What is Capital Expenditures (CapEx)?
CapEx is the budget set aside for major property components with finite lifespans — roof, HVAC, water heater, appliances, exterior paint. CapEx differs from maintenance (which covers ongoing repairs) and is a critical line in any honest rental underwrite.
CapEx items wear out on a schedule. A roof lasts 20-25 years; an HVAC system 12-18; a water heater 8-12; interior paint 5-7. Spread the replacement cost over the useful life and you get an annualized CapEx reserve — typically $1,200-2,500 per door per year for a typical single-family rental.
Skipping CapEx in underwriting is the #1 way investors fool themselves about a rental's real cash flow. A rental that "cash flows $300/month" on paper but underbudgets $200/month in CapEx is actually cash-flowing $100 — and one HVAC failure in year 5 eats two years of "profit."
The standard underwriting reserves are 5-10% of gross rent for repairs (ongoing maintenance) and 5-10% for CapEx (major replacements). Combined, that's 10-20% of gross rent NOT going to the investor's pocket — a number new investors consistently underestimate.
Concepts that connect.
Net Operating Income (NOI) is a rental property's annual gross rental income minus all operating expenses, before debt service and income taxes. NOI is the denominator of cap rate and the numerator of DSCR — it's the most-used number in rental underwriting.
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat — a real-estate investing strategy where an investor buys a distressed property cheap, renovates it, rents it out, refinances at the improved appraisal to recover most or all of the original capital, then repeats the process with the recovered capital.
Cash-on-cash return is annual pre-tax cash flow divided by the total cash the investor put into the deal (down payment + closing + rehab + reserves). Unlike cap rate, it accounts for financing. The most useful metric for comparing leveraged investments.
Property management is the third-party service of leasing, collecting rent, handling repairs, and managing tenant relationships on a landlord's behalf. Typical cost in 2026: 8-10% of monthly rent collected, plus a leasing fee of 50-100% of one month's rent on new tenants.
The Weekly Deal Memo
One market memo, one off-market playbook, one tool review. Every Friday. Free.
No spam. Unsubscribe anytime.