I bought my first property a few months ago. There was a lot of deferred maintenance which ended up adding up to about 15% of what put in as a downpayment.
Fortunately, the property is currently cashflowing nicely.
In my accounting books, should I classify this "deferred maintenance" as a "repair" (and factor that into my repair budget), or consider it simply as a cost of buying the house (affecting cash-on-cash and cap rate statistics)?
I usually consider up front repairs as part of the acquisition cost, although I'd be interested to hear what others think.
Presumably these repairs should increase the value of the property, so you could refinance to get some of your cash back out and make your CoC numbers better.
What others think is not important unless that other is your accountant.
Here, any expenditures made to get the property rent-ready are capitalized - essentially part of the acquisition. I suspect it is similar on the other side of the line.
@Steven Hamilton II would be able to provide you with the definitive answer.
@Alex Silang Most costs incurred to acquire the property and get it rent ready is added to the cost basis of the asset and depreciated over 27.5 years. So your deferred maintenance is added to the cost of the property and depreciated.
Additionally, some costs related to the loan origination are capitalized and amortized over the life of the loan.
I think you should classify the deferred maintenance repairs as an acquisition cost on your books, but then do book-to-tax adjustments for your tax returns, in order to expense those items. On your business books, repairs necessary immediately upon acquisition are truly part of the acquisition expense, and unnecessarily skew historic repair expenses if you account for them as repairs and maintenance.
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