Commercial real estate is considered as one of the most reliable long-term investments you can make. This is because well-run commercial properties generate residual income and appreciate in value over time. However, it’s not all sunshine. Even the most well-managed property has critical systems that will eventually require major maintenance or worse — replacement. The cost for this work is known as a capital expense, and every real estate investor must set aside money to pay for it. Once this money is set aside, it is known as a capital expenditure reserve or CapEx reserve.
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Contents What are Capital Expenditures?
A capital expenditure is any repair, installation or upgrade that will extend the life of a given property. The main difference between a capital expenditure and routine maintenance is that routine maintenance only restores a broken or malfunctioning system to its original working condition. For example, replacing the valve on a leaky faucet is a routine repair, whereas upgrading the plumbing for the entire building from galvanized lead pipe to copper pipe is a capital expenditure.
This is because fixing the leaky faucet only returns the sink to its normal function, but upgrading to copper pipes will result in better water flow, more consistent water temperature and improved water service for the entire building. Common examples of other capital expenses include the following: Roof replacement
Replacing existing electrical wiring with new insulated conduit
Replacing single-pane windows with energy efficient double-paned glass
Adding solar panels to the roof Converting toilets and shower heads to low-flow models Installing new flooring Installing a new sprinkler system Installing new […]
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