Importance of Real Estate Maintenance Funds
An amazing run of good luck has come to an end. Despite owning a number of older rental properties, I haven’t had to deal with a major repair in almost two years. Recently I had to replace a water heater that failed and take care of several plumbing problems requiring extensive repairs. While I wasn’t happy about it, it wasn’t a problem because I had maintenance reserve funds set aside for such events. Of course, you have reserve funds for your rentals as well, don’t you?
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Along with death and taxes, rental property repairs of one of life’s certainties. Yet many landlords are hurt by big repair bills because they weren’t prepared for them. It’s not just the novices either, many experienced investors get lulled into a false sense of security when they go without major problems for a relatively long time.
The proper way to handle repair contingencies is to have a dedicated repair fund. Each month a portion of rent collected should be deposited into this fund. A typical percentage would be ten percent. If properties are very old or you are in an area with high cost of repairs you may wish to bump that number up a little higher. The problem with such a fund is that as the balance grows you may see this as a pile of cash that should be doing something instead of just sitting there. Yielding to the temptation of utilizing those funds is akin to making a deal with the devil – at some point you will be burned.
I recently talked to a local investor with quite a few rental homes. He was in a bind because of major maintenance problems at several properties that occurred at the same time. He never bothered with a maintenance fund because he relied on a credit line when he needed cash. Like many of us, those credit lines were cancelled after the real estate meltdown. Although he has plenty of equity in his properties, he can no longer use them as a piggy bank. He now relies on credit cards for emergencies but the interest rates are ridiculous and his cards are just about maxed out. Money that should be going into a maintenance reserve is now paying credit cards. He is one large property repair away his own financial disaster.
Expect the Unexpected
It is certain that houses will need paint, electric and plumbing will have problems, a roof will eventually need to be replaced, and a number of things large and small will go wrong. What isn’t certain is when it will happen. Don’t cut corners on a repair fund. It’s quite common for new investors to take shortcuts when venturing into their rental business. The school of hard knocks educates them soon enough, hopefully they can survive. Set up that fund with your first rental, when you have a problem you’ll appreciate the value of having done so. While I wasn’t happy about writing checks for those repairs I needed, I didn’t lose any sleep at night wondering how I would pay for them.
A winning effort begins with preparation. – Joe Gibbs