Property owners maximize their cash flow by having their buildings fully leased with minimum expenses. Does this mean that landlords should never fix anything in order to keep cash flow high? In case you were wondering, the question is rhetorical. Repairs and maintenance do not happen in a vacuum and ignoring them causes a “fix it later” situation. There is, however, a measured approach between maximizing profit and minimizing upkeep expenses. With compressed cap rates [especially in the bay area], this spread becomes increasingly important to track. In the following paragraphs, we will discuss specific examples and hopefully provide some useful information to help you upkeep your property.
Each month, you fund your maintenance budget. Now, how do you stretch this budget like an elastic rubber band? The basic principle is to prioritize spending on those items which matter and keep the rest for a rainy day. Your prioritization should be first to habitability issues rather than liability or comfort issues. Notwithstanding the priorities, you should try and solve those small comfort problems before they become big habitability and liability issues. These small comfort problems are often precursors to larger issues which can morph into habitability and liability matters.
How can you do this? The best way to do this is to perform periodic maintenance surveys from your tenants. You may ask what the best timing is? If you have been doing surveys every six months, try increasing the frequency to every three months, etc. This is not fishing for work … you are showing your tenants that you care, make them feel appreciated and will end up taking care of those small items before they become larger issues. You should also encourage tenants to speak up when they see something going on. Whether there is an issue inside their apartment or in the common area, they should be met with gratitude and appreciation when they speak up. Tenants are much better able to identify those items which a management company or an owner can easily miss. That sprinkler head shooting a stream of water in the air at 5 a.m. or rodents spotted running into the crawl space door from outside are gold and can be easily addressed.
Tenants will appreciate the fact that you respect their need for a functional and healthy space and consequently, their loyalty will increase, and your turnover rate will decline. At the same time, you can help educate tenants to respect the proper way to use appliances and fixtures.
Fix what is broken in a timely manner; however, if a clogged toilet is a frequent occurrence in the same apartment, search for the root cause of the issue. Is the toilet too old and weak at flushing? Has the tenant placed a foreign object inside (specifically; a toy or toothbrush?) Did this occur shortly after they moved in or halfway through their initial term? Did the plumber document on the receipt the cause of the clog, or can you ask them to document the cause of the clog? In good faith, it is good to pay for the first toilet clog; however, when you get two or more calls for the same issue, you should engage Sherlock Holmes to do some investigative work. If you can identify that the clog was due to the tenant using some foreign object such as “flushable” wipes or the blue/white toilet tank tablets that stifle the toilet’s flushing power, this may be the time to tell the tenant that they are responsible to pay for the repair. Have the tenant pay for the second service call. Alternatively, offer to split the cost of a new toilet 50/50. If the toilet is already new, it is highly unlikely that it is defective. Talk to the tenants and ask them to be candid about the root cause of the issue in order to have a working toilet. In our business we reward tenants who are transparent, and we take care of the maintenance on those items which need repair or replacement as a result of normal wear and tear.
Let us say you have a tenant who loves to cook with big heavy pots, or every time you visit the apartment you see them cooking their heart out. From the manager and owner point of view, all the heavy slamming down of these heavy pots and constant usage may cause the heating elements and receptacles on the stove to be replaced every three to six months. In addition, this heavy usage may also create a fire hazard with all the grease spilling over onto the stove. A good solution is to upgrade to a smooth top stove for about $150 more. Some tenants might even consider an upgraded stove to be an enhanced amenity.
Landscaping is nice but can hardly be considered as appealing as air conditioning. Water utility and maintenance costs can be the big x-factor on your profit/loss statement. I understand that having the greenest grass on the block can be a matter of pride; however, a variety of succulents, bark, and wild grass landscape motif can be just as eye-catching as the green grass and also help your wallet. You could switch to an amazingly simple drip system instead of managing a half-acre sprinkler system that drenches some portions of the grass, but somehow manages to leave a few corners of yellow grass. Just wondering how this happens. Do you really need 35 trees on your property constantly dropping pine needles and sap on the roofs of cars and clogging the gutters? How about just having four palm trees facing the street instead? Tree trimming can cost around $500 per tree per year for fast growers. During times of drought or extreme rain these can create additional liability should limbs or branches fall off the trees. Speaking of water, you should also check if your pool has any underground leaks. There are just a few specialized companies who can locate and fix pool leaks. I am not advocating for a building with 100 percent concrete and 0 percent green space around the property. That would convey the image of a jail. Your property should still feel inviting yet be sustainable.
The curb appeal of your property should fall somewhere between standard and unbelievably gorgeous. If your property looks too boring, it may be overlooked by prospects. If your property is overbuilt, it may have functional obsolescence and require a crew of passionate artists to maintain. In other words, your property should be able to be maintained by any professional vendor (pool, landscapers, etc.). Another tip is to always pick stock paint colors that can be easily touched up instead of repainting entire walls. Everyone knows that color matching from an existing stucco wall is not a perfect science. I think we have all seen those walls where there is a brown section, and then “another brown” painted on several random spots. If you have a buy-and-hold property, do not do custom paint mixes or obscure colors as paint formulas change from time to time. There are plenty of stock combinations available to a designer to really make your property ‘pop’ from the street. Solar up lights also add a very nice touch to your property’s evening look.
Energy efficiency in relation to your master-metered items (utilities the landlord pays) should not be overlooked. Simple things like installing LED light bulbs, efficient hot water heaters, recirculation pumps, eco-recirculation pumps, pipe insulation, water saving shower heads, modern dual-flush toilets, faucet aerators, banning car washes, etc. can help lower your master-metered expenses. Show the tenants they should feel good because they are doing their part to help save the environment one eco-flush at a time.
Tenant retention is key. If you have a tenant who has lived in a unit for five years, and you can convince them to stay for another two years, then you are in a great position. If they decide to move, you probably have a significant reconditioning expense equal to one or two months’ rent plus one- or two months’ lost rent during the new tenant search. Should I even mention the 2-month free rent promotions some landlords are offering during COVID-19? An existing tenant’s standard for interior apartment condition is also much softer than an incoming tenant. Right now, during COVID-19, the key to higher cash flow is retention, retention, retention. Location, location, location is also important. If incentives need to be offered to sign a 12-24-month renewal term, consider it. Start with a free microwave/toaster and work your way up. The recommendations above assume that your tenant is paying within 25% of market rent and is relatively trouble-free.
Succeeding at this topic is all about having the correct mindset. If you spend money in all the right places, the cash flow will come in ample amounts and you can build up reserves for the inevitable roof, and parking lot, etc. You will also have money left for next month’s surprise expense – (do not act surprised). On the other hand, if you choose to react to repairs slowly, the current month’s budget for expenses can get blown wide open. Slow reaction can also lead to secondary damages and liability. If a tenant reports a pothole after a big rainstorm, that should get filled as soon as possible. For those landlords who have dealt with a trip/fall lawsuit, the claims may seem frivolous, but the headaches are real. Here are some numbers to think about: fix a single pothole for $200 or invite a lump-sum payout, higher insurance payments and possibly policy cancellation. You will have to fix the pothole anyways, so might as well do it now!
For all those owners with buildings more than 40 years old: are your stair rails and guardrails too low and spaced out more than a 4-inch sphere can fit? Don’t wait to fix these issues. Liability might get you before maintenance does. I have seen some pretty interesting attempts at fixing this issue. It’s best to do the permanent solution now. Call your contractor asap. For a metal railing system, you may be able to use the existing metal frame and raise the rail and wrap the pickets with mesh. A good wrought iron contractor can take care of this. For a wood railing system, it’s easy to add wood and additional pickets. Redwood lattice screens can also be easily tacked on for good measure.
Another situation requiring quick reaction is a reported bedbug infestation. If you have any signs of this in your property, you must act immediately. Bedbugs can spread and treatment is quite expensive. Any failure of the tenant to cooperate and the treatments will continue costing you more money. Education and cooperation are key. Treating one unit for $1,500 now is better than treating the three units adjoining them next month for $6,000 total and so on. Do not just go to Home Depot and buy $20 foggers, drop them off on the tenant’s doorstep and think you are done. The coast is not clear from bed bugs until a German Shepherd inspects the premises with it’s special nose. These special canines are usually retired narcotics dogs.
The key to succeeding on this topic is to stay engaged. Keep your eyes and ears open. If you are too busy, hire somebody who can stay engaged on your behalf. Tenants will literally tell you what is important to them. Just listen and complete all reasonable requests. Consider all requests for optional upgrades in exchange for term extensions. Maybe this tenant asking for a new dishwasher is also willing to pay $25 more per month in rent. Happy tenants will also want to keep your property clean and free of pests. Unhappy tenants do not care if your property is trashed. When a tenant says, “I think my toilet flapper is broken.” ask them “Is that something you feel comfortable and capable replacing? I would be happy to pay for the parts.” We have a few handy tenants that like having options. When you can simultaneously save a tenant’s time and your money, that is a win-win. We hope you found something in this article helpful. Send us some feedback below.
Disclaimer: I hold a Real Estate Broker and CA General Contractor’s license. However, I am not a lawyer, or CPA. Each Owner’s situation is individual and unique. I recommend you consult with your legal or tax professional for advice that fits your situation. The information given in this article comes from a practical perspective. We love all our clients, tenants, and fellow landlords. If apartments are operated properly, owners, tenants and landlords are all on one team. This article is written from the viewpoint of the landlord. For more information, contact Rob Chiang, CEO of RC Real Estate at www.AptsManager.com, 408-646-4218 or [email protected]