Are You Recouping Your Capital Expenses?
We all have to consider the cost of improving your property. The improvement may be a new deck, remodeling the kitchen, or the cost of new windows; they all have costs and benefits. As a general contractor in Sacramento, I get to be a part of some of the discussions that property owners and managers have when making the final decision. This is especially true when it comes to investment properties like apartments.
Capital Improvement Checklist
What is it going to cost to make the Capital Improvement?
Take a look at the labor and material cost to come up with a dollar figure that the project can be completed with. Having a valid number will allow you to budget for future changes if the funds are not currently available to start. Keep in mind that this number can change if the job gets pushed too far into the future.
Let’s say the cost is $10,000.
What is the payback of the Capital Improvement?
For an investment property you need to ask yourself, “How much more can I get by making these changes to the property?” You may be able to benefit from the improvement without raisning the revenues, but for now, let’s get a figure that is more concrete. Can you get more rent by making the improvement?
You can collect an addition $1,000 in total rents annually. Your Return on investment is 10% (1,000/10,000) per year.
Is it a long-term Capital Improvement?
If the improvement is only going to last a year or two before having to do it again, or make more changes in the future, don’t consider it a long-term improvement. Installing new windows or a fitness room is an example of a long-term improvement.
Will the Capital Improvement have associated costs?
Before finishing here, you need to ask yourself if there will be and regular costs associate with the capital improvement. Will if require regular upkeep? Are there parts that need to be replaced frequently? If so, you need to take this into account also. Adding a large room will require additional heating and air conditioning; a new playground will be virtually carefree.
If the annual cost is $500 for maintaining the improvement, your return on investment drops to 5% - ((1000-500)/10000)=5%
A general contractor familiar with the decision making process may be able to help in making the decision, as well as helping with the costs of the capital improvement costs. Don’t be afraid to ask for help from a contractor that you are willing to work with in the Sacramento area.
Tromler Construction has over twenty five years of general contractor experience.
Comments(8)