Capital Expenditure (CapEx)

A capital expenditure buys or replaces a long-lived major component, such as a roof, an HVAC system, a water heater or a parking lot. For cap rate purposes, investors and appraisers usually set aside an annual reserve for these costs and count it as an operating expense.

The calculator's default is a 5% reserve, which on the example property is $2,280 a year. Remove it and NOI rises to $31,172, which turns a 5.78% cap rate into 6.23% on the same $500,000 price. Nothing about the property changed; the roof still wears out.

Brokers sometimes quote NOI "before reserves", and buyers comparing listings should check which convention each one uses. A one-time capital project, such as a planned renovation, is usually kept out of NOI and added to the purchase cost instead, since it changes the basis rather than the annual income.