CapEx or Capital Expenditures is a common term in the business world.
And it is just as relevant to flippers, developers and real estate entrepreneurs in California.
In its purest sense, capital expenditures are funds invested by a company to grow its business.
They usually refers to the purchase of physical assets such as property and equipment or non-physical assets such as technology, software or trademarks.
In terms of real estate development, capital expenditures are key investments made in real estate assets.
They extend to everything from the physical purchase of a property to the cost of significant renovations including reroofing, knocking down walls, kitchen upgrades and landscaping.
The term covers all investments geared towards the long-term improvement of the property for the purpose of sale or lease.
The importance of understanding Capital Expenditures
Understanding CapEx or capital expenditures is critical because it significantly impacts your return on investment (ROI) and cash flow.
It is also a valuable metric used to measure the sustainability and profitability of your flipping or real estate development business.
There is an old axiom that says you have to spend money to make money.
That is in essence what CapEx is all about.
Get it right and you will maximise the value of your properties, leading to greater ROI and cash flow via sales and tenancies.
Get it wrong and you risk either overcapitalising or failing to realise a property’s true potential.
The CapEx formula
The CapEx formula can be used to calculate the capital expenditures of a business from its balance sheet and income statement.
CapEx = PP&E (current) – PP&E (previous) + Depreciation (current)
PP&E refers to ‘Property, Plant and Equipment’. To determine the capital expenditures over a particular period, start by establishing its current value before subtracting its previous value.
Hence, if you were seeking the CapEx for 2024, you would subtract the 2023 value from the 2024 value.
The final CapEx figure is realised by adding the depreciation or amortization of intangible fixed assets for the term you are seeking.
For instance, if there was $100,000 worth of tools purchased with the intention of them lasting five years, the depreciation over one year would be $20,000.
That $20,000 is added to produce the CapEx.
Capital Expenditures vs Operating Expenditures
When calculating capital expenditures, it is important not to confuse them with operating expenditures (OpEx).
Capital expenditures are typically one-off expenditures of a capital asset such as the purchase of a property or the materials and fixtures for a bathroom upgrade.
They include anything that has the following impact on an existing capital asset:
- enhances its value
- extends its life
- improves its functionality
Capital expenditures also encompass anything with an expected lifespan of more than a year.
Operating expenditures are recurring in nature and part of the daily operations of the venture and include:
- any day-to-day maintenance
- insurance costs
- property taxes
- utility costs
- marketing the property for sale or rent
Capital expenditures are not immediately tax deductible but can be depreciated over time.
Flippers and developers in California should plan their CapEx around state and federal tax laws to maximize their deductions.
Operating expenditures are normally fully tax deductible.
Examples of CapEx in California property flipping and developing
Here’s a closer look at different types of capital expenditures common in the California real estate market.
Structural and foundation work – reinforcing foundations or seismic retrofitting to comply with California’s earthquake safety standards.
Roof replacement – installing a new roof which is common among older properties in cities like Los Angeles and San Francisco.
Major system upgrades – Replacing HVAC (heating, ventilation and air-conditioning), outdated plumbing or rewiring electrical systems to meet Title 24 energy-efficiency requirements.
Kitchen and bathroom upgrades – High-end renovations that add significant value in luxury markets such as Beverly Hills or Orange County.
ADU (Accessory Dwelling Unit) Constructions – Developing and building ADUs to increase potential rental income or accommodation capacity has become a popular investment strategy in California due to recent zoning law changes.
Energy-efficient improvements – Installation of solar panels, energy-efficient windows or EV charging stations to meet California’s environmental regulations and attract buyers.
Outdoor enhancements – Addition of pools, decking and landscaping which are all highly desirable in California’s Mediterranean climate.
Permit-required upgrades – Any renovations requiring permits such as expanding square footage or altering structural elements which can be costly owing to California’s strict building codes.
Get advice today
Capital expenditures are a fundamental component of property development.
The best way for flippers and real estate developers to source funding for capital expenditures is with hard money.
And when you need hard money in California, you should look no further than Equidy.
Equidy is a hard money lender with one of the most trusted, revered and enviable reputations on the west coast.
They lend hard money to their valued clients for projects when traditional lenders refuse.
They never waver from their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they strive to reward entrepreneurship and always help their clients turn their wealth creation dreams into reality.
But Equidy is much more than just a hard money lender.
Equidy has an intimate and personal history with property, and has immersed itself in all aspects of real estate and property development in California for more than 40 years.
They provide strategic advice to budding flippers and developers about the wisdom of capital expenditures for their projects.
They have a vast knowledge of the industry, working closely and creatively with their clients, providing their wealth of knowledge and support network as their projects take shape.
Leveraging their reputation, trust and using clear communication to minimise the risk to all parties has allowed them to enjoy long and established relationships with serious investors, sellers and real estate professionals.
Make no mistake, no-one knows more about property development in the golden state than Equidy.
Contact Equidy today to book your free strategy call.
