Controlling Maintenance Costs

"It's not how much money you make, it's how much money you keep." ...Robert Kiyosaki

Too many investors focus only on ROI. ROI is only a snapshot of how the property is likely to perform today. ROI tells you nothing about how the property will perform over time and nothing about your true return once maintenance, evictions, taxes, vacancies and other real-world factors are taken into account. In this article, I will talk about controlling maintenance costs.

Keeping Maintenance Costs Down

Maintenance cost is not a single item. I divide maintenance cost drivers/factors into the following categories, you may have more:

Remedial Maintenance Costs

The most important way to keep your maintenance costs down is to not buy properties that require a lot of ongoing maintenance. Below are some generalizations about the property and ongoing maintenance cost:

For example, when I owned properties in Atlanta and Houston, I was always replacing roofs (composition or built-up), wooden siding, windows (wooden), dealing with wood rot, termites, and landscaping. The properties were all older so plumbing, electrical and foundation issues were also a significant cost. While the paper ROI was high on these properties, my actual cash flow was much lower than I expected. Property age, climate, construction materials, landscaping, moisture were all working against my profit. Compare these issues to a typical property in Las Vegas.

Am I suggesting you only buy properties in desert locations? No! But when you are comparing properties, consider ongoing maintenance cost.

Service Providers

Finding cost-effective service providers to do the rehab and make repairs is never easy. If you are a remote investor, it's even harder. We overwatch the rehab for our clients and since we do several each month, we are a significant portion of their business so we have their attention. Still, we have to go on site almost every day to ensure the work is performed correctly, stays on budget and completes on schedule.

How can you find good service providers? When you are selecting a Realtor, their ability to provide good referrals and willingness visit the property to check on progress (and hopefully take a video) is essential. A Realtor that works with investors will have the referrals you need and their total business with the various service providers should give you the leverage you need.

On price, generally, you cannot afford the cheapest service provider. The bottom priced vendor has rarely provided the quality of work needed and rarely completes the work on schedule. Frequently, these "low cost" providers would not start work on schedule and several never completed the work. Then, I was forced to hire someone else to undo the damage they did and then do the actual work. This happened frequently when I first started (about 10 years ago).

Property Managers

Your property manager can be the right choice for rehab and repairs. However, there are some things to watch out for.

I do not trust property managers who have an in-house repair group. Several years ago, the property manager I was working with hit some financial problems and suddenly all my clients needed new garbage disposals and water heaters. Coincidence? I did not think so. I only work with property managers who have no "repair department" and contract out all their repairs. The property manager we currently work with has a list of providers and she sends the work out to her list of providers on a rotational basis. And, if any vendor is too expensive or does poor work, they are deleted from the list.

Many (most) property managers add a charge for handling the work. Some have a fixed cost ($25, $50?) and others add a surcharge (10%, 20%?). Even if they do not do the service in-house, property managers often still has a financial incentive to perform repairs.

Remedial maintenance is a direct hit to profitability and you want to choose a property manager that does not have a financial incentive to increase your costs.

Tenant Pool Considerations

My experience is that the tenant pool can have a huge impact on your total maintenance cost. The tenant pool a given property targets is based on four factors:

The tenant pool for C class properties in Las Vegas is largely cash-based. Cash-based tenants tend to have little or no concern about leases, eviction, skips or property damage judgments. They live cash based lives so they carry no "credit history" therefore what they did in their financial past has little or no impact on their present or future lives. My experience is that turns are much more frequent and damage is much more common.

On the other hand, the tenant pool for class A properties is credit based. These tenants know that if they have an eviction, a skip, late rental payments or a damage judgment, the ability to obtain future housing, credit or even certain jobs will be greatly impacted. The class A tenant pool tends to take much better care of properties resulting in less damage and repair costs.

Lease Agreement

The lease agreement is a very important document. It is not just a document to encourage payment of rent, it also helps control your maintenance costs. I will list a few items you may want to consider including in your lease agreement. The tenant:

Property Manager Tenant Screening

The concept behind property manager tenant screening is similar to not purchasing properties that will require a lot of maintenance. Do not choose tenants who are likely to cause damage to your properties. Too many property managers only check credit and the current landlord. Neither is effective.

Credit scores will not tell you much about the tenant other than if they have a history of making payments on schedule. The credit score tells you nothing about whether they have a pattern of frequent moves (turn costs and vacancy) or property damage.

Their current property manager is not a good source of factual information on the tenant. If the tenant is terrible, the current property manager is very likely to give them a glowing review to get them out of their property. Where you can usually get good information from is the property manager where they lived prior to their current residence. Basically, you need to ask the prior property manager whether they would rent to the tenant again.

The Property Inspector

At least once a year the property inspector we work with has saved us from buying a bad property. Unless I have an inspection performed by someone I trust, I would not consider buying the property.

A good example was a property that had an excellent return. The property manager and client liked it and it was in excellent condition (low rehab cost). However, about 30 minutes into the inspection the property inspector called me and recommended canceling the purchase. The reason was the back patio.

The property had a large back patio. Unfortunately, it is sloped 1 to 2 degrees TOWARDS the property. Patios must slope away from the property to keep rain out of the house. A likely future scenario we could have faced would be the wind and rain lining up correctly to drive the water into the property. We would call the insurance company and report the water damage. They would send an adjuster out, who would lay a level on the patio and promptly deny the claim.

Never buy any property unless you have an independent inspection. It does not matter if the seller offers an inspection report to you. You need your own independent inspection.

Summary

Controlling your maintenance costs starts when you select the property. Do not buy high maintenance properties unless the property will (actually) generate sufficiently high returns that you can easily afford the high maintenance costs. There are also several other factors which enable you to control costs and you need to be very aware of all of them and take appropriate measures.