Investors, especially new investors, focus on how to correctly run the numbers on their investment properties. They plug numbers into spreadsheets and formulas to come up with the correct income and expenses. If the numbers look good, they buy it! That’s when the investment leaves the spreadsheet and becomes reality. Unfortunately for the novice investor, too often the real word gives the spreadsheet a slap across the face with a cold, hard reality check.
The real question that needs to be asked is, How in the world are these investors coming up with the numbers to plug in? Maybe a newbie truly understands the formula, but has zero understanding of what makes up its variables. For example, we know capital expense includes things like roofs, plumbing systems, electrical systems, drywall, etc.
The investor then says, Well, the roof doesn’t leak, the plumbing works, electrical works, and the walls are all standing. They want to be conservative, so they budget for things to go wrong. Unfortunately, they go wrong much faster than the spreadsheet ever told them.
Often investors are buying houses that have cap ex monsters lurking everywhere, but they fail to address them or even know about them until they are too bad to handle. Understanding the ins and outs of how to prevent capital expense or having someone on your team who does is vital to not getting stuck with one of these money-sucking monsters.
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Preventing Capital Expense
Newbies often straight out miss looming capital expenses staring them in the face. We all did it a few times starting out. The more experienced investor has learned from others (or their mistakes) to know what to look for. They have checklists, contractors, and inspectors. No major issue gets past their due diligence!
What blows my mind is that once the property is owned, even the experienced investors let depreciation run its course. They take the tax deduction and smile. Not me; I’ll take the take depreciation and reduce my capital expense through preventative measures.
You’ve heard of tenant-proofing a property, right? I do that — and take it one step further and life-proof these properties to forever cut down on my cap ex.
Just because it’s not broken doesn’t mean it can’t break tomorrow!
Below, I will list 5 of the most overlooked, yet simple tricks to prevent or slow capital expense on your properties.
1. Attic Ventilation
A roof is one of the most common capital expenses because every rental has one. When these things cause problems, they can be a big money sucker. What many forget to look at is that it’s not just how the roof keeps water out, but also how it lets air out. Ever been in an attic in July? Yeah, it’s hot. I live in Ohio and have been in 160 degree attics due to poor ventilation. Air should be able to circulate through the soffits and up through a ridge or some other type of vent. Not venting an attic can dry rot shingles from the inside out. This can turn a 30-year shingle into a 15-year. On top of that, it can dry rot roof decking and joists.
I have heard so many landlords say, The tenant pays for utilities so I don’t care about the insulation. Well, the landlord might not pay for the gas or electric, but they do pay for the furnace and AC that is having to work twice as hard to keep your tenant cozy. These machines are rated for the average square footage they have to cool. Now, if you have windows that don’t shut, no insulation in the attic, and doors that you can feel the breeze through, then you can expect to be swapping out out HVAC systems much sooner than needed.
3. Exhaust Fan in Bathrooms
I worked for a rental property company as their handyman prior to investing myself. It seemed like the tenants always had mold in their bathrooms from excess moisture in the air, splashing out of tubs or showers. They were willing to call and complain about the mold, but never to turn the exhaust fan switch on when needed.
In all 20 of my units, I have installed an exhaust fan on the same switch as the light and outlet in the bathroom. Pretty much, if they want to have the light on, then the exhaust fan is on as well. Problem solved! I have never had mold in a bathroom. Even if they splash water out of a tub, there is enough air flow from frequent use of the bathroom (fan being on) that it dries out before mold can grow.
During due diligence, investors may check for signs of a leaking basement, and it could be completely dry. However, that doesn’t mean improper grading or slope of the earth can ever be ignored! If you notice water puddling in the yard, sitting against the house, or simply not draining quickly enough away from the house, it should immediately be taken care of!
Related: How to Accurately Estimate Expenses on a Rental Property in 3 Easy Steps
Improper grading can cause foundations to shift, basements to leak, and thousands of dollars of damage. All you have to do is get the ground to slop away from the house. In extreme cases, french drains or sump pumps may be needed, but the point is, take care of ground water so it doesn’t hit you with a huge capital expense.
5. Seal Concrete
This is so simple, but most investors never do it. Driveways, sidewalks, steps, porches, and patios can cost thousands of dollars to replace. If you have them in good condition rather than letting the elements eat away at them, add spraying them with sealer to your annual maintenance checklist. Doing this each year can make these things last 10 times as long and prevent a huge concrete job in the future.
Let me hear some of your tricks for eliminating/slowing expenses in your rentals!
Don’t forget to leave a comment below!