Repair or Replace Decisions in Apartment & Multifamily Projects

Repair or Replace Decisions in Apartment & Multifamily Projects http://www.karenhanover.com Cash flow is critical in apartment & multifamily investment, and rental income less expenses is where it originates.

Expenses include a large component related to the maintenance and repair of appliances, heating and air conditioning systems.

Controlling expenses is important, but there's a point at which every apartment & multifamily owner/manager must consider whether it's better to keep repairing old equipment or to replace it.

Both timing and cash flow are considerations in repair or replacement decisions in apartment & multifamily investment.

If the exit strategy is to hold for the long term, then a decision can be based solely on an analysis of the cash flow benefits from wholesale replacement of equipment that's creating large expense outflows for repairs due to age and condition. Buying 50 new furnaces can be a good decision if the loan to make the purchase results in a monthly payment lower than the current repairs. With a one year warranty, the first year would be a slam-dunk. Subsequent years should still show a decent return if the units are cleaned and maintained to reduce emergency problems.

In areas requiring air conditioning, the heating is a part of the overall system in most cases. With the repairs on both components considered, there can be a savings from replacement, especially at today's high cost to repair A/C units using new refrigerants and techniques mandated by law to protect the environment. Selection of systems that use a less expensive to maintain refrigerant can be a factor. Then there's the efficiency aspect. There can be a significant difference in cost for a high efficiency system versus the normal efficiency units. It's hard to recoup this in some cases by increasing rents and advertising the efficiency to prospective tenants.

Unless utility costs are very high in an area, the trade-off for high efficiency may not be worth it.

While heating and air conditioning systems aren't items that are esthetically interesting to tenants, refrigerators, laundry equipment and dishwashers can be.

They see and use them every day, and they also see modern appliances in ads and stores. Some tenants may make a decision to rent based on modern appliances, so there can be marketing considerations to go along with saving on repairs to old units.

Apartment & multifamily owners should look at repair or replacement decisions as a balance of tenant retention/marketing with savings in monthly repair expenses.

Repair or Replace Decisions in Apartment & Multifamily Projects, Copyright 2010 by http://www.karenhanover.com