Balancing repairs against returns is a challenge all property investors need to manage. As a new investor, you want to buy a property and see a return on your investment. You have calculated all your numbers and you know you can get a 10 or 15 percent cash to cash return, so you’re excited. Then the roof suddenly needs to be repaired or the water heater has to be replaced. If you’re earning a cash flow of $200 per month and the water heater bill is $1,000, that’s five months of profits that disappear, and you might start to wonder if investing was a good idea.
The first six months of property ownership is a stabilization period. Be prepared for repairs. I always add a couple thousands of dollars to my repair budget in those first six months. That way, I’m not surprised when a tenant moves in and repairs are needed. Once they start living there, those tenants will find things you didn’t. Ideally, we can go over these properties carefully before a tenant moves in. That gives you less of a stabilization period, but these things still happen. Things are going to break and there will be problems.
Returns versus Repairs
So the tension comes in between returns and repairs because if you don’t do repairs, you’ll maximize your returns. But that’s shortsighted because you want this asset to last for decades. The only way to preserve your asset is by making the necessary repairs. You’ll need to take some hits as depreciation expenses. Remember that you can expense those on your taxes.
Preserving Your Asset
You must keep up with that property. If you let it fall into disrepair your cash flow will be higher, but you won’t be able to sell it later without significant investment. You don’t want to find yourself making $30,000 of repairs on a $50,000 property because you didn’t maintain it over time. It makes more sense to maintain the property and keep it up. That ensures your investment property is going to perform for you over the long term.
The challenge as an investor is to maximize cash flow and at the same time make needed repairs. That’s the strategy and as investors, we need to walk that fine line. If you build this into your financial models in the beginning, it will be a lot less painful. Account for the repairs and maintenance that will be needed. Don’t try to maximize cash flow to the point that you neglect your asset.
If you have any questions about this, please contact us at Bradstreet Proper, LLC, and we’d be glad to tell you more.