When investing in real estate, regardless of single family or multi-family or actively or passive investing, it is important to know and account for all potential expenses. In doing so, recognizing any deferred maintenance is key.
What is Deferred Maintenance?
Deferred maintenance is a term used to describe past-due maintenance. These are routine services or work that should be done to keep the property in top shape. They can include pest control, landscaping plumbing services, and routine paint touch ups during unit turns and more.
Maintenance should be considered a normal operating cost in the real estate investment business. Deferred maintenance is costly and can lead to devastation for the owner and the community. If the previous owner has neglected the routine landscaping services and now a tree branch has grown and extended to a piece of the roof, causing ongoing damage, the needed repairs, left incomplete are referred to as deferred repairs.
Count the Costs
We discussed the importance of accounting for your capital expenditures and repairs, but when doing so and in your or your sponsor’s due diligence, even as a passive investor, ensure to identify any deferred maintenance and repairs. While these may be costly, what is more costly is not having accounted for them in the first place. Experienced investment firms know this!
Remember, with problems come opportunity. Deferred maintenance creates a value-add opportunity for you and your partners. When the previous owners fail on the upkeep, units go vacant and unhappy residents leave. Not good. As the potential new owner, you now can complete the repairs, turn the units and improve resident satisfaction. In doing so, you are increasing the net operating income of the property and forcing appreciation.
What is most important is to complete a thorough due diligence and fully account for deferred maintenance and repairs. Sometimes these ugly details signify passing on the investment; other times, they mean opportunity.
As David Lindahl says in his book, Emerging Real Estate Markets, “An ounce of prevention is worth a pound of gold in your pocket!”
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Rodney Robinson II