What Do You Do When Repairs and Maintenance Get out of Control?

[NeilUttamsingh]

Hi Folks,



I am looking for some feedback on the below mentioned.



Over the past 6-8 months, I have incurred $10,000 in repairs and maintenance on 3 different properties.



In addition to dealing with a non paying tenant that I am currently evicting, when all is said and done, repairs and maintenance as well as costs associated with evicting (lost rent, further repairs to the property) will put me in the hole $15,000 total...and possibly more than that...



This is of course a ridiculous amount of expenditures in a very short period of time.



I do not panic because I am running things like a business.



I use my revenue (monthly cash flow) to pay down my expenditures (large repairs and maintenance costs)



However, since repairs and maintenance and associated costs have gone so high, paydown from revenues will take longer.



I am looking for feedback from others who have gone through this, and what you decided to do about it.



I look forward to your qualified feedback.



Best Regards,

Neil.

 

[johnsu]

Hi Neil,



One of the heavy hitters in REIN told me that THERE IS NO CASHFLOW IN RESIDENTIAL REAL ESTATE!



What he does to mitigate the risk of "runaway expenditures" is he gets a reserve fund of 3% of purchase price put away. It helps him sleep at night. The 3 month reserve fund that REIN suggests in no where near enough to carry a rental for 5 years.



My 2 cents! How do I know? Been there done that and will never do that way again! ha ha!

 

[Thomas Beyer]

Not at all unusual ! Solution : lower mortgage ie more cash flow and/or higher reserves ! Ever wondered why REITs which distribute cash monthly have mortgages of 50% loan-to-value only ?

 

[ChrisDavies]

First, buy the best assets you possibly can. I won't bust your chops about that since you know your stuff and you've already bought them.



Sometimes this is the right moment to do a through evalution of the property and sink more money into it for preventative maintence. You're spending enough money it's worth revising your financing and do what you can to reduce maintencne costs in the future.



If you're doing lots of work, you have lots of opprotunities to look for other contractors or trades to improve the quality of the work or reduce your costs.



Dealing with non-payment and tenant damages is tougher out east than here in Alberta, but a zero-tolerance model is a good idea, even if you start to push the line when it comes to your tenancy board.

 

[RedlineBrett]

The best ways to deal with R&M are at acquisition. This is one of those times where it's better to pay now rather than pay later. The quick flip guys say 'you make your money going in' as a buy and holder I believe that you control your costs going in.



This means that you must get a very good property inspection performed and if you have a bigger multi-family property I've learned that you may need to go to an extra level and bring in system specific experts to evaluate the true condition of the property you're considering.



Most sellers will leave a lot of deffered maintenance alone because it seldom adds a lot of value. Items like electrical, roof and plumbing do not garner increased buyer interest the same way that new siding, kitchens and bathrooms do. So the only time that the guts of most properties get any attention is when they change hands. These are the items that will hit you for R&M.



Use the property inspection as leverage with the seller on price. Then, create a list of things that you want the seller to do for you before you close. If you want extra items done then you can agree to pay *more* for the property but have the seller do the work before you close so that you can build the work into your purchase price rather than have to go out of pocket for it afterwards. You can have your own general contractor prepare an estimate and leave it with the lawyers to be paid out at closing when you follow through with the purchase. If the seller doesn't want to do the work while owning the property this amount can be treated as a holdback to be disbursed to the buyer a few weeks after closing once the work is complete.



You're still going to get R&M expenses, but they won't be as bad or as frequent.

 

[TodorYordanov]

Some really good advice here already.



Pay very close attention to the numbers and continuously improve.

I find that running a report on a monthly basis to monitor the performance of a property helps me the most.



Once you know where your money is going to and why, you will be able to figure out the proper course of action to improve.

 

[housingrental]

Hi Neil

Good to see you are still around; you are missed!

Stress free operations start prior to purchase - I recommend cash reserves around 6% of gross asset value of portfolio.



[quote user=NeilUttamsingh]Hi Folks,



I am looking for some feedback on the below mentioned.



Over the past 6-8 months, I have incurred $10,000 in repairs and maintenance on 3 different properties.



In addition to dealing with a non paying tenant that I am currently evicting, when all is said and done, repairs and maintenance as well as costs associated with evicting (lost rent, further repairs to the property) will put me in the hole $15,000 total...and possibly more than that...



This is of course a ridiculous amount of expenditures in a very short period of time.



I do not panic because I am running things like a business.



I use my revenue (monthly cash flow) to pay down my expenditures (large repairs and maintenance costs)



However, since repairs and maintenance and associated costs have gone so high, paydown from revenues will take longer.



I am looking for feedback from others who have gone through this, and what you decided to do about it.



I look forward to your qualified feedback.



Best Regards,

Neil.

 

[housingrental]

This is good advice but still too low if you have a significant operation costs vs your employment income - you can easily go through 3% when a few things go wrong at once - non payment + foundation issues, etc..

In some ways if you have a single house it doesn't matter too much for most people - as you can easily subsidize it if needed for a period of time from your income.... if you have many houses / buildings something else...





[quote user=johnsu] Hi Neil,



One of the heavy hitters in REIN told me that THERE IS NO CASHFLOW IN RESIDENTIAL REAL ESTATE!



What he does to mitigate the risk of "runaway expenditures" is he gets a reserve fund of 3% of purchase price put away. It helps him sleep at night. The 3 month reserve fund that REIN suggests in no where near enough to carry a rental for 5 years.



My 2 cents! How do I know? Been there done that and will never do that way again! ha ha!

 

[JoeRagona]

Hi John,



It may also depend on what members thing "3 months" is. I've always put three months worth of rental payments, which is close to, but not exactly 3% of the purchase price.



I put that in the account immediately on closing - it's usually an average of $4000 per property.



Also, because we buy newer homes, we usually can build the SPF over a year or two to the $6000 suggested as 3% of purchase.



I have always believed in B & C plans and it's one I suggest for everyone - even with money available on LOC, I suggest that is left in place instead of maxing it out just to buy another property. The downside is your money is not working for you, but the good part is you can sleep when these things come up.



The other bonus is, you can look for JV capital and no longer seem desperate because you have run out of money .

 

[Mike Milovick]

My experience has been in real estate that there are really no surprises when it comes to maintenance and repair items if you had a proper home inspection done at the time of purchase.



I would be looking very closely at your home inspection report when you purchased to determine if you were made aware of these problems and budgeted accordingly. Or, if based on the income coming in and the property purchase price, the income/expense structure was appropriate to handle the problems.



Note that the rating system my home inspector uses compares the average house/building of similar vintage to the subject property - and proposes a budget to address functional concerns.



Sadly, a lot of investors don't budget for maintenance and repairs. If you don't spend regulary on repairs and maintenance, just like a car, you will have major breakdowns.

 

[NeilUttamsingh]

Hi Adam,



Thanks for the kind words!



-Neil.

 

[invst4profit]

You do not mention whether you are dealing with long term holdings or new investments which have gone sower due to missed items at time of purchase.

If long term properties, which is the philosophy of the REIN investment system, then what you are experiencing is not abnormal. Many investors happily drift along expecting expenses to remain in the 30% range believing this is normal. In reality expenses are, as I have often stated, closer to the 50% range in the real world when looking at long term holding of properties.

Unfortunately these expenses often come in bunches which makes it feel worse than it actually is.

In my honest opinion I believe what you are experiencing is normal and more accurately reflects true historic values for long term expense costs on income investment properties. Statistics, although American, indicate expenses (on average) historically run at 50% of monthly income when viewed in decades.



You could buy newer and hold for shorter periods of time, which would definitely eliminate the sting of unexpected high expenses, but this would still result in close to the same level of cash flow due to higher financing costs/amounts.



It's the old "Pay me now or pay me later" scenario.

 

[Thomas Beyer]

[quote user=MikeMilovick]If you don't spend regulary on repairs and maintenance, just like a car, you will have major breakdowns.


Wise words to heed for real estate investors !!

 

[manojsingh]

One silver lining Neil, Some of the loss will be offset from your income tax. So you will get almost $5000 back from revenue canada. My experience that there is no cash flow in residential real estate especially in Hamilton. My experience with Brampton is different, There is positive cash flow.

 

[Thomas Beyer]

[quote user=manojsingh] there is no cash flow in residential real estate


somewhat vague statement .. of course there is cash-flow if the mortgage is low enough ... but indeed, frequently not at 75-80% levered !

 

[invst4profit]

Every income property will cash flow if you purchase it outright with cash. Assuming you do not credit any of the rental income toward the cash invested in the property to offset the lost opportunity to invest elsewhere.



For me, personally, I do not subscribe to the theory that throwing cash at a property creates cash flow. What it does is create a separate income stream. One portion of the rental income is attributed to the building the other portion to the cash invested. If you really want to fully understand the financial health of a income investment property you must break it down otherwise as I have mentioned every building will produce positive cash flow simply by throwing money at it.



Sorry Thomas but I have never bought into yours, and others, cash flow accounting methods.

Understandably your definition of positive cash flow, as you have mentioned in the past, is different than mine.

 

[Thomas Beyer]

[quote user=invst4profit]Sorry Thomas but I have never bought into yours, and others, cash flow accounting methods. Understandably your definition of positive cash flow, as you have mentioned in the past, is different than mine.


huh ? What accounting ?



usually, but not always, cash re-invested into an asset improves its value, rentability and longevity !

 

[housingrental]

I feel odd writing this but Thomas is 100% correct and Greg is 100% not... a rare situation for Greg...



Greg:



Certain properties will not cash flow even with no mortgages... they are not economically viable....rare but more common in older properties targeted to low income renters as bad mix of very high repair, management, legal, cleaning and utility expenses, low rent per suite and per sq ft., vacancy, and high uncollected rent.



With higher down payment / lower mortgage there will be more cash flow (or less cash loss). Your thought process in that this does not change the net income, and the building's desirability to you, is correct.



However stating this is not cash flow (and trying to change the meaning of cash flow) is not correct.

 

[Nir]

Hi,

Some very good points raised regarding cashflow! others just do not make sense.

Anyone saying there is no cashflow in RE is saying there are no 7% CAP properties (or better)!

I will write this again as it's that simple and that wrong: If you believe there is no cash flow in RE with say 25% down, you are indirectly saying there are no true (long term) 7% CAP properties or around that % depending on the mortgage interest you can get of course. That's just wrong - yes, they are hard to find! but they do exist everywhere.

Sincerely,

Nir

 

[invst4profit]

I am not redefining cash flow I am simply pointing out the true source of cash flow on a property. Every property should have two clearly defined income streams if a investor is to have a clear understanding of investment income properties.



One must make the assumption that cash must earn it's keep. If we make the leap of faith to assume, for example, that the prevailing return on cash invested is say 4% then a investor would expect his cash to earn 4% in a income investment property.

This is the principal behind my belief that the income from a rental property has two income streams. One naturally is the property itself the second is generated solely by the amount of cash a investor places on a property including principal pay down after purchase. My accounting has this income, attributed to cash investment, deducted from the cash flow of the property as is all other expenses.



As a example a $300000 property. If we assume a 4% mortgage rate and therefor attribute a return on cash invested at 4%, for simplicity purposes then with 20% down one would pay approx $9600/year interest on $240000 mortgage and would expect the property to pay $2400 annually toward the investors $60000 cash injected.

If the investor should pay down say 50% then they would pay $6000 annually in mortgage interest and the income from the property would pay the investor $6000 toward the return of $150000 injected. It should be the same $12000 deducted off of the top of the income flow from the property. Injecting cash should not make a property any more attractive if a investors bottom line is profit.

A investor in theory makes the same profit whether the cash is put into the property or invested elsewhere so it is Zero net gain paying down a mortgage (in theory).



Cash flow is based on what is left over after all expenses and deductions are subtracted from the rental income. It is a investors option to ignore the fact that cash must earn it's keep. However trying to place a positive spin on the relationship between pay down and cash flow doesn't fly with me.



Paying down a property does not increase true cash flow nor does it make a property in any way more attractive to invest in.

Bottom line there is true cash flow and forced cash flow. It's exactly the same dollar earned at the end of the year just a different perspective on the true quality of a investment property. If it takes my cash to make a investment attractive then obviously putting makeup on a pig is truly a personal choice.



For me it is a sales pitch consisting of smoke and mirrors that my accountant doesn't buy and neither do I but I am not in the business of selling investment properties.