CAPEX or Replacement Reserve on MBs calculator ??

Question

Hello BP Family!

Kind of running in circles on this dilemma and would love to get your opinion on this.

When using @Michael Blank 's calculator (which is a state of the art weapon) i see the "deposit to replacement reserve" line item in the EXPENSES box, but there is no CAPEX line item. So if you use this line item as your capex, this would lower your NOI, hence your property value goes down. So i would typically add an extra line after debt service to account for CAPEX without affecting my NOI.

I have heard some of the other big guys in MF to never account your CAPEX as your expense.

What is your opinion on this? How do you account for CAPEX using this calculator?

Thank you!

Mauricio

Stephen Brown · Answer

Part of what you are looking at is making an offer on the property. Usually sellers either leave capex out or put it below the line.

If you move it above the line then your offer is lower.

True NOI it's below the line.

But it is an expense, just like debt.

Alvin Sylvain · Answer

All that does it move the effect of the CapEx from the NOI number to the Cash-Flow, Cash On Cash and Internal Rate of Return numbers. A savvy investor will be looking at all of those numbers.

At the end of the day, the CapEx is very real, very necessary expense. Which accounting bucket you get it from isn't going to change the Big Picture.

I always use a percentage of rent as CapEx whenever I'm analyzing a property. Which probably explains why I never get the same results the seller advertises!

Mauricio Ramos · Answer

@Alvin Sylvain thanks for your response, and that is precisely my question. I think i made the question a bit confusing.

Ill clarify that i am not referring to regular maintenance and repairs as capex.

In your opinion, the capex should be an expense so it should be taken from "above the line" and affecting the NOI. I have heard from other "gurus" that the capex should be taken out after debt service, ie, from the cashflow, not considering it an expense. This way it doesnt affect your NOI, giving you a more valuable asset.

So my question was, which way do you do it, and you answered my question.