Accounting for Vacancy and Repairs

18 Replies

Let me say first,  this may be in the wrong forum but this seems to be the closest to the topic at hand.

The question is, "How does one account for Vacancy and Repairs?"  The question is specifically related to Quickbooks and is probably intended for a CPA or bookkeeper.

Some background information as to why I'm asking the question.  I read an article recently on budgeting for a major maintenance item such as a roof that will be needing to be replaced in say 5 years.  They recommend putting aside for a 5k roof replacement $1000 per year for 5 years.  What is the best way to track this and "earmark" those funds for that category in the Quickbooks program?

This got me thinking, most every "Deal Analysis" spreadsheet accounts for Vacancy and Maintenance as a percentage of the income generated.  Once the money comes in are you also supposed to tag that portion of the income to the underlying category "Vacancy" and/or "Maintenance" so that you know its reserved for those categories, OR are those numbers just used for a preliminary "Is this a good deal" check?

I have searched the forums for similar questions and haven't found any on this topic.  They all discuss the front end "Deal Analysis" ect but not the back end of the business or bookkeeping side.  

As a Recap the questions are:

1) How does one account for Vacancy and Repairs?

2) What is the best way to track this and "earmark" those funds for that category in the Quickbooks program?

3) Once the money comes in are you also supposed to tag that portion of the income to the underlying category "Vacancy" and/or "Maintenance" so that you know its reserved for those categories, OR are those numbers just used for a preliminary "Is this a good deal" check?

Any advice in this area will be greatly appreciated.

Thanks,

Jeff

I've been wondering about doing this myself.  This link is to a Quickbooks support site about setting up a budget in Quickbooks.

http://support.quickbooks.intuit.com/support/pages/inproducthelp/Core/QB2K12/ContentPackage/Core/Budget/task_budget_create.html

Your question motivated me to set up our budget, which I've just spent the last hour or so doing.  If you have questions doing yours, let me know.

@Jeff Vincent

Your question asks about repairs, but the context of your question is really about a reserve fund for major systems replacements.  I can tell you how I account for these things but I am sure that my method is just one of several solutions that may fit your circumstances.

First, repairs fix things that are broken.  Repairs are unscheduled.  We don't know when repairs will be needed nor how much they may cost so I don't really set aside any funds for future repairs.  Instead, I pay for repairs out of current cash flow as they come up.  

A replacement reserve fund is intended to pay for major systems replacements on a predicted schedule.  Each major system has an expected life cycle.  Prorate the replacement cost over the number of months before the replacement is needed, then put that amount in your replacement reserve fund each month.  If you expect to need a new $10000 roof in 25 years, then transfer $34 from your rent income each month to a replacement reserve account.  If you expect to replace a $600 water heater in 15 years then transfer $4 each month from your rent income to your replacement reserve account. Debit Cash and credit the Replacement Reserve account each month.  I have a savings account that I use for the replacement reserve fund.  At the end of each month, I transfer a set amount from my cash account to the savings account.  

Vacancy is not really an expense and I don't track it in my accounting system.  Vacancy is, instead, a period in which I have an unoccupied rental unit that is not producing income.   The failure to receive income due to vacancy is not a deductible expense.  


My husband and I owned 40 rentals, from apartments to single family homes.  We allowed a budget of  $100.00 per unit in case of repairs.  Of course not all 40 units (homes and buildings) would need repairs each month, so our budget (Escrow Account) would build up.  And then go down when big expenses like roof repairs came up. Then we would have to start over again. (When you have a lot of houses and their old, they need roofs, and if the houses are all the same age, they tend to go bad all at the same time, then you have a big expense)

But you could never anticipate how much a repair is going to cost or when it's going to happen.  If you want to set aside a certain amount of money do it by depositing it into an Escrow Repair Equity  Account in QuickBooks. 

Have a separate bank account as well called Escrow Repair Account.

When you put money into an Equity Account QuickBooks doesn't consider it income.  It considers it an Asset and will show up on your Balance Sheet. So, even though you will be depositing that money (or transferring that money over to a Bank Account) that bank, that money won't show up as income.

As far as Vacancy.  We always thought we were doing well if we made $100 per unit in profit.  (At least).  Most of our homes were paid off, so we made pure profit on those that didn't entail an expense for that month.

Buy cheap, buy many, fix them up, and pay them off.  The more rentals that are paid off, pays for the other houses that have mortgages.  Each house helps each other.  The more you buy, the more you make.  However, keeping your homes is a different story and I wrote a blog on here about keeping your homes.

Nancy Neville

@Carole G.  

Thanks for the Link, it will be most helpful in setting up a budget within quickbooks!

Dave NA has suggested along with an EQUITY account in the Chart of accounts such as "ESCROW for Repairs" and "ESCROW for Vacancy".

Thanks everyone, with all of your advice I am able to create a complete custom solution to the challenge of tracking Vacancy and Repairs and staying on the right track.

I appreciate your help!

v/r

Jeff

Nancy Neville thank you for your information. Very helpful.

With the separate Reserve or Escrow Accounts, did you have one account that you put Maintenance, Vacancy, and Capital Expenditures into, or separate bank accounts for each one?  What about an account for taxes?  

@Jeff V.  

I don't understand how you will use an Escrow for Vacancy account.  Vacancy isn't an expense, it's a lack of revenue.

Katherine,

Having been at this for a few yrs now since the post, I realize the Vacancy portion of the question was just my in-experience showing.   

What I was trying to really figure out was Capex budgeting in quickbooks.

Sorry for the confusion. 

Jeff V

Originally posted by @Katherine S. :

@Jeff V.  

I don't understand how you will use an Escrow for Vacancy account.  Vacancy isn't an expense, it's a lack of revenue.

I agree, but when when you set aside a percentage of income based on Vacancy Rate, where do you keep the money. How do you place it to where it's not income, like Maintenance and CapEx described above?

@Jeff V. I am so sorry! I did not notice the age of your original post. I too am trying to figure out the accounting aspect, including capex. Have you read "Profit First"? That may be a good method for me.

For anyone looking for the same information here is a link to a simple way to accomplish the accounting for future CAPEX expenses.

Jeff V

We and our clients do keep track of vacancy year after year. You will be surprised to see how much money you are losing and dig deeper as to the reason behind it.

Monthly analyze your reports, compare Profit & Loss Previous Year, budgets, forecast and more. 

It's a reserve.  The way you account for it is you put the money in a savings account

Debit Cash

Credit Capital Expenditure Reserve

and/or

Debit Cash

Credit Vacancy Reserve

There is no expense and there is no income so from a tax perspective, it makes no difference until you actual spend the money

For Best Practice, do you have one account that you put Maintenance, Vacancy, and Capital Expenditures into, or separate bank accounts for each one? What about an account for Property Taxes?

Bump to try and get a more clear answer to the last post above mine.

When people are setting aside say (THESE ARE HYPOTHETICAL):

10% for CapEx

5% for Repairs and Maintenance

5% for Vacancy

Do you create a savings account for each of these? 

Or just put it all in one savings account and then just split it up in QuickBooks so you know what is what? 

Or can it all just stay in the business checking and then just be organized in QuickBooks per reserve accounts created in the Chart of Accounts? 

I am just getting started with QuickBooks for my new rentals and this piece is confusing me quite a bit.  

Even more confused as to how we can not have that count as income... it went through my QuickBooks system as payments that were then received and deposited and now have been recorded in my "Rents Received" income account... 

Should I be doing something to splice off pieces for Cap Ex, Maintenance, Vacancy before doing all that?

Updated 16 days ago

My one other confusion is that since this is all (This month's rents) posted in QB as having been deposited into my business checking (since it has been) how do I go about shifting it all around in QUickBooks at that point? I now have a savings account open and added to QB for these pieces (Cap Ex, Vacancy, Maintenance/Repairs). Just not sure how to get all that settled in QB since all the money is shown in my business checking in QB.

Originally posted by @Brian H. :

Bump to try and get a more clear answer to the last post above mine.

When people are setting aside say (THESE ARE HYPOTHETICAL):

10% for CapEx

5% for Repairs and Maintenance

5% for Vacancy

Do you create a savings account for each of these? 

Or just put it all in one savings account and then just split it up in QuickBooks so you know what is what? 

Or can it all just stay in the business checking and then just be organized in QuickBooks per reserve accounts created in the Chart of Accounts? 

I am just getting started with QuickBooks for my new rentals and this piece is confusing me quite a bit.  

Even more confused as to how we can not have that count as income... it went through my QuickBooks system as payments that were then received and deposited and now have been recorded in my "Rents Received" income account... 

Should I be doing something to splice off pieces for Cap Ex, Maintenance, Vacancy before doing all that?

 Having a separate savings account will be much easier since you will not have to use your imagination to track your reserves. To set it up in QB, I would create sub-accounts of your savings account and enter the corresponding transactions at sub-account level, any interest at main level and reconcile at main level. Your Chart of account will look like below:

Savings Account

Capex Reserve

R&M Reserve

Vacancy Reserve

For simplicity, say you have $100 as your basis of allocation, then you will transfer the actual fund from your checking to your savings reserve a total of $20 ($10 Capex, $5 R&M, $5 Vacancy) then record it QB as follows:

Account                                      Debit             Credit

Savings:Capex Reserve $10

Savings:R&M Reserve               $5

Savings:Vacancy Reserve         $5

Checking Account                                             $20

And say you transferred $10 fund from savings to checking to cover actual expenses Capex $5, R&M $2 & Vacancy $3, then you will book it as follows:

Account                                             Debit            Credit

Checking Account                           $10

Savings:Capex Reserve                                        $5

Savings:R&M Reserve                                           $2

Savings:Vacancy Reserve                                     $3

Your savings/reserve account will then has a balance of $10 broken down as follows:

Savings Account                  $10

Capex Reserve $5

R&M Reserve                   $3

Vacancy Reserve             $2


I also suggest that you this when you have enough funds to cover your reserves. Hope this helps!

@Dan V.

Thanks so much! This is exactly what I was looking for and hopefully helped others in this thread.

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