All the years we lived in this house I knew about it. Yet, I ignored it.
First, it was a small moldy patch in the washroom ceiling. Then an occasional drip in my home office. I knew that my kids’ bathroom had a barely visible pathway to the floors below, but I ignored it.
It was an idyllic Sunday afternoon. I was watching an SNL clip with my daughters in the living room, waiting for dinner to warm up. Suddenly, I hear the misplaced sounds of drips. Within seconds, the drips turns to showers, and then my wife’s scream, “Mo, your office is flooding!”
Realizing what unfolded I sprint to the top floor, where my 5-year old turned on (and forgot about) the bath. There I find two inches of water.
I rushed to stop the flow, fruitlessly attempting to mop up a seemingly endless water supply. Simultaneously, my wife and two older kids are scrambling to empty my office of books, computers, printer, notes and anything else in harm’s way. The two younger kids are bumbling around, repeatedly getting in the way and frantically asking if we have to change houses.
Two hours later, with the water finally under control, we plop down around the dinner table, knowing that there are still hours of work and untold damage costs ahead.
Damn that little crack – and its neglectful owner!
In real estate, deferred maintenance is a term that refers to the foolish exchange, where we ignore small problems in the short term – because we don’t want to spend the money or can’t be bothered – in exchange for much bigger problems over the longer term. For example, someone daft enough to ignore a tiny leak in exchange for eventually replacing all the carpeting, flooring, and paneling on three floors of the poor sap’s house.
As an investor in real estate, I should have known better. I am well aware that deferred maintenance creates opportunities for responsible buyers. Deferred maintenance is the mark of poor management, and signals upside potential for newly acquired properties.
It is also so deeply human, as deferred maintenance is not limited to homes or real estate.
Most people do not maintain their cars (until they break down), do not visit a dentist religiously (until something hurts), and do not exercise or diet until the pants stop fitting.
The unfortunate outcome is that those who defer regular maintenance (aka yours truly) will be paying much more for the same item. You will still need to put oil in your car, but now you will also need to pay for a tow truck. You will still need to visit the doctor, but now you will also need to pay for medication.
In investing – whether you’ve done it or not – you’ll still need to plan, still need to diversify, to conduct due diligence, to be more thoughtful, etc. Though, after learning the hard way, you’ll also need to write off the latest poor decision or climb out of the latest hole you dug for yourself.
Studies show that people don’t take financial education seriously until they absolutely need it. This is no different from people’s dispassion about learning to change a tire – until they are stranded with a flat. The difference between a flat tire and failure to properly maintain or steward one’s wealth, is that failure with one can ruin your day whereas failure with the other can put all your needs, aspirations and decades of work in jeopardy.
For high net worth individuals, the impact of deferred maintenance is that much greater, and the fix is that much more complicated.
We know that, mathematically, those who lose 50% need to make 100% to make up for the losses. And 100% gains are very hard to come by.
These are often a function of several investor deferred maintenance issues:
· Failure to develop, update or maintain a comprehensive investment plan
· Failure to develop, update or maintain a thoughtful estate plan
· Failure to adhere to an all-encompassing asset allocation
· Failure to adhere to the practice of rebalancing & de-risking the portfolio
· Failure to adhere to the discipline of assessing the performance of your investments
· Failure to ensure that your investment managers are (and continue to be) best in class via ongoing due diligence
· Failure to verify that the fees being charged are appropriate and consistent
These are all critical maintenance activities for the “stay rich” investor, whose priority is wealth preservation.
Perhaps the most underestimated side effect of deferred maintenance is the reputation it engenders. We all have friends or family members that are sloppy and unreliable. We also have friends or family members who are uber-conscientious and would never let you down. We tend to adjust our expectations of each of them.
When it comes to business and investing, reputation travels much faster and more vigorously than it does for Cousin Bob’s flakiness. Renters quickly learn to avoid your properties. Potential clients shun your organization and charlatans seek those that cut corners.
For your protection, commit to avoid deferred maintenance with your portfolio, as investment mistakes cannot be reversed with some new carpeting and drywall.