The Building Sends Its Bills Late
There’s a peculiar thing about owning real estate: most of the expensive things don’t send you a monthly bill.
The bank does. The insurance company does. The property tax people certainly do.
The roof doesn’t. Neither does the HVAC system. Or the plumbing. Or the electrical system. Or the windows, elevators, parking lot or facade.
They just sit there. For years. Which makes it very easy to look at a property and say: "Rent is $2,500. My regular expenses are $1,800. I’m making $700 a month." Maybe. But I suspect some of that $700 belongs to people who simply haven’t sent their invoices yet.
The building sends its bills late. And I don’t mean just the usual advice about putting money aside for a new roof. It matters how things age. A twenty-year-old roof may still be a perfectly good roof. A twenty-year-old piece of technology may be something nobody wants to repair anymore.
Is the newest technology always better than what came before it? Certainly not. But technology changes anyway. Parts disappear. Manufacturers disappear. Codes change. The people who knew how to service certain systems retire. Eventually somebody tells you: "Yes, technically we can repair it. But..." And you know what comes after the but is going to cost money.
Obsolescence is a building expense too. We understand this instinctively with other things. Nobody expects a twenty-year-old computer to be state of the art. Nobody is surprised when a fifteen-year-old phone becomes useless. But buildings confuse us because they operate on a much slower clock.
Twenty years sounds like an eternity. Which means twenty years from now has a tendency to become somebody else’s problem. Until it isn’t.
Think about how much can change over the life of a building. Heating and cooling technology changes. Electrical demands change. Building codes change. Insurance requirements change. Tenants change. Something considered an upgrade today may be considered hopelessly dated twenty years from now.
And materials themselves have histories. Some age beautifully. Some merely get old. And some turn out to have been terrible ideas that the entire industry was enthusiastic about for fifteen years.
At some point, a bit of a historian starts showing in all of us. You learn what they were building with in this neighborhood in the 1980s. You learn which systems from that period tend to survive and which ones don’t. You start recognizing that the year something was built can tell you almost as much as its present appearance. Yet we rarely prepare for these things with the same urgency we prepare for next month’s mortgage payment.
I think that’s partly because human beings are terrible at emotionally experiencing an expense twenty years away. Tell me I need $20,000 next Tuesday and I’ll start making phone calls today. Tell me I’ll probably need $100,000 sometime around 2046 and my brain files it under: "We’ll deal with it."
Unfortunately, the building has already started dealing with it. The roof is getting older today. So are the pipes. So is the wiring. So is every mechanical system in the place.
And perhaps that changes what we should call cash flow. If the property puts $700 a month into my pocket, how much of that money is really mine? Maybe $700. Maybe $500. Maybe $300. Because the roof owns some of it. The HVAC owns some. The plumbing owns some. And some of it may belong to a system I haven’t even realized is becoming obsolete yet.
The really strange part is that you can own a property for years without discovering that your accounting was optimistic. Buy it. Collect the rent. Spend the cash flow. Sell seven years later. The roof survives. The HVAC keeps running. Nothing catastrophic happens. You walk away thinking: "Great investment."
And maybe it was. But you also consumed seven years of that roof, seven years of the mechanical equipment and seven years of the building’s useful life. You didn’t necessarily avoid those expenses. You may simply have sold the building before it presented the bill.
There’s nothing inherently wrong with that. Assets change hands. But it makes me wonder whether we should pay less attention to a building’s simple chronological age and more attention to where everything in it sits in its life cycle.
What is wearing out? What is aging well? What is becoming obsolete even though it still works?
What might insurers, regulators or tenants stop accepting before it physically fails? And what expensive component is quietly using up its remaining life while I’m calling the money in my bank account “profit”?
We’re very good at preparing for bills that arrive next month. Maybe real estate requires learning to prepare just as seriously for the ones that arrive next decade. Because those bills are already accumulating. They just haven’t been mailed yet.
- Drago Stanimirovic