Major Repairs and Depreciation: How to Include Them in an Investment Model

Capital repairs and depreciation: why they matter to investors 🏗️

Major repairs (capital repairs) and depreciation shape the true profitability of a property. Ignoring them can lead to surprise expenses and inflated returns on paper.

Definitions in plain terms

• Capital repairs: extensive works to replace or restore major building elements and systems.
• Depreciation: the accounting recognition of asset value decline over time; used to spread the cost across useful life.

Step-by-step: how to include them in your investment calculation ✅

1. Assess current condition: visual inspection, building documentation, and any maintenance records.
2. Identify life-cycles: consider how long major systems (roof, façade, plumbing, heating, elevators) will likely last before needing major work.
3. Create a repair reserve: include an annual fund for capital repairs in your financial model — as a percentage of rental income or a fixed yearly amount based on expected cycles.
4. Reflect in cash flow: treat the reserve as a recurring expense when calculating net operating income and return metrics.
5. Use depreciation separately for accounting: depreciation affects book value and may influence tax scenarios, but it does not generate cash.

Practical advice for realistic estimates 🔍

• If documentation is limited, adopt a conservative reserve. Older buildings typically require shorter-interval major works.
• Divide costs by unit when feasible: for multi-unit buildings consider how expenses distribute across owners or how they affect rent pricing.
• Prioritize preventative maintenance: regular small investments can delay the need for large capital interventions.

Approaches and examples (illustrative) 💡

• Conservative approach: plan for more frequent capital injections and larger reserves.
• Opportunistic approach: assume less frequent large repairs, accepting higher risk in exchange for potentially greater short-term returns.

Choose the approach that matches your risk tolerance and investment horizon.

Accounting vs cash flow: the important distinction 🧾

Depreciation may reduce taxable income under accounting rules, but it does not provide cash flow. Always model both accounting impacts and actual cash movements to avoid overestimating liquidity.

Tip: run scenarios showing net operating income with and without the repair reserve to see the true impact on yield.

Red flags to watch for 🚩

• No formal repair plan or sinking fund for the building.
• Unusually low contribution amounts assigned to capital repairs.
• Visible signs of systemic wear: leaks, structural cracks, outdated systems.

Checklist for buyers and investors ✔️

• Obtain maintenance records and any past repair documentation.
• Verify that planned repairs align with the building’s condition.
• Run multiple scenarios: optimistic, base, and conservative.

Final thoughts and next steps 🧭

Accounting tools like depreciation are useful, but the safety net is a real repair reserve and realistic scheduling of works. Incorporate both into your investment model to protect returns and avoid unpleasant surprises.

If you’d like, we can build a tailored cash-flow model that includes capital repairs and depreciation for a specific property and help find options with balanced risk and return. Start searching or view apartments on our site: https://buyhome.ge/en/search

Contact BuyHome — we’ll help you choose and calculate the right property for your goals.