Capital Expenditure (CapEx)

A capital expenditure is money spent to buy, replace or improve a long-lived asset: a roof, a furnace, windows, a kitchen. For a rental it either goes into cash invested at purchase or is funded over time by a reserve that reduces annual cash flow. Both affect cash on cash return.

The default deal carries a CapEx reserve of 5% of collected rent, about $2,964 a year. Leaving it out would raise cash flow and push the return from 6.3% to roughly 8.3%, but the roof still wears out. The reserve spreads that future bill across the years it is used.

CapEx done right after purchase, like the $10,000 rehab in the default inputs, belongs in the denominator instead. That raises cash invested and lowers the return in year one. If the work supports higher rent, the numerator grows too, and the net effect depends on how much rent each dollar of work adds.

Further reading: Capital Expenditure (CapEx) on Wikipedia.