When evaluating a multifamily investment property, most investors focus on key performance metrics like cap rate, cash-on-cash return, and internal rate of return (IRR). Yet, one of the most overlooked but critical components of accurate underwriting is capital expenditures (CapEx). Ignoring or underestimating CapEx can significantly distort returns, lead to unexpected cash flow shortfalls, and erode investor confidence.
What Are Capital Expenditures?
Capital expenditures are major costs incurred to repair, replace, or improve long-term assets within a property. Unlike regular operating expenses—such as cleaning, landscaping, or routine maintenance, CapEx items are non-recurring and extend the useful life of a property’s systems or structures.
Common multifamily CapEx items include:
Roof replacements
HVAC systems
Plumbing and electrical upgrades
Parking lot resurfacing
Exterior paint and siding replacement
Window and door replacements
Unit renovations (flooring, cabinetry, appliances)
These are typically large, planned expenses that must be budgeted over time to ensure the property remains functional, competitive, and compliant.
Why CapEx Analysis Matters in Multifamily Investments
Protecting Cash Flow
Underwriting without accounting for CapEx can create a false sense of profitability. A property that appears to generate strong net income may quickly become a cash drain when a $200,000 roof replacement hits unexpectedly. Investors who set aside CapEx reserves can maintain consistent cash flow and protect distributions.
Enhancing Long-Term Value
Strategic CapEx spending can directly influence rent growth and property appreciation. For example, upgrading unit interiors, adding amenities, or improving curb appeal can justify rent increases and attract higher-quality tenants.
Ensuring Accurate Valuations
Proper CapEx forecasting prevents overpaying for a property. A building with deferred maintenance may look like a bargain—until you realize the HVAC systems are past their lifespan and the plumbing needs a $100,000 overhaul. Savvy investors adjust their offer price to reflect these realities.
Lender and Investor Confidence
Lenders and syndicators scrutinize CapEx plans closely. A clear, itemized CapEx budget demonstrates professional asset management and risk awareness, both critical for securing financing and investor participation.
How to Calculate and Budget for CapEx
Conduct a Thorough Property Condition Assessment (PCA)
Before acquisition, hire professional inspectors to assess the condition and remaining useful life of major systems and structures. A PCA provides a foundation for CapEx forecasting.
Estimate Replacement Costs and Lifespans
Assign realistic replacement costs and expected lifespans for each major component. For example, if a $50,000 roof has a 25-year life, your annual CapEx reserve for that item should be around $2,000 ($50,000 ÷ 25 years).
Use a CapEx Reserve Schedule
Build a CapEx schedule that forecasts all major replacements and improvements over a 10–15-year horizon. This schedule helps investors visualize when significant expenses will occur and how much should be reserved annually.
Incorporate Reserves Into Your Financial Model
Include a line item for “Replacement Reserves” in your pro forma—typically ranging from $250 to $400 per unit per year depending on the asset’s age and condition. This amount is deducted from net operating income (NOI) to reflect true, sustainable cash flow.
Differentiate Between Immediate and Ongoing CapEx
Immediate CapEx: Deferred maintenance or renovation projects needed right after acquisition.
Ongoing CapEx: Long-term improvements planned throughout the hold period.
Recognizing this distinction helps in structuring financing and capital calls appropriately.
Calculating and planning for capital expenditures is not just good practice, it’s essential to the financial health of a multifamily investment. Investors who accurately account for CapEx avoid surprises, protect returns, and enhance the long-term value of their assets.
Ignoring CapEx, on the other hand, can turn a promising investment into a costly lesson. In multifamily real estate, cash flow might keep you afloat—but CapEx planning keeps you alive.
