SS288: How to Budget for Deferred Maintenance Properly

SS288: How to Budget for Deferred Maintenance Properly

Budgeting for deferred maintenance is key to repositioning a property. In this episode, Charles discusses how to properly budget for these renovations by creating a detailed plan.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

  • Dealing with deferred maintenance is a necessary part of repositioning any multifamily property, and it’s in this deferred maintenance where investors can unlock the property’s true value. Some deferred maintenance items are more important than others, and it is up to the investor to evaluate the property, identify the necessary repairs (preferably before purchasing the property), budget for them, and ultimately correct them.
  • 1. Start with a Physical Needs Assessment (PNA)
    • During the due diligence inspection, alongside an inspector, we want to make a full inventory of all of the building systems and outline their remaining useful life or RUL. This includes roofs, HVAC, plumbing, and electrical systems. We want to bring in a specialized contractor for each of these major systems, not just a general inspector.
  • 2. Categorize and Prioritize
    • What is most important, needing attention day one? What needs to be done in the first 90 days? What can be done in the first year? What are the other items or systems needing replacement in the next 2-3 years? Or in the first 5 years?
    • Systems and mechanicals needing immediate attention are scheduled and completed immediately upon closing. Less urgent repairs can be scheduled afterward.
    • Immediate attention items would include life/safety and legal repairs. This would include failing stairs and railings, roof leaks, leaking boilers, plumbing problems, and similar issues.
    • Secondly, operations and efficiency items. Patched HVAC systems that need replacement, old hot water heaters that are nearing the end of their life, and appliances that are problematic and require replacement.
    • Third, cosmetic and value-add renovation items. Renovating vacant apartments. Improving the landscaping. Painting the exterior. Updating common areas. Correcting cosmetic issues with the parking lot and sidewalk. If they are more serious, they should be moved to the immediate attention category.
  • 3. Budgeting. A common mistake is trying to pay for major deferred maintenance out of cash flow. It is imperative that you budget and allocate funds to address deferred maintenance before you close on the property. There are 2 types of budgets:
    • Operating Budget (OpEx): For routine, day-to-day maintenance (e.g., fixing a leaky faucet, replacing a single window screen, minor drywall patches).
    • Capital Budget (CapEx): For major projects that extend the life of the property (e.g., replacing the whole roof, repaving the parking lot, upgrading all HVAC units). Deferred maintenance belongs here.
  • 4. Calculate and Fund Your Reserve Account. Now that we know what needs to be repaired and the useful life of all systems on the property, we can start creating and funding our reserve account.
    • For example, if you have 4 hot water heaters that were replaced at the same time, and you have estimated you have 4 years of useful life left, you can start putting aside cash monthly for their replacement, but don’t rely on cash flow to cover repairs that need to be completed in the first year or two.
    • You should make a monthly deposit into your reserve account. This could be $250-$400 per month, per unit, depending on the quality, condition, and age of your property. This is in addition to the funds set aside to address the immediate deferred maintenance repairs. It is important to be well capitalized when purchasing and repositioning an apartment building.
  • To learn more about how to spot deferred maintenance, check out episode SS267.
  • Deferred maintenance is not just about identifying the repairs but also accurately forecasting, budgeting, and planning for them. The first year of owning a property is the most important for getting the asset back on track and driving appreciation.

Transcript:

Charles:

What if the biggest risk in your next department deal is not the purchase price, but the repairs you forgot to budget for? The deal can look profitable in your spreadsheet, but one bad roof, one failing boiler, or one parking lot replacement can wipe out years of cash flow. This is why deferred maintenance is not a repair problem. It is an underwriting problem, a budgeting problem, and a risk management problem. Welcome to Strategy Saturday. I’m Charles Krillo, and today we’re breaking down how to budget for deferred maintenance properly.

Charles:

Let’s get started. Dealing with deferred maintenance is a necessary part of repositioning any multifamily property. And it’s in this deferred maintenance where investors can unlock the property’s true value. Some deferred maintenance items are more important than others. And it’s up to the investor to evaluate the property, identify the necessary repairs, preferably before purchasing the property, budget for them, and ultimately correct them.

Charles:

Number one, start with a physical needs assessment, P&A. During the due diligence inspection alongside an inspector we want to make a full inventory of all the building systems and outline the remaining useful life or RUL. This includes HVAC plumbing electrical systems. We want to bring in a specialized contractor for each of these major systems not just a general inspector.

Charles:

Number two, categorize and prioritize. What is most important, needing attention day one? What needs to be done in the first 90 days? What can be done in the first year? What are the other items or systems needing replacement in the next two to three years or in the first five years? Systems and mechanicals needing immediate attention are scheduled and completed immediately upon closing. Less urgent repairs can be scheduled afterward.

Immediate action items would include life safety and legal repairs. This would include failing stairs, railings, roof leaks, leaking boilers, plumbing problems, and similar issues.

Secondly, operations and efficiency items. Patched HVAC systems that need replacement. Old hot water heaters that are nearing the end of their life. appliances that are problematic and require replacement.

Third, cosmetic and value-add renovation items. Renovating vacant apartments improving the landscaping painting the exterior updating common areas correcting cosmetic issues with the parking lot and sidewalk. If they are more serious they should be moved to the immediate attention category.

Charles:

3. Budgeting. A common mistake is trying to pay for major deferred maintenance out of cash flow. It is imperative that you budget and allocate funds to address deferred maintenance before you close on the property.

There are two types of budgets. Number one is the operating budget or or the OpEx, for routine day-to-day maintenance. For example, fixing a leaky faucet, replacing a single window screen, minor drywall patches.

Number two is capital budget, or CapEx, for major projects that extend the life of the property. Replacing the whole roof, repaving the parking lot, upgrading HVAC units. Deferred maintenance belongs here.

Charles:

Number four is calculate and fund your reserve account. Now that we know what needs to be repaired and the useful life of all systems on the property, we can start creating and funding our reserve account.

For example, if you have four hot water heaters that were replaced at the same time and you have an estimated four years of useful life left you can start putting aside cash monthly for the replacement. But don rely on cash flow to cover repairs that need to be completed in the first year or two. You should make a monthly deposit into your reserve account. This could be to per month per unit depending on the quality, condition, and age of your property.

This is in addition to the funds set aside to address the immediate deferred maintenance repairs. It is important to be well capitalized when purchasing and repositioning an apartment building.

Charles:

To learn more about how to spot deferred maintenance, check out episode SS267. That’s SS267. Deferred maintenance is not just about identifying repairs, but also accurately forecasting, budgeting, and planning for them.

The first year of owning a property is the most important for getting the asset back on track and driving appreciation.

I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, and potential show topics at globalinvestorspodcast.com. If you’re interested and actively investing in multifamily real estate, go to syndicationsuperstars.com and join the wait list for our one-on-one mentoring program.

Again, that’s syndicationsuperstars.com. Look forward to another episode next week. See you then.

Links Mentioned In The Episode:

  • SS267: Deferred Maintenance: How to Spot and Budget for Hidden Property Issues

Are You a Fan? Subscribe, Rate, Review & Share – Click Here To Learn How

What question do you always wish I would ask but I never do?

Connect with the Global Investors Show, Charles Carillo and Harborside Partners:

Leave a Reply

Scroll to top