Understanding CapEx For Landlords – “It’s Not Rocket Surgery”

I know, I know, you don’t like math.  We’ll keep it manageable.

Landlords lose money on their rental properties for many reasons. Still, the most common is failing to factor in all the costs of owning, managing, and maintaining the property before buying it.

Far too many landlords just subtract the monthly mortgage bill from the rent, and even those who factor in vacancies, maintenance, property management fees, accounting costs, and the likelihood of rent default still get it wrong.

So, to avoid this type of pitfall, let’s discuss capital expenditures or capex. 

What Is Capital Expenditure (CapEx)?

Capital Expenditure is any significant expense or investment you spend on your property to maintain and improve its value over time. 

For a shorter explanation, capex is large-scale property repairs and replacements. Capex are recurring since everything in a home eventually needs replacing or repairing, although they’re rare in most instances.

For example, maybe the roof only needs replacing every 20 years or so… but it costs a lot of money. And then there are furnaces, air conditioning condensers, flooring, framing, electrical systems, plumbing systems, HVAC and ductwork, kitchens, bathrooms, windows… every component in every home needs to be replaced or updated and on a largely predictable schedule.

Capex is different from operating expenses, which are the bills you pay to run your rental properties. Here’s a table to show you the differences: 

CapEx Deep Dive

If any of you think that might not be a problem, let me give you an all-too-common example. 

Let’s beat up on a landlord named Bill to illustrate this point. Bill bought a property that leases for $1,000/month, and his mortgage payment is $750/month. Bill thinks he’s a genius about to earn $250/month.

In reality, Bill is in big trouble. He has other expenses before we even get into CapEx:

• • Vacancy Rate: 10% = $100/month
  • Maintenance: $1,000/year = $83.33/month
  • Property Management: 8% = $80/month
  • Accounting, Bookkeeping, Administrative & Misc: $400/year = $33.33/month

(Psst: We have a free rental property calculator, that includes CapEx!)

Before CapEx, Bill’s property will cost him an average of $1,046.66/month. We’ll be generous and give Bill the benefit of the doubt that his property taxes and insurance are included in his mortgage payment of $750. But he’s still cash flow negative.

And the news gets worse from here.

Landlords are always taken by surprise when a furnace breaks, the roof needs replacing, or the AC condenser drops out. Last year, it was the roof, and after shelling out the $5,000 to replace it, Bill consoled himself by saying “Well, this was an off year because of that roof bill, but next year will be better.”

But this year, the furnace broke, and he’s howling in frustration after the $2,500 bill to replace it.

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