Thinking of Skimping on CapEx? Read this First!
By Kerry Curry, Contributing Writer
If you own residential rental properties, or your own home, you know you have to maintain your investment. This can mean keeping up with everything from a fresh coat of paint to replacing a roof or HVAC system.
Deferred maintenance can have costly implications. If you let something fall into disrepair, you may ultimately spend far more on repairs or replacement than if you had acted sooner.
Striking a balance on capital expenditures, or CapEx, is vital to preserving your investment and your profit.
Think of CapEx for your rental property as a necessary expense, similar to paying taxes. You don’t want to pay more taxes than you owe. Nor do you want to spend more on CapEx than makes good sense. If you spend too much, you’ll be leaving profits on the table. If you spend too little, you may cause your properties to deteriorate, which in turn could affect the amount of rent you can charge and the quality of tenants you can attract.
Set up a reserve fund for CapEx
A residential property investor should always set aside a reserve from cash flow for CapEx. Depending on how you’re financing your properties, it may also be an account that your lender requires you to maintain.
Some capital expenditures are no brainers that should be fixed immediately. An example would be a hole in the roof, a broken refrigerator or an HVAC system that quits working. As an investor, you’ll need to decide if the part needs to be replaced (a CapEx expense) or can be repaired (a maintenance expense). But putting off either isn’t a good option.
Don’t over-improve your rental properties
It’s important that property investors not over-improve their residential rental properties, as they’ll unnecessarily risk lowering their return on investment.
In order not to over-improve, a real estate investor should have a good understanding of the neighborhood where his or her rental property is located. Do all the kitchens have granite counters, stainless steel appliances and tile or hardwood floors, or do the majority of neighborhood houses have solid surface counters, black or white appliances and less-expensive flooring such as laminate?
A renter who demands those higher-end finishes may not be willing to rent in the modest neighborhood where lower-end finishes are the norm. As a result, if you splurge on high-end finishes, you may find you are unable to command the higher rent you thought such finishes would attract because of where the property is located.
Understand your market and the renting clientele in order to make smart CapEx decisions.
If you plan to sell the property soon, improvements should be made with the goal of getting the biggest bang for your buck.
It’s not possible to tell an investor exactly how much money should be put into CapEx reserves. A mortgage lender may require a certain amount, but if you don’t have a loan on the property, you’ll need to make the call yourself.
Real estate investors should consider a variety of factors when determining how much to set aside for CapEx, including the property’s age, condition and location. You may need to adjust your calculations as you gain additional experience.
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
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