How Much Should You Budget for Repairs Before Buying an Investment Property?

One of the mistakes I see investors make is assuming that because a house is livable, it won’t take much money to get it ready to rent. The house looks pretty good. The HVAC is working. The roof isn’t leaking. The kitchen and bathroom are functional. Maybe it even has a tenant in it already. On the surface, it feels like a property you can buy and put into service without much additional expense.

Then the inspections start.

Depending on the municipality, getting a property through an occupancy or rental inspection can uncover a surprising number of smaller items. GFCIs, handrails, smoke and carbon monoxide detectors, plumbing leaks, slow drains, peeling exterior paint, damaged siding, tuckpointing, downspouts, windows, electrical issues and other seemingly minor repairs can add up quickly.

That’s why when I’m looking at a “livable” property with an investor, I don’t like underwriting it with a $0 repair budget just because nothing obvious jumps out during the showing.

So How Much Should You Assume?

As a starting point, I generally think an investor should have $5,000–$10,000 in the numbers for a livable property that still needs to make it through inspections. On an older St. Louis property, using something around $7,500 as a placeholder until we know more is not unreasonable.

That doesn't mean you're automatically going to spend $7,500. You may get through for considerably less. But I'd rather have money built into the deal and not need it than make the numbers work by assuming there won't be any surprises.

There’s also an important distinction between a building inspection and a municipal occupancy inspection. They are looking at the property through different lenses. A municipality may require something to be corrected that isn't a major concern on the building inspection, while your building inspector may identify deferred maintenance or larger issues that aren't necessarily required for occupancy.

That brings me to the part I think investors sometimes miss.

Passing Code Isn't the Same as Being Investor-Ready

Let's say you spend $3,500, complete the required municipal items and get your occupancy permit. Technically, you're rent-ready.

But what else did the inspections tell you?

Maybe there's deteriorating tuckpointing that isn't bad enough to prevent occupancy. Maybe the HVAC is working but hasn't been serviced in years. There could be drainage that isn't causing a major problem yet, an aging water heater, a slow plumbing issue, exterior wood that's beginning to deteriorate or a roof that's nearing the end of its useful life.

You don't necessarily need to fix every one of those things before you put a tenant in the property. This is an investment, and I'm definitely not advocating over-renovating a rental. But there is a big difference between choosing to defer an item and ignoring it because it wasn't required by the city.

Sometimes that $1,000 repair you postpone becomes a $3,000 repair later. A small leak damages drywall. Poor drainage turns into water intrusion. Deferred HVAC maintenance becomes an emergency call in July. Exterior deterioration that could have been addressed relatively inexpensively becomes a much larger project a few years down the road.

And once you have a tenant in place, repairs can become more complicated and more expensive. You're scheduling around someone's occupancy, potentially paying emergency service rates and dealing with a tenant who understandably isn't thrilled when something stops working.

I Look at Repairs in Three Buckets

When we're evaluating one of these properties, I like to separate the repair list rather than treating every inspection item equally.

Must Do Now: Anything required for occupancy, safety issues, active leaks, electrical hazards, structural concerns or something that could cause additional damage if we leave it alone.

Smart to Do Now: Deferred maintenance that isn't technically preventing occupancy but makes financial sense to address while contractors are already there and before a tenant moves in.

Can Wait: Cosmetic improvements and legitimate deferred items that aren't likely to cause additional damage or significantly increase in cost by waiting.

That second category is where some of the best decisions get made. Spending a little more upfront isn't always a bad thing if it reduces your chances of paying considerably more later.

Sometimes the Seller Has to Participate

We make the best assumptions we can before writing an offer, but there are things you simply cannot know from a showing. That's one of the reasons we do a building inspection. If the inspection uncovers an unexpected $8,000, $10,000 or $15,000 expense, the economics of the deal may have changed.

At that point, we will often go back to the seller and say, essentially: if you can reduce the price or give us a credit of X dollars, we'll proceed. If not, we may need to release the deal. That's not necessarily the buyer trying to renegotiate a deal they already made. It's responding to new information that wasn't reasonably available when the offer was written.

Of course, the seller doesn't have to agree. They may negotiate, say no or offer something in between. Our job is to figure out what the property is worth to our buyer now that we know more about what we're actually buying.

When Does the Deal Stop Working?

This is where investors need to be willing to go back to the numbers rather than becoming emotionally attached to getting the deal closed.

If we assumed $5,000 in repairs and the actual number comes back at $8,000, that doesn't automatically make it a bad deal. Maybe there's enough cushion to absorb it. Maybe we negotiate part of it with the seller. But if we thought we were buying a rent-ready property and suddenly we're looking at $15,000 or $20,000 between required repairs and important deferred maintenance, that's different.

At that point, don't rationalize each repair individually. Rerun the deal.

What is your actual basis after the purchase price, repairs and closing costs? What rent can the property realistically achieve? What does the return look like now? Are there larger expenses coming in the next few years that still aren't included in that number?

Sometimes the new numbers still work. Sometimes a seller concession gets the deal back where it needs to be. And sometimes the right decision is to walk away.

The property doesn't know what you originally planned to spend. The deal either works at the new numbers or it doesn't.

Build the Cushion Before You Need It

There are absolutely properties that really are rent-ready and need very little after closing. But particularly with older housing stock, I don't think that's something investors should automatically assume.

If I'm underwriting a livable property that still needs inspections, I'd much rather start with a reasonable repair cushion, get the inspections completed and then be pleasantly surprised when we don't use all of it.

Passing occupancy tells you the property can be rented. It doesn't necessarily tell you whether you've adequately budgeted to own it.

That's the bigger question I want investors asking before they buy.