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 - Something breaks and must be repaired.
- Service Providers - Service providers do not all charge the same price for the same work, or take the same amount of time to complete the same work.
- Property Manager - Some property managers have an in-house maintenance staff from which they make a significant portion of their total profit. Others may apply an uplift charge on all repairs.
- Tenant Pool - The tenant pool can have a huge impact on your maintenance costs.
- Lease agreement can impact maintenance costs.
- Property manager tenant screening.
- The property inspector.
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:
- Older properties require more maintenance than newer properties.
- The tenant pool has a large impact on your ongoing maintenance cost.
- Composition roofs require more maintenance than tile roofs.
- Properties in climates with hard freezes require more maintenance than properties in mild climates.
- Properties in locations with a lot of moisture require more maintenance than properties in dryer climates.
- Wood siding requires more maintenance than aluminum or stucco siding.
- Properties with lush vegetation require more maintenance than properties with little or no vegetation.
- Locations with high levels of termite activity will require more maintenance that areas with little or no termite activity.
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.
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).
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:
- Type: High rise, single family home, condo, etc.
- Configuration: Two bedroom, three car garage, large lot, etc.
- Location: North of the river and south of...
- Rent range: Typically, tenants will pay no more than 1/3 of their gross income for rent. Sometimes it is far higher but in general, 1/3 is about right. So, a property that rents for $1,000/Mo. will target tenants with an income of about: $1,000/Mo. x 3 x 12 = $36,000/Yr.
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.
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:
- Is required to report any water damage or leakage within 24 hours. And, the tenant may be held responsible for any water and/or mold damage, including the cost to remediate such damage if they do not report timely.
- Is responsible for minor repairs and normal maintenance including air filters, light bulbs, etc.
- Is responsible for any damage caused by tenant neglect.
- Will replace broken glass, no matter who caused it.
- Is responsible for maintaining the landscape
- May install or replace window screens at their expense
- Will pay for all repairs, replacements and maintenance caused by their misconduct or negligence or that of their family, pets, guests, including but not limited to any damage done by wind or rain caused by leaving windows open and/or by overflow of water, or stoppage of waste pipes, or any other damage to appliances, carpeting or the property in general.
- Is responsible for having the carpets professionally cleaned upon move out and must present the receipt. If they do not, then the property manager will have the carpets cleaned and will deduct the cost from the tenant's security deposit.
- May pay $50 for each service request except for water damage or leakage.
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.
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.