Asset Management (Part 3)
Capital Expenditures
Capital expenditures (CapEx) are the cash deployed to acquire, upgrade, and maintain physical assets. If an item has a useful life of less than one year, it must be expensed on the income statement rather than capitalized, which means it isn't considered CapEx. There are generally two reasons companies spend money on capital expenditures (capex): to grow the business, and to extend the useful life of the assets the business has acquired. Often, a value-added investment strategy uses capital expenditures strategically to force appreciation and create value for LP investors. We’ll cover in greater detail the various elements of CapEx in this month’s blog post.
Property maintenance is vital as no property is impervious to maintenance issues. Roof leaks, HVAC replacement, installing railing, and fixing a deteriorating parking lot are some of the capital expenditures we’ve experienced. All CapEx issues related to the maintenance of the property should be addressed immediately. If you let issues fester they will eventually result in you losing tenants, causing bigger problems and possible fines from the county or city. For example, if you don’t address a roof leak immediately then you run the risk of water damage or potential mold issues which can easily run you into the thousands to fix. We make it a priority during our initial walkthroughs, with our team of professionals, to identify as many of these issues as possible so we are prepared and funded once we take over the property. The results from proper upkeep of CapEx maintenance can be very beneficial and we reap the rewards of a well-kept property and a happy tenant base with a higher valuation. Without a doubt, there will be unexpected costs and issues that will arise but with proper preparation and action, these issues can be kept to a minimum, saving you money in the long run.
Once a property is purchased, with our onboarding, immediate issues, and maintenance at bay we then proceed with our value-add strategy fueled by CapEx. This is when we’re able to accelerate the value of properties with various CapEx projects; just to name a few: adding a laundry facility, asphalting driveway/parking lot, painting the exterior, adding gutters, installing energy-efficient systems, interior renovations, and much more. An asset manager must have trusted vendors handling these projects or things can spiral out of control quickly. We have experienced that firsthand, for example, we were submitting an application for a permit but the contractor wasn’t the right fit and he was in over his head with submitting the required documentation. Not only did this cost us more money but getting everything corrected and headed in the right direction cost us a bit of time as well. Reliable vendors will be able to accurately quote projects and complete them on time. After the projects are completed, the goal is to have the next buyer/lender take notice of the results from the upgrades thus raising the value of the property. The quicker we can accomplish this goal the sooner we can sell/refinance the property to fulfill our obligations to our investors.
Both short and long-term, maintenance and value-added CapEx are vital if you’re looking to capitalize on investing in multi-family assets. Along with the increased valuation of the property, there are several tax benefits as well that are passed along to our investors. CapEx can be a wonderful tool for asset managers but only with proper due diligence and execution. Once the property is stabilized and all CapEx projects completed, we must prepare for the sale of the property. Our final installment will show how asset managers prepare and navigate through exiting the investment.
