Three Types of Capital Expenditures (CAPEX) in Multifamily

Capital expenditures, or capex, are a crucial aspect of multifamily real estate investing. Understanding how to allocate your capex budget effectively can significantly impact your property’s value, rental income, and overall success. This article explores the three main categories of capex and how to approach them strategically.

1. Value Creation CapEx

This category focuses on improvements that enhance the property’s overall value. These are not cosmetic upgrades but address foundational elements that make the property more desirable and functional in the long run. Examples include:

• Roof repair or replacement
• Repaving the driveway
• Upgrading the HVAC system

While these investments may not directly increase your rental income, they make the property more attractive to potential tenants and buyers, ultimately leading to higher resale value.

2. Revenue Creation CapEx

This category targets improvements designed to raise rental income. These upgrades directly impact the units’ aesthetics and functionality, potentially justifying higher rent collection. Examples include:

• Unit renovations (kitchens, bathrooms, flooring)
• Adding amenities (fitness center, pool)

It’s important to consider the market cycle when allocating funds for revenue creation capex. In a seller’s market, these improvements can significantly boost rental income. However, in a buyer’s market, the return on investment might be lower.

3. Better-To-Do CapEx

This category encompasses essential maintenance and repairs that prevent future problems and ensure the property’s ongoing functionality. Neglecting these can lead to costly repairs down the line and potentially lose tenants due to inconveniences. Examples include:

• Gutter cleaning and repairs
• Wall maintenance and repairs
• Plumbing maintenance and replacements

“Better-to-do” capex is essential regardless of the market cycle. Maintaining the property in good condition is crucial for tenant retention and avoids costly emergencies.

Strategic CapEx Allocation

By understanding these three categories and the current market cycle, you can make informed decisions about your capex budget. In a seller’s market, a balanced approach with all three categories might be ideal. In a buyer’s market, prioritize value creation and “better-to-do” capex, ensuring the property remains attractive and functional.