Just the Peaks
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“Well, that’s just Capital.”
How to Budget for Improvements Without Disrupting Cash Flow
Whether you’re upgrading HVAC systems, replacing roofing, or modernizing units, capital improvements are a necessary part of owning and operating multifamily properties. However, even essential upgrades can wreak havoc on cash flow if they’re not properly budgeted.
This month, Everest Loan Officer Rose Schwartz is helping us break down proven strategies to help owners and property managers plan for capital expenditures while preserving investment stability. These approaches help ensure that improvements enhance property value without compromising your operations.
Strategy #1: NOI Allocation
One of the most reliable ways to budget for capital improvements is to proactively set aside a portion of your Net Operating Income (NOI) each year. A good rule of thumb is to reserve 3 to 5% of annual NOI for capital projects. The final amount will vary based on property age, condition, and location.
“Operating expenses are usually something property owners analyze on an annual basis,” says Rose. “But the thing is, capital expenses are often a bigger concern. They tend to get overlooked until an emergency happens. Then owners are forced to pay out large sums to repair and recuperate.”
Emergency repairs and urgent renovations never seem like a big problem—until they are. With just a fraction of your yearly revenue tucked away, you can keep unanticipated issues from driving you into debt.
Think of it in terms of numbers. If your property earns $500,000 in operating income each year, you would only need to set aside $15,000 per year at minimum to help cover urgent concerns. Yet, having that small amount readily available can help save you hundreds of thousands through early maintenance and a reduced likelihood of high interest payments on last-minute loans and lines of credit. Now, doesn’t that sound like it’s worth every dollar? We think so.
Strategy #2: Creative Financing
It’s easy to fall into the trap of tradition—especially when it comes to financing. But, while the past has tons to teach us when it comes to smart strategies, modern advancements have also given us some significant improvements.
“Modern financing options go above and beyond traditional loans,” Rose explains. “Multifamily property owners now have access to financing specifically designed for landlords. Some types of improvements may also help borrowers qualify for better loan terms under different programs, such as Green Advantage® from Freddie Mac*.”
*Source: Freddie Mac Green Advantage Program
Choosing the right funding structure based on your property type, financial situation, and improvement specifications can help you select a financial product that meets your needs without compromising your financial stability overall.
Some common recommendations include:
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Freddie Mac and Fannie Mae multifamily loans – These products often offer rehab or green improvement incentives
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Bridge loans – This is a great option for short-term funding needs during repositioning of your assets or ownership situation
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PACE (Property Assessed Clean Energy) financing – This program helps fund energy-efficient and renewable upgrades, repaid through property taxes
This is where loan experts come in. An experienced professional can help you choose the appropriate funding structure for your project. Especially when you’re managing multiple building sites or units, choosing the appropriate product can help you preserve liquidity even while navigating new debt.
Strategy #3: Phased Renovations
It might seem obvious, but we’ve been surprised at how many people overlook a phased approach. It seems to be all-too common to try to take on all the struggles of a renovation or repair in one big mess of responsibility—instead of structuring things in more manageable micro-projects.
“A phased approach lets managers spread the cost and complication of bigger projects,” says Rose. “It can also help limit the disruption to tenants and—in an industry where tenant satisfaction is a huge priority—that can make a huge difference to the bottom line.”
As you work to organize your capital improvement project(s), try organizing the steps using one or more of the following criteria:
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Unit turnover timing – Renovate vacant units first to reduce tenant disruption. Then move on to occupied units, as needed.
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Systems lifecycle – Replace fast-aging systems (such as HVAC) before more resilient ones (such as plumbing).
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Priority tiers – Make any safety upgrades first. Aesthetic improvements later, prioritizing minimal disruption to tenants.
Planning renovations over multiple quarters or years gives property owners more control over financing and timing. For example, many owners phase renovations to align with lease renewals. This can help reduce vacancy.
Strategy #4: CNAs and Reserve Studies
For a budget to be effective, a property owner must anticipate big-ticket expenses—not just react to them. Thankfully, there are two primary tools investors can use to get ahead:
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A Capital Needs Assessment (CNA) identifies major system replacements and expected timelines.
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A Reserve Study calculates how much should be saved each year to cover projected long-term costs.
“Capital Needs Assessments and Reserve Studies are commonly used by institutional investors,” explains Rose. “They’re also often required by lenders—especially when they’re underwriting for larger portfolios.”
These assessments can help investors make more informed, less-stressful decisions about their capital. The more you can estimate ahead of time, the more efficiently you can allocate and acquire funds for necessary renovations.
Here’s our bottom line. What’s yours?
Here’s the thing: budgeting isn’t just a good idea. It’s a proven method for making the most of your investment. In 2023, The National Apartment Association reported that preventative maintenance and long-term forecasting were associated with higher asset performance and reduced debt for multifamily investors.
As much as it seems tempting to focus on the here and now, it’s not going to be your best bet in the long run. Capital maintenance is unavoidable. Thankfully, budgeting for them doesn’t have to disrupt your cash flow. In fact, that budget? It’ll be a whole lot less disruptive than unexpected repairs.
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