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CAPEX: The Most Important Financial Metric

What is CAPEX? Capital expenditure, or CAPEX are funds that are used by a company to aquire, upgrade, and maintain physical assets such as property, buildings, or equipmnet to keep cash flow coming (Investopedia).

Example Real Estate: Buildings, residential and commercial are going to need a constant supply of cash for upgrades over time. As a landlord your heating systems, plumbing, roofs, hot water heaters, windows, etc will all need updated at some point into the future.

Example Oil and Gas: The equiment at the wellsite depreciates over time and costs dollars to stay constantly producing oil and gas at the current rate. The seperator, pump-jack, and tank batteries will all need replaced.

50% rule Overview:

50% rule: At least 50% of your rental income will be spent on expenses. So if you get gross rents at $1,000 a month in rent, $500 will be spent on expenses external to your mortgage/cost of capital.

50% rule example: A single family home (SFH) as an investment is currently renting for $1500 per month. What’s the maximum I should expect to pay for the mortgage and the expenses?

Answer: You should plan to pay .5 * $1500 = $750 on expenses. This means that you have $600 left over to pay the mortgage and get your profit. If you’re looking for a $100 profit per investment, the maximum your mortgage could be is $500.

Not understanding CAPEX in any buisness could be detrimental to the success of the entity.