Owning a property, whether it’s an RV park in Lake Charles, an apartment building in New York City, or anything in between, is a rewarding but complex endeavor. While property owners meticulously plan their budgets, one crucial line item often remains overlooked – repairs and maintenance.
Unplanned Expenses: The Real Culprits
Operating budgets are carefully crafted, factoring in equipment replacement schedules and the expected lifespan of various components. But what happens when Mother Nature throws a curveball? Take, for instance, the experience of owning a workforce housing RV park in Lake Charles, Louisiana. Two hurricanes hitting within five weeks caused significant damage, especially to the electrical power infrastructure and essential buildings. The catch? Insurance didn’t cover the underground infrastructure, leaving property owners with an unexpected bill.
Similarly, sewage treatment plants faced repeated pump replacements due to residents flushing non-flushable items, costing thousands each time. Thunderstorms, too, could wreak havoc, as they burned security cameras and internet infrastructure without warning.
Theft is yet another unforeseen expense property owners often neglect to budget for. When a $500 gas-powered pressure washer disappears, it’s hardly worth filing an insurance claim, and there’s no allocated budget for replacements.
Even experienced property owners can fall victim to these surprise expenses. Take Blackstone Group, for example, a major player in real estate with 11 NYC buildings, mostly older ones. Despite the strong rental market, managing unexpected maintenance and improvement costs exceeded their expectations, leading to financial challenges.
Budgeting for the Unexpected: A Daunting Task
Property managers face a conundrum when it comes to budgeting for vandalism. A single recurring window breakage, not worth an insurance claim each time, can quickly deplete a maintenance budget meant for an entire year. Vandalism and breakage are difficult to anticipate, making budgeting for such incidents almost impossible.
Older buildings, especially in cities like New York and Chicago, present unique challenges. Minor repairs can snowball into major capital expenditures, triggering the need for wholesale replacements. The risk of unexpected costs in property maintenance budgets is seldom accounted for.
Insurance Premium Shock
To compound matters, insurance premiums have seen staggering increases, especially in the southern states of the US, with some properties facing 500% to 700% hikes in a single year. While property owners may negotiate higher deductibles, they rarely adjust their maintenance budgets to accommodate the new reality. Strong rent growth in recent years has provided some relief, masking the rising costs.
However, property owners find themselves in a tough spot as insurance is a non-negotiable requirement, and insurers hold all the cards. Eliminating an insurance policy could lead to defaulting on property loans, an unacceptable risk for any property owner.
Dissecting the Budget
An analysis of operating budgets for several projects reveals a significant discrepancy between insurance premiums and maintenance budgets for multi-family apartments. In some cases, insurance costs are double the budget allocated for repairs and maintenance. Further scrutiny of apartment appraisals from CBRE shows substantial variation in budgeting for insurance and maintenance across similar properties in the same markets.
In conclusion, in the world of property ownership, repairs and maintenance are undoubtedly the top line item to scrutinize and prepare for. These unexpected expenses can wreak havoc on an operating budget, and property owners need to be vigilant and adaptable in their financial planning. As the real estate landscape continues to evolve, proactive budgeting for repairs and maintenance will be crucial for safeguarding the financial health of property investments.