Multifamily Deferred Maintenance: Watch Out, The Devastating Scary Mistakes That Taught a Profitable Lesson

One defining characteristic of Midwest multifamily housing stock is its age. The long decline in manufacturing employment that began in the 1970s resulted in almost no new multifamily housing construction for nearly 30 years. This means that Midwest multifamily housing stock is heavily skewed toward 1960s and 1970s vintage construction—and that multifamily deferred maintenance is a real risk.

Multifamily Deferred Maintenance Isn’t Going Away on Its Own

We bought our first multifamily property in 2006. The floor plan layout and natural light were great, but the structure told a different story: a 1970’s build with original aluminum-framed single-paned windows, balconies 30 feet above ground with 35-year old cantilevered joists in delicate condition, and deteriorating engineered wood siding (T1-11). And I reserved for none of it.

I thought I could fund repairs from cash flow. I was undercapitalized, wearing rose-colored glasses, and concerned about overcapitalizing and suppressing ROE. In addition, the equity required to purchase this 58-unit building consumed almost all of the cash that I had, leaving very little left over for upgrades and repairs.

I knew this was risky, given the age of the asset and the problems I knew of, but my going-in basis in the property was was incredibly low relative to replacement cost (and for good reason!). Furthermore, based on my modeling, I felt confident that this property would cash flow generously out of the gate, and my thought was that I could fund capital projects over time using excess cash flow.

But reality hit fast: the property produced cash flow—just not enough to handle both distributions and capital projects.

The Window Project: Costly, Complex, and a Turning Point

One major challenge? Replacing 236 custom-sized windows. Fabrication alone took three months. Storage and logistics added layers of complexity. The hard costs came in at $102,452, not including delivery or installation. This is a classic example of multifamily deferred maintenance compounding over time.

As investment managers and property managers, we should always focus first on improving the resident experience first. Very closely behind this needs to be a careful focus on risk management. Our focus on resident experience helps the asset perform better with respect to rents and retention, and our focus on risk management helps reduce our exposure to liability from slip and fall injuries due to trip hazards and snow and ice hazards.

These priorities also help provide clarity on how to allocate scarce resources. After closing, I went to work immediately on finding additional resources for repairs and upgrades

Eventually, I found an Ohio energy conservation loan program aimed at multifamily housing. After a complex application process, I secured a 10-year, interest-only loan at 3%. The windows got replaced. The residents noticed. Cooler summers. Warmer winters. A quieter environment. Retention and satisfaction went up.

Hidden Value in Incentive Programs for Multifamily Deferred Maintenance

The experience highlighted why so many incentive programs, from bonus depreciation to state-backed rehab loans, exist. Replacing 236 windows powered economic activity: manufacturers, truck drivers, installers, and vendors. These programs exist because real estate rehab has economic ripple effects.

We also tackled cantilevered joist issues and learned to replace them with minimal disruption. Within ten years, we’d replaced all the windows, balconies, and the roof—without ever having reserved capital up front.

Don’t Try This at Home – We Got Creative, But We Got Lucky!

We pulled this off because NOI growth enabled two cash-out refinancings. Still, this approach wasn’t replicable at scale. For a 150-unit acquisition two years later, we reserved $500,000 at closing—but even that wasn’t enough.

That second project involved kitchen fires, ongoing repairs, and a high-wire act balancing rent growth, rehab priorities, and reserve dollars. Timing became everything. Prioritizing the resident experience and risk mitigation wasn’t optional—it was survival.

Multifamily Deferred Maintenance: The Real Lessons in Hindsight

We still own both properties. They’ve done well. But here’s what I learned:

Real estate isn’t just about hitting numbers—timing matters. In year 10, the 150-unit property produced nearly $1.5M in gross income—26% above the original pro forma. But we could have gotten there much sooner.

Underwrite rent growth with confidence—if comps support it. I used overly conservative rent growth assumptions. That limited upfront capital, slowed progress, and extended the timeline.

For example, even though the 150-unit project rents were almost 15% below the comps, and the market was growing at 3% per year, I assumed 2% rent growth in year 1, 6% in years 2 and 3, and then 2% thereafter. In year 5, our pro-forma gross income in year 5 was $1,030,000, and our actual year 5 gross income was just about on target.
However, in year 10, after we were finally able to get all the work done, our actual gross income was $1,494,000, vs. original pro forma gross income of $1,184,000. It would have been much better for everyone to get this work done earlier in the hold period so we could be farther ahead in year 5.

Multifamily deferred maintenance affects investor confidence. Distributions were infrequent and inconsistent. Investors were uneasy—even though we ultimately exceeded pro-forma.

Deferred Doesn’t Mean Forgotten

Underwriting rent growth is a balancing act, and using assumptions that are too aggressive will get you into trouble very quickly. I would rather err on the side of conservatism, but being too cautious can also handcuff you to your business plan much longer than is necessary, and it will cause investor returns to be less dramatic because they are drawn out over time. I like to say that the only thing I know for certain about our underwriting is that I know it will be wrong, but I’ve also learned that being too conservative in order to account for these unknowns also has undesired consequences.

At year 10, we refinanced the asset, returned 100% of investor capital, met the preferred return, and still generated a 12.25% annual simple return—without selling the property. A solid outcome. But the runway could’ve been shorter and the returns more dramatic if we had moved faster.

Multifamily deferred maintenance may not show up in the first year’s numbers, but it always catches up. And when it does, it tests your assumptions, your capital plan, and your investor trust.