment properties. These will affect how much money you have available for financial solutions, depending on whether they involve renovations or not.

 

Final Thoughts

Capital expenditures are essential when it comes to improving an investment property. These small changes will add value and functionality to the asset, making them much easier to sell than other properties on the market that do not implement any renovations. 

 

The critical thing you should understand about capital expenditures is their role in making renovations on your investment properties. They are essential because they can affect the value of a real estate asset. However, do not purchase an expensive property just for this purpose alone.

 

In any purchasing decision related to buying or selling a property, investors must always consider how much they will make from their investment. This includes comparing renovation costs versus not making any improvements at all. This way, you'll know whether the money spent was worth every penny or not. 

 

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