Repairs vs improvements: which one counts in NOI?
Repairs are operating expenses and belong inside NOI. Improvements are capital and sit below the NOI line with the CapEx reserve. The test is what the money did: fixing the furnace is a repair, replacing the furnace is an improvement.
Why it matters
The two get lumped together in most quick models, and they behave completely differently. Repairs recur every year and belong in the run rate. Improvements are lumpy, arrive on their own schedule, and destroy a year's cash flow when they land.
What it does to the number
Classifying a $9,000 roof as maintenance in the year it happens. NOI collapses for that one year, the cap rate reads as though the property has failed, and the following year it reads as though it has recovered. Neither number describes the property.
Worth knowing
- Repair: patch the roof, fix the water heater, service the HVAC, paint a room at turnover.
- Improvement: new roof, new HVAC system, new water heater, a kitchen renovation.
- Repairs go in maintenance, inside NOI. Improvements go in the CapEx reserve, below it.
- The IRS has its own repair-versus-capitalisation rules for tax. They are related to this distinction but not identical — ask a CPA.
The rule this calculator locks
Maintenance is an operating expense; capital expenditure sits below the NOI line.