How would you handle this on P&L?

[Jon Blackburn]

Hi Team,

I recently closed on a multi-family property where the seller allowed a new tenant to move in to a unit needing rehab right before closing. He collected a security deposit, and told the guy to keep his receipts from fixing up the place and that the cost would be deducted from the rent (HORRIBLE situation to inherit...I know). 

The silver lining is that the guy is doing great work, and it was something I was going to need to pay for anyways. We're still ironing out the numbers, but hypothetically let's say the rent is $400/month and the total job was $2,400. If I give the tenant 6 free months of rent to compensate, isn't that going to make my P&L look like I've had a vacant unit for 6 months? How would you address this? Should I pay him $400/month and then have him immediately pay me $400 in return, so that I'm showing income on the unit?

[Frank Jiang]

I would recommend having him generate an invoice for the services that he has provided.  You will also provide receipts for rent during the period.  This should look like two completely separate transactions (a tenant rented from you and paid you rent / you hired a person and he did maintenance work which you paid for).  Actual cash does not have to exchange hands.

This sets the incredibly important precedent with the tenant that rent is separate from capex improvements and these improvements must be handled with your authorization and in an official manner.  Otherwise, in three months when he can't make rent, he'll replace a bathtub without you knowing and start deducting this from rent payments.