Capex vs Opex when looking at a T12

[Jeff Kehl]

I've been thinking about making the jump to larger apartment complexes and reviewing a lot of T12s to understand them. One thing I find very misleading is that they seem to throw a lot of things into Capex, the 9400 series of accounts that I would consider Operational Expenses because they reoccur fairly often. For instance a lot of the expenses for turning apartments such as replacing carpet, painting and repairs. On my properties I always count those as operational because they tend to happen every few years.

Also, they have new appliances in Capex which makes sense to me but that tends to be an on going thing in older apartments so it seems like something needs to be reserved out of the NOI for that. Not to mention reserves for roofs, paving, etc.

I tend to see a lot of T12s that show Opex as 50-60% of Gross rents then they show NOI of 50-40% and THEN they show 20% spent on CAPEX some of which looks ongoing to me.

So my question is this, for folks that evaluate a lot of T12s, do you subtract a portion of Capex as reserves from the NOI before applying cap rate? For instance if they show 50% operating would you subtract another 10% for reserves from the NOI before applying cap rate? On many of the ones I look at doing so makes them only look ok because they have high occupancy. Drop it a little and they would be unprofitable.

Also, when I acquire a new property I find that I get a larger number of turns at first and of course the units need rehabbed. Do you budget higher capex in the first 6 months?