Capital Expenditures Versus Routine Repairs for the SFR Investor
Financing for single-family rental investments by B2R Finance is based on commercial lending principles that include a capital expenditure reserve.
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 EXPENDITURE DEFINED
A capital expenditure is something you can capitalize over a certain time period. It adds to or upgrades a property’s physical assets. It typically is a one-time major expense.
Under B2R Finance lending standards, a borrower pays monthly into a reserve fund that can be used for capital expenditures and submits a receipt or other documentation to request funds from the account.
Examples of capital expenditures include a new roof, appliance or flooring. A capital expenditure could also include installing a new heating and air conditioning system or doing a major overhaul of an existing HVAC system. The same goes for extensive new plumbing or major electrical work.
If you are painting multiple properties, that could be included as a capital expenditure, but routine painting upon move-out is just that, routine. You won’t be able to tap your capital expenditure reserve to pay for run-of-the mill maintenance.
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.
Some repairs could be conceivably paid for from either the capital expenditure fund or the operating fund. B2R Finance looks at whether the expense is “major” to determine whether it qualifies to be paid for from capital expenditure reserves.
For example, if you need to replace multiple sinks or toilets, that would come from the CapEx reserves, but if you only need to replace one sink or one toilet, that would come out of your annual operating budget. If you need to replace one light fixture, expect to pay for that from your operating budget. If you need to replace multiple light fixtures, the expense could come from the CapEx fund.
Hopefully these examples give investors a clear idea of the difference between capital expenditures and routine maintenance. If money remains in the capital expenditure account at the end of the loan term, it is returned to the borrower.
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