Accounting for Vacancy and Repairs

[Jeff V.]

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

[Dave Toelkes]

@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.