You’re staring at the Profit & Loss statement for your dream first rental. The numbers look good… mostly. Then your eyes lock on a single line item from 2021: $15,000 for ‘Roofing Repair.’ Your stomach sinks. Is this property a money pit? Or was that a one-time fluke?
This moment of confusion is where investors separate the amateurs from the pros. You need to know if an expense is a predictable part of business or a true financial disaster. To do that, we need to look at an old accounting concept with a very modern lesson: the “extraordinary item.” In this post, we’ll demystify these big, scary expenses and give you a simple framework to budget for them, turning your fear into financial confidence.
Table of Contents
What Was an “Extraordinary Item”?
For decades, an “extraordinary item” was a formal accounting term for a major financial event that was set apart from a company’s regular income and expenses. It was reserved for things that were truly out of the blue.
Key Attributes:
To qualify, an event had to meet two strict criteria:
- Unusual in Nature: The event was completely unrelated to the typical day-to-day activities of the business. For a landlord, this might be the government seizing a property through eminent domain to build a highway.
- Infrequent in Occurrence: The event was not reasonably expected to happen again in the foreseeable future. A perfect example would be a sinkhole opening up in the backyard.
Crucially, a huge but predictable expense was never an extraordinary item. Replacing a 25-year-old furnace, for example, is a large but expected cost of owning property.
The Big Twist: The Term is Officially Retired
Here’s the crucial update: In 2015, the Financial Accounting Standards Board (FASB) officially got rid of this term to simplify financial reporting.
But if the term is gone, why should a new real estate investor care? Because the risk didn’t retire. You still have to deal with these exact same financial situations, even without the fancy label.
Why This Concept Still Matters for Real Estate Investors
The term is obsolete, but the strategy for handling major costs is more important than ever. Smart investors don’t lump all big expenses together. They think in three distinct categories, and understanding the difference is key to your survival and success.
| Expense Category | What Is It? | How You Pay for It |
| Operating Expenses (OpEx) | The regular, predictable stuff: property taxes, insurance, lawn care, a leaky faucet. | From your monthly cash flow. |
| Capital Expenditures (CapEx) | Big, infrequent, but predictable replacements: new roof, HVAC system, water heater, repaving a driveway. | From a separate “CapEx” savings account you fund with a % of rent each month. |
| “Black Swan” Events | True, unforeseeable disasters: a house fire, a major tenant-injury lawsuit, a tornado in a non-tornado zone. | Your insurance policy + a dedicated cash “Emergency Fund.” |
That $15,000 “roofing repair” from our intro? That was a Capital Expenditure (CapEx). It’s not a sign the property is cursed; it’s a sign that you need a plan to pay for the next big replacement.
Your Practical Game Plan: From Rookie to Resilient Investor
A professional investor doesn’t just hope for the best; they build a financial fortress to withstand challenges. Here’s how you do it.
- Master Your CapEx Budget. This is non-negotiable. Set aside 5-10% of every month’s rent into a completely separate savings account. This is your “planned maintenance” fund, ensuring you have cash on hand when the water heater inevitably fails in 5-10 years—protecting your cash-on-cash return.
- Build a Separate Emergency Fund. This is your “oh-no” fund, and it is not the same as your CapEx fund. It should hold 3-6 months of total property expenses (mortgage, taxes, insurance, utilities). This fund is for true surprises, like covering your large insurance deductible after a fire.
- Get Rock-Solid Insurance. This is your primary defense against a true Black Swan event. Don’t skimp on coverage. A comprehensive landlord policy, plus considering an umbrella policy for liability, protects your entire net worth from a single catastrophic event.
Think of it like this: Your CapEx fund is for buying new tires every 50,000 miles—you know you’ll need them. Your Emergency Fund is for when your engine unexpectedly blows up on the highway. They solve very different problems.
Common Pitfalls and Mistakes
New investors often make critical errors by not understanding these distinctions.
- Ignoring CapEx Entirely: This is the most common mistake. An investor calculates monthly cash flow but “forgets” to set aside money for the new roof needed in seven years. When that bill comes due, their “profitable” investment suddenly becomes a massive liability.
- Using the Emergency Fund for Planned Upgrades: Raiding your emergency cash to pay for a planned kitchen remodel or a new driveway leaves you completely exposed to a true disaster.
- Misinterpreting a Past P&L: Seeing a large past expense and dismissing it as a “one-time thing” without investigating is dangerous. You must ask: was it a true fluke, or was it a predictable CapEx that will come due again on your watch?
FAQs: Extraordinary Item
Is a roof replacement considered an extraordinary item for property owners?
No, a roof replacement isn’t classified as an extraordinary item because it’s a predictable cost over the life of the property. An extraordinary item involves something truly unexpected—like severe storm damage—whereas a new roof is a capital expenditure you can anticipate and plan for.
Why did accounting standards remove the term extraordinary item?
The Financial Accounting Standards Board (FASB) removed the term extraordinary item in 2015 to simplify financial reporting. However, understanding what used to qualify as an extraordinary item still helps real estate investors prepare for rare, high-impact costs that don’t fit into regular operations.
How should investors handle expenses that used to be called extraordinary items?
Investors should manage costs once labeled as an extraordinary item by maintaining strong insurance coverage and an emergency fund. While the accounting term extraordinary item no longer appears on financial statements, the concept remains vital for budgeting against major unforeseen losses.
Conclusion
Forget the official term “extraordinary item.” Instead, burn the three buckets into your brain: OpEx, CapEx, and Black Swans. By budgeting for the predictable (CapEx) and insuring against the truly unpredictable (Black Swans), you take control of your investment’s financial future. You’re no longer just hoping for good luck; you’re building a resilient real estate business designed to withstand whatever comes its way—whether you’re managing a single family rental, scaling through BRRRR, or building generational wealth.
