CapEx
Capital expenditure
Capital expenditure is money spent on components with a useful life longer than a year — roof, furnace, windows, a full kitchen. It is not deducted in the year you spend it; it is added to basis and depreciated. In underwriting, a CapEx reserve of 5% to 10% of gross rent is set aside monthly so the eventual bill is already funded.
CapEx reserve = gross scheduled rent × reserve percentage
Worked example
5% of $31,800 of scheduled rent puts $1,590 a year, $133 a month, into the reserve.
Rental metric examples use the default $265,000 duplex at $2,650 monthly rent, 25% down and 6.75% over 30 years. Strategy and tax examples use the assumptions stated above rather than that rental deal.
The mistake to avoid
Where this is calculated
The rental property depreciation calculator computes this from your own numbers and shows the arithmetic expanded. 27.5-year straight line with the IRS mid-month convention, the annual tax shield, and recapture at sale.
Related terms
- Cost basisCost basis starts with purchase price, capitalised closing costs and improvements.
- Depreciation recaptureDepreciation recapture is the tax owed at sale on the depreciation you deducted along the way.
- 1031 exchangeA 1031 exchange defers capital gains tax and depreciation recapture by rolling the proceeds of an investment-property sale into another investment property.
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