Adding value to your property portfolio all comes down to concentrating on doing the basic well.
Now that we understand what the implications for property investors are from the Budget, clearly it is even more important to focus on your property business and what proactive steps can be taken to reduce large expenses and improve bottom-line profits.
Most people can easily see the value of buying a property at a discounted price, renovating it and adding significant value and obtaining the highest market rents – and in turn yields. Along with the fact that vacancy factors are also significantly reduced, the numbers are easy and it all makes sense, right?
However, when the focus turns to the maintenance of properties and calculating the costs of maintenance, many investors either lose perspective or have no game plan on how to deal with this crucial part of their business. In fact, many investors I deal with admit to avoiding the issue and more often than not leaving it solely to their property manager to deal with.
I sat with a commercial investor not long ago talking property – as you do – and I asked him what he spent annually on maintenance. Not only did he quote me an overall figure for maintenance, but he also quoted me a figure for improvements and brought his calculations down to rent per square metre and his investment in maintenance from that rent in each of his buildings.
His attention to these details had him owning over two hectares of commercial property throughout New Zealand and clearly he knew his business better than anyone.
Working for commercial property investors as a maintenance company is very easy, as they use the basic business principles above and are clear on what they want to achieve from property. However, residential investors vary greatly in their experience and approach.
So let’s cover some key points on residential property maintenance, why you should invest in maintaining your rental properties and how much they should be costing you once you have control over your maintenance and what you need in your maintenance toolbox.
Firstly, and by far the most important, start by making sure that you or your property manager is doing regular inspections of the property and that you are using a property maintenance review form that details every aspect of the property. Use a detailed check-list and always take photos so you can establish owner costs from tenant costs very clearly. This is the biggest single issue we see every week, where no documentation has been recorded and owners end up carrying the cost every time.
Secondly, once you have carried out your inspections, including maintenance, deal with the small issues immediately so they don’t escalate into something more serious. Pay particular attention to any water leaks or ingress as these will not simply go away, they will escalate and will surely cost you large sums of money in the end.
Roofs and gutters should be checked and cleaned annually without fail. Interior rooms that have water usage such as kitchens, bathrooms and laundries should be checked every six months, including under the sinks and from under the house if at all possible.
Make sure you check around your hot water cylinder as well, as these are sure-fire destroyers of property when they start to fail and the resulting damage can be very extensive and expensive.
Thirdly, always make sure you have insurance and it is specific to property investment, but don’t expect that your insurance company will settle all your claims for damage automatically. If the insurance company or assessor believes you have neglected your maintenance duties, the damage could have been avoided or has been happening over a period of time, it is unlikely they will settle or entertain your claim.
We do several major repairs for landlords every week that insurance companies have rejected, usually due to water damage and averaging $3,000 to $5,000, which is great for us but not so good for the landlord.
The fourth aspect you need to consider is employing tradespeople and companies to work on your investment properties.
Here are out hints and tips and how to go about the selection process:
• Are they experienced in property investment and do they understand your business?
• What is their skill level or are they qualified to carry out works you have contracted them for? (I have seen some electrical jobs done by handymen that are just fires waiting to happen)
• Do they have relevant qualifications for their industry and are they a member of a contraction association?
• Do they have insurance that covers any damage that may occur whilst working on your property? I guarantee your insurance company won’t pay for their mistakes on your properties, so who will? Some estimates put non-insured contracting companies at as high as 30%
• Are they charging a fair and reasonable price including travel (are they local) and do they detail their quotes and invoices so you can clearly understand any works that need to be carried out and make an informed decision?
• Are they available 24/7 and on public holidays? Emergencies often happen out of normal trading hours and if you can’t get hold of them you will have to resort to the Yellow Pages and incur the appropriate costs also.
• Do they have references form other investors? Word of mouth is often the best way to get good-quality tradespeople. All of our 40 sub-contractors have come from referrals to our business.
• Make sure you understand their terms of trade and pay them when all invoices are due. Contractors love that and will love you as a valued client every time. Remember, never ever pay for works in full or up-front or until you are satisfied that the end result is what was detailed in the quote and don’t ever except verbal quotes or prices.
The fifth aspect is to set a budget for the next 12 months and each year after, in a bid to concentrate on really getting maintenance cost under control. If you carry out the basics each year there is little doubt that year-on-year your overall costs will reduce and those large bills will be few and far between.
You can then also get quotes in advance for any large items that may need updating, such as roofs or hot water cylinders and put them into your costs, allowing you to plan for these and spread your spend.
The last but still crucial part of your toolbox is knowledge, which is more often than not free and can save you as a landlord a lot of time and money.
Local property investor associations run regular evenings on property maintenance and there is also an enormous amount of information available on the internet. If you are a DIY type, your local Bunnings and Mitre 10 run workshops every weekend for free on all aspects of maintenance so you are up-to-speed.
The Department of Building and Housing has the most comprehensive information available on line in New Zealand and again it’s free and easy to access.
Happy investing and as the old saying goes, “knowledge is key”.
Mark Trafford Director “Maintain To Profit”