If you are a real estate investor, chances are, you’ve heard of the term deferred maintenance. Even if you’re not sure exactly what it means, you’ve probably been guilty of it before. We all have!
In this article, we’re going to talk about what exactly deferred maintenance is, what the true costs of it are, and how to not let it thwart your real estate investment business.
What Is Deferred Maintenance?
Deferred maintenance in real estate is putting off any work a building needs to remain functional, safe, and in the best possible condition.
While it can be tempting to put off things like a leaky roof that’s only trickling, damaged gutters, or restaining your wood siding, it could be much worse than just taking care of the problem right away. “Saving money” by not completing repairs on time can end up costing you far more money in the long run. Not to mention, it can put your tenants and your real estate investment at risk.
The 3 Main Risks of Deferred Maintenance
#1- Cash Flow Killer
As a real estate investor, you know that one of the most important things is maintaining a high rental property cash flow. When you first ran the numbers and decided your investment property was profitable, you calculated your expenses, such as a mortgage payment, taxes, utilities, etc. Hopefully, you added some room in your budget for regular property maintenance and repairs.
Related: How to Find Positive Cash Flow Properties
Costly replacements can be a cash flow killer, and it is always best to focus on making repairs whenever necessary. While it might seem like a pain to spend $3,000 to get your wood siding restained every few years, failing to do so will leave you with a $30,000+ bill when the siding has rotted and you have no choice but to replace it. If you defer maintenance like this for too long, you may face additional costs, such as repairing structural damage, removing mold growth, and insulation replacement.
You can see how quickly deferred maintenance can rack up future expenses. While it’s tempting to save money at the moment, your best bet for maintaining positive cash flow is regularly setting aside some cash for preventive maintenance.
#2- Asset Depreciation
One major risk of deferred maintenance is asset depreciation.
Another danger of deferred maintenance for real estate investors is asset depreciation. Imagine what would happen if you let the “little things” slide. Suddenly, years down the line, you might find you’ve done damage to your investment through deferred maintenance that has reduced its value. And, in order to restore your investment property to its former glory, you might be faced with dropping a sum of money you can’t afford. In the event you need to sell your property, you won’t get as high of an asking price as you should.
One of the greatest benefits of being a landlord is owning assets that increase in value over time. However, owning property is also a responsibility, and property cannot appreciate all on its own. It takes an attentive and caring owner to not only maintain its value but also complete work to add to its value wherever possible.
#3- Legal Dangers
Money problems aren’t the only risks of deferred maintenance. Failing to care for a rental property in a way that creates a safe environment for your tenants can get you into legal trouble.
Simple tasks like making sure chimneys are professionally cleaned on a yearly basis, having decks inspected and fixed when needed, and keeping electrical and mechanical equipment in good working order and up to code is important. If you fail to take these preventative measures, your rental property can become dangerous. In the event that an accident occurs and a tenant is injured, you may be liable for not adequately managing a rental property.
What Is a Good Reason for Deferred Maintenance?
At this point, you might be wondering if there is any good reason for deferred maintenance.
The answer is, generally, no. However, it is unrealistic to assume that you will never come across a situation where you need to perform repairs on a rental property that you can’t afford.
Life happens, and sometimes, as they say, when it rains, it pours. If several expenses come up at once, you might find yourself in a position where you need to make difficult choices.
Tip:
The only time it’s advisable to opt for deferred maintenance on a house is if you cannot afford to perform maintenance or make the necessary repairs. However, if it is financially feasible to do the work right away, it’s recommended to take care of it promptly.
Prioritizing Deferred Maintenance with a Backlog
So, what do you do if you don’t have the cash reserves needed, and you are forced into deferred maintenance?
It’s important to keep excellent records of all the work you’ve performed and create a backlog of work that must be performed when money becomes available to do so.
In your backlog, make sure you date everything. This will help you remember how long certain issues have existed so that you don’t accidentally let them go on for too long. You’ll also want to create a system of prioritizing work. Work that presents immediate danger and/or the potential to escalate quickly into more expensive work should, of course, be prioritized. Something like fixing chipping paint or cosmetic landscaping can be temporarily skipped over without causing harm.
Related: The Ultimate Rental Property Maintenance Checklist for Landlords
Tips to Reduce Maintenance Backlog
Here are some tips for minimizing the number of items that end up going on your deferred maintenance backlog:
- Whenever possible, practice preventive maintenance. Be it cleaning, thoroughly inspecting, and regular upkeep, performing these tasks are generally cheaper than the damage incurred by not staying on top of them. This can keep big expenses from showing up on your backlog.
- Whenever you are faced with making a replacement on your rental property, choose low maintenance materials. For example, reside a house in vinyl instead of wood.
- If you are able to tap into home equity to make repairs, it is better to use this resource than to let your investment property fall into disrepair. Of course, cash is best, but when it’s not available, get creative, and use other resources to keep your maintenance backlog from getting out of control.
Deferred Maintenance Budget
That being said, how can you budget for repairs and upkeep so that your property is not forced into deferred maintenance mode?
The first step is to set aside money in a separate bank account specifically for your rental property maintenance. If you can open up a new bank account, which you should be able to for free, you’ll be less tempted to spend it.
Next, choose an amount you want to set aside out of your rental profits each month. If you choose to save $100 each month, by the time an $800 bill rolls in, you can calmly reach into your rental maintenance savings account and pay it.
The Takeaway:
The best way to protect yourself and your investment property is to stay on top of rental property maintenance by practicing preventive care. And the best way to ensure you have enough cash flow to properly maintain your rental is by using Mashvisor’s real estate investment software to score the hottest deals on the market!