Maintenance budget credit to equity?

Question

It's commonly accepted that principal pay down is really profit, even if not Cash on Cash, as it is still a credit to your asset column. Why doesn't that logic extend to maintenance dollars budgeted from the rental revenue?

Yes, that money is debited but it should really be credited as well because it adds value to your asset column, no?

If I use that money to paint the house and put in new flooring, a roof, etc. it is adding value to my house. So should one really consider it an expense with no return?

Jack B. · Answer

There is a big difference between a repair and an improvement. A repair of $100 to fix a sink leak doesn't add value to the house. But painting the house, putting in new flooring, stainless appliances, granite counter tops, and sprucing the house up does add value. That's why the IRS distinguishes between repairs and improvements and the cost of improvements is added to your basis in the property.

You can also rent the property for more when it is in spruced up condition, and the same goes for selling it. Since it is being paid for with money from tenants pockets, improvements shouldn't be merely debited. There should be a credit, in accounting parlance, to the value of the house.

Last but not least, principal pay down and equity gains are profit, as soon as you realize them by tapping them. They aren't some kind of expense on your balance sheet, they are capital gains whether your realize them or not...

Lot's of posts on here about factoring principal pay down into your returns.

Thomas S. · Answer

There is no return from doing repairs, it does not increase the value of the property by simply maintaining it.

Principal pay down is one of those profit numbers that does not really exist so is not commonly accepted as profit. Not until you either refinance and pull it out or sell.

A reversal of the economy can easily see equity disappear and along with it the principal pay down "profit".

I do not know who you are referring to when you state that "It's commonly accepted ......." but it is not the investors I associate with. Profit is money you can spend or invest elsewhere.