Jun 23rd

What Real Estate Owners Should Know About Capital Expenses

To keep everything in working order, any real estate, whether it’s a multi tenant building, warehouse, or office, needs regular maintenance. Routine maintenance is usually sufficient, but every now and again, a large investment is required for bigger problems like a new roof or air conditioning replacement.

As a real estate owner, it’s vital to prepare for things that aren’t considered routine maintenance or recurring costs.  Without the proper preparation landlords and owners could be forced to pay cash, cutting into their distribution funds or requiring a capital call. Preparing for unforeseen problems now will help save you in the long run.

Real estate is an asset plan that is commonly passed down from generation to generation and often needs ongoing maintenance, on top of nonrecurring maintenance due to the age of certain assets. The need to set aside money for capital expenses is often overlooked, especially when high net-worth families own properties without debt.

Without having a constant reminder or someone looking over the shoulder of high net-worth assets without debt, capital reserves and regular inspections are not always a priority for these types of properties. This is a key component in why budgeting for these items is detrimental.

Creating A Plan

A new roof or HVAC unit is not common capital costs, but when they arise, they are big. A roof, like an HVAC system, may endure 25 to 30 years. However, if they do need replacement it can cost up to hundreds of thousands of dollars, leaving unprepared property owners an unpleasant surprise.

To minimize these shocks and surprises, Ricks recommends including a five-year capital plan. Creating this plan and setting aside 20 cents per square foot per year, will give plenty of room if these capital costs are to ever come up.

When building a reserve for your real estate you’ll be protecting your distributions in the long run, providing a consistent cash flow for all the beneficiaries of every property. In your reserve for capital, the funds could be allocated towards property improvements that would increase the value of a property for sales and/or refinancing purposes. Using these allocated funds on the upkeep of the property would help ensure that it’s not devalued due to deferred maintenance.

Getting A Good Deal

After having ownership of the property for so long, family owners don’t always realize every expense that goes into maintaining it. Property must be taken care of and treated differently because you can’t just go off and sell a portion of it as if it was a stock. Securing bids for every project ensures you’re getting the most cost-effective work on all properties.

Nobody wants to deal with the shock of having to pay for unexpected capital expenses, make sure to plan and prepare so your property and expenses don’t have to suffer. Continue to maintain and uphold your property by creating a capital plan.

For more information, you can download the full report here or visit Forbes to read more.

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