Capital Expenditure (CapEx)

A capital expenditure is money spent on a long-lived part of a property, such as a roof, HVAC system, water heater or kitchen remodel. It is capitalized and depreciated rather than expensed. DSCR calculations leave it out, which is why a property can pass a lender's ratio and still run short of cash.

Residential DSCR lenders look only at rent against the monthly payment. A $12,000 roof replacement does not show up anywhere in that math, even though it can wipe out a year of positive cash flow on a property with a ratio near 1.20.

Investors cover capex by setting aside a reserve each month, often figured as a share of rent or a dollar amount per unit. Commercial underwriting sometimes deducts a replacement reserve before calculating net operating income, which lowers the ratio a little but gives a more honest picture.

Further reading: Capital Expenditure (CapEx) on Wikipedia.