Virtually NO Maintenance Reserves Needed for Property Analysis!

Virtually NO Maintenance Reserves Needed for Property Analysis!

Cincinnati, OH · Member since 2014 · 122 posts · 29 votes

Hello everyone - I am starting this topic because I am curious to know 2 things:

1)  Is there anyone out there doing this with success?

2)  What your thoughts are around this subject, in general.

My uncle owns (outright) 24, 4-family townhomes that he has acquired over the last 25 years. He basically owns an entire street, and he was able to payoff the mortgages faster because he puts $0...THAT'S RIGHT...ZERO DOLLARS...into a general maintenance account. Most people put, on average, 10% per month into a maintenance account, but he never has. He has always taken the extra 10% and has applied it toward the principal of his loan balances. Now he owns $2.5mm in real estate, cash flowing $108,000 per year. Keep in mind - this is not to be confused with a CAPEX account. He does save money for large items such as a roof, building structure, etc. However, most investors do both. But, WHY was he able to achieve this success?

I sat down with my uncle to learn about his success, and here is his secret. He met with a real estate attorney and developed a lease that forces the renter to take care of the general maintenance of the property. For example, if a light bulb needs replaced, the lawn needs cut, snow needs to be removed, someone breaks a window, etc., then the tenant is responsible for the caring of the property. This allows him to be virtually hands-off from his properties, and he doesn't need to pay a property management company on a monthly basis. If a tenant moves out, he will bring in his contractor to fix up the place, but he doesn't have to give away 10% of his rents to a maintenance account or property management company. However, just to reiterate, he does put money away for CAPEX. He is responsible for the bigger ticket items like plumbing, electrical, roof, etc. By writing this stipulation into his lease, he has been able to pay way more money on his principal every month, hence why he was able to payoff $2.5mm in just 25 years.

I asked him to show me a copy of his lease, and I ended up writing this into mine as well.  What this does is give the tenant "some skin in the game".  They are actually invested in the property, not just living there.  Of course, this isn't fool proof, but he hasn't had any issues in the last 20 years.  I have owned 2 properties since May, and I haven't had to visit either of them yet.  It is written in the contract that if any of these conditions is not met, then the owner keeps the security deposit in full.

Has anyone else out there head of this?  I haven't seen it in any forums, but my uncle and I have been able to get away with dumping another 10% of capital on the mortgage every month.

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Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y

Not a chance that I would leave any type of repairs to my residents.  My maintenance guys are trained to make repairs exactly the way that I like them to be done.  I don't want a major repair resulting from some minor plumbing leak or to have a resident slice a big gash in their arm trying to change out the glass in a window.

I would rather save my money by doing quick and efficient repairs that are done right.

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  • Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
    11y

    I think a lot of people do the same things described.  Except they keep the cash to acquire more properties instead of paying additional on the mortgage.  My strategy is to hit $10k a month in rental income and then roll all cash flow into mortgages and zero them.  I have percentages for all the costs of doing business, but I don't focus on them.  I have a checking account for each property and let it build up to a certain amount ($5K) then all cash flow at that point goes to another checking account which I use to purchase more.  Once I hit $10K in rents a month and all accounts have $5K time to kill all the mortgages.  But, I also invest in the market as well.  Rental income is like an annuity for me. 

  • Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    11y

    I do exactly what your uncle has done. We make the tenants have skin in the game by making them responsible for the properties and actions. They do all minor maintenance and we also don't follow up and check on them. We do fix things as soon as we are informed. 

    We buy class A properties that are nice and allow us to self-manage even from across the country and with full time + positions. We don't keep "huge" savings accounts but use all cash flow to fund new acquisitions. We live frugally so we are able to absorb a large "surprise" expense if something comes up.

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y

    @Bryan Neal.  Thanks for the reply.  And you're right, not having to focus on the little maintenance all the time has freed him up to focus on paying downall of his properties.  I am sure, at first, he did exactly what you are doing, and used the excess cash to buy more units.  However, now that he is done acquiring property, he was able to pay them off extremely quickly.  How close are you to reaching your 10k/month goal?

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y

    @Elizabeth Colegrove.  How many properties do you own at this point?  Also, in your actually property analysis that you do for each acquisition, do you eve have to include a general maintenance account?  My uncle would typically leave out a general maintenance calculation, as well as property management.  As a result, this would increase his own personal CAP rate up to 20%+.  Now, another investor may not see that large CAP rate, but he does :).

  • Investor · Spokane, WA · Member since 2014 · 733 posts · 155 votes
    11y

    $108k cash flow off $2.5M seems a bit low...?  

  • Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    Not a chance that I would leave any type of repairs to my residents.  My maintenance guys are trained to make repairs exactly the way that I like them to be done.  I don't want a major repair resulting from some minor plumbing leak or to have a resident slice a big gash in their arm trying to change out the glass in a window.

    I would rather save my money by doing quick and efficient repairs that are done right.

  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    11y

    My tenants change light bulbs, batteries, and furnace filters. They cut the grass, rake leaves, and shovel the snow. So they do have a lot of responsibilities.  If they break something in the property, they need to have it fixed.

    However, if something breaks from normal wear and tear, or just wears out due to age, then yes, I repair it. I put aside money for repairs and capital improvements every month. I'd rather have a little too much money set aside than be scrambling if things suddenly happen all at once.

    Where does your uncle get the money to turn over the unit? Does he dip into the CapEx fund?

  • Rental Property Investor · Indianapolis, IN · Member since 2014 · 354 posts · 167 votes
    11y

    @Kyle H. 

    Can you share what the statement looks like in the lease?  I have my tenants take care of many of the normal maintenance issues but I am curious what your uncle's statement looks like. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    @Kyle H.   flip side to this is tenant does not do maintenance like they should and your Hvac breaks on you.. or that little water leak that should be fixed is left to create water damage mold ext... 

    there is a fine line here... but yard work snow removal  light bulbs I see.. but in no way do I let them change the filters.. they just wont' do it like I would do it.. filters cost money and tenants by and large will let it go to long... 

  • Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y

    Having the ability to pay for maintenance is more of the issue, I don't use 10% personally, don't think I ever did, but I do use it to determine lending or partnership arrangements.

    What you do need to consider is the cost of capital, simply keeping funds set aside for emergencies, an example might be an annual fee on your credit card, lost interest that might have been earned or loss of other opportunities (but loss of opportunities is rather in theory as there aren't many real opportunities lost from having a small reserve). You do need a reserve, but you should be able to pay for some car expense too.

    It's a bit like having a high deductible on an insurance policy, the premium is cheaper but you need to come up with more money if you have a loss. Is the difference in the premium worth more than the cost of keeping money set aside or arranging to obtain the amount needed?  

  • Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes
    11y

    @Kyle H.  Most of what you named "light bulb needs replaced, the lawn needs cut, snow needs to be removed, someone breaks a window, etc." are all things that most tenants are responsible for either as expected duties or to pay to fix in the case of accidents.  I think of maintenance as painting, floor coverings replacement, fixing burned out electrical socket, worn or deck etc.  Things I wouldn't trust to a tenant or do between tenants maybe taking some from security deposits if it was above normal wear and tear.  I am guessing your father either pays these from cash flow or has a bit wider interpretation of capital expense than some here. 

    I too pay most of this out of cash flow when it happens instead of keeping a separate maintenance fund. I do figure roughly 40% for vacancy, maintenance, CapEx, and property management when doing analysis to determine if I want to purchase something. I usually keep 25-30% back in actual reserves from rents since I have other sources of income I can pull from if I need more than that for something.

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y

    @Bryan Case.  Hi Bryan - good point.  I just wanted to make it clear that this is his cashflow AFTER paying the government as well. 

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Dawn Anastasi:

    My tenants change light bulbs, batteries, and furnace filters. They cut the grass, rake leaves, and shovel the snow. So they do have a lot of responsibilities.  If they break something in the property, they need to have it fixed.

    However, if something breaks from normal wear and tear, or just wears out due to age, then yes, I repair it. I put aside money for repairs and capital improvements every month. I'd rather have a little too much money set aside than be scrambling if things suddenly happen all at once.

    Where does your uncle get the money to turn over the unit? Does he dip into the CapEx fund?

    He dumps all cash into a few large accounts.  He is also a CPA and owns his own firm, so this is his side job :)  His amount of money to turn over any given unit is under $1k, so he doesn't worry about it too much.

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Jay Hinrichs:

    @Kyle H.   flip side to this is tenant does not do maintenance like they should and your Hvac breaks on you.. or that little water leak that should be fixed is left to create water damage mold ext... 

    there is a fine line here... but yard work snow removal  light bulbs I see.. but in no way do I let them change the filters.. they just wont' do it like I would do it.. filters cost money and tenants by and large will let it go to long... 

    Jay - you make great points here.  I agree with worrying about the bigger natured-items, such as hvac and water.  He still comes out to inspect the full property 3 times per year, just to make sure any of these issues that you speak of don't get too out of hand (should they arise).  There are definitely negatives to this though, and some you can't really avoid.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    We if he is doing ispections then he is not truly letting he tenant do maintenance...

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    11y
    Originally posted by @Steve Olafson:

    Not a chance that I would leave any type of repairs to my residents.  My maintenance guys are trained to make repairs exactly the way that I like them to be done.  I don't want a major repair resulting from some minor plumbing leak or to have a resident slice a big gash in their arm trying to change out the glass in a window.

    I would rather save my money by doing quick and efficient repairs that are done right.

    Was going to say the same thing.

    What happens if:

    -  Tenant goes to fix the broken window and a piece of glass slashes his face.  The $100 you thought you were saving may turn into a much, much, much larger lawsuit;

    -  Tenant "fixes" a minor plumbing leak and a year later you have a mold problem.

    -  Tenant is supposed to shovel snow off the sidewalk and "forgets" to do it -- then someone walking past slips and falls?  You get sued.

    For my rentals, I don't even want the tenant to change the air filters -- that gives me a reason to stop by the property once a quarter to change it and "check on" the place...

  • Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
    11y

    @Kyle H. 

    About 3 years away.  Unless the my job changes my plans.  

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Paul Ewing:

    @Kyle H.  Most of what you named "light bulb needs replaced, the lawn needs cut, snow needs to be removed, someone breaks a window, etc." are all things that most tenants are responsible for either as expected duties or to pay to fix in the case of accidents.  I think of maintenance as painting, floor coverings replacement, fixing burned out electrical socket, worn or deck etc.  Things I wouldn't trust to a tenant or do between tenants maybe taking some from security deposits if it was above normal wear and tear.  I am guessing your father either pays these from cash flow or has a bit wider interpretation of capital expense than some here. 

    I too pay most of this out of cash flow when it happens instead of keeping a separate maintenance fund. I do figure roughly 40% for vacancy, maintenance, CapEx, and property management when doing analysis to determine if I want to purchase something. I usually keep 25-30% back in actual reserves from rents since I have other sources of income I can pull from if I need more than that for something.

    I agree with you here, Paul. I am sure he is paying his items out of the cash flow. However, since most of his properties rarely need anything more than a large Capex payment, he is able to dump all of the extra money into the principal of his mortgage, instead of into a cash reserve account. By carrying less reserves and paying down principal, his theory is that he will say a ton more in interest of his life than anything else. But this, like anything else, is debatable.

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Jay Hinrichs:

    We if he is doing ispections then he is not truly letting he tenant do maintenance...

    Well - I see what you're saying, but up in the original post, it states that he handles all the large ticket items such as roof, plumbing, electrical, and hvac. Therefore, he is coming out to inspect these bigger ticket items to know what is in the pipeline for possible repair down the road. The maintenance account and Capex account are two separate things in most people's analysis. I was just curious as to who is having success by saving cash reserves, and if anyone is having success by paying down the principal faster instead.

  • Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    11y

    I wondering about semantics here. Changing lightbulbs, furnace filters and batteries are tenant consumables...they are not "maintenance". If a tenant causes damage, such as a broken window, that would be charged to them and is not a maintenance expense for the landlord. Lawn mowing and shoveling are typically tenant duties in an SFH.

    Even with a lease clause, you can't make tenants here in CA responsible for repairs for damages they didn't cause.

    So what is it that is so special about your uncle's lease?  He can't charge his tenants for hvac or plumbing or electrical or normal wear and tear.  What am I missing?

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @J Scott:
    Originally posted by @Steve Olafson:

    Not a chance that I would leave any type of repairs to my residents.  My maintenance guys are trained to make repairs exactly the way that I like them to be done.  I don't want a major repair resulting from some minor plumbing leak or to have a resident slice a big gash in their arm trying to change out the glass in a window.

    I would rather save my money by doing quick and efficient repairs that are done right.

    Was going to say the same thing.

    What happens if:

    -  Tenant goes to fix the broken window and a piece of glass slashes his face.  The $100 you thought you were saving may turn into a much, much, much larger lawsuit;

    -  Tenant "fixes" a minor plumbing leak and a year later you have a mold problem.

    -  Tenant is supposed to shovel snow off the sidewalk and "forgets" to do it -- then someone walking past slips and falls?  You get sued.

    For my rentals, I don't even want the tenant to change the air filters -- that gives me a reason to stop by the property once a quarter to change it and "check on" the place...

    Your points here are valid.  When it comes to these maintenance responsibilities, he is VERY specific.  They are not allowed to handle any plumbing issues whatsoever, window fixes are required to be taken care of by the tenant, but they must calls a window professional to do them, etc.  However, the point about the snow on the sidewalk (and I am sure there are many other examples) makes sense.  I don't know if there is anyone that can write this up legally where he can take it off his plate and pass reliability onto the tenant.  Additionally, he still has a reason to come out to the property, anyways, a few times per year to investigate the capex items.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    11y

    window is an odd thing... Like if they broke a window?

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Account Closed:

    I wondering about semantics here. Changing lightbulbs, furnace filters and batteries are tenant consumables...they are not "maintenance". If a tenant causes damage, such as a broken window, that would be charged to them and is not a maintenance expense for the landlord. Lawn mowing and shoveling are typically tenant duties in an SFH.

    Even with a lease clause, you can't make tenants here in CA responsible for repairs for damages they didn't cause.

    So what is it that is so special about your uncle's lease?  He can't charge his tenants for hvac or plumbing or electrical or normal wear and tear.  What am I missing?

    Most people put aside money for property maintenance/upkeep (i.e. property manager). This can take away 10% of cash flow every month. However, since he makes the tenants responsible for the total upkeep of the property, he does not have to put money aside for general maintenance or a property management company. In the original post, I may not have been extra clear on everything, but he still puts money into savings for Capex items (roof, electrical, plumbing, hvac), and the tenant is not responsible for those. This post was just created to see who out there is also doing these things, and what are these people doing with the 10% cash flow (give-or-take) that they would otherwise be putting into a general maintenance account or paying to a property management company.

    In my uncle's case, he dumped the 10% onto the principal of his mortgage, thus able to pay it off way faster.  Are other people doing this, or do most people have a reserve account, or both? 

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Jay Hinrichs:

    window is an odd thing... Like if they broke a window?

    Exactly - so if the tenant breaks a window, they are required to get it fixed or replaced immediately, but it must be done my a professional.

  • Cincinnati, OH · Member since 2014 · 122 posts · 29 votes
    11y
    Originally posted by @Dan Perrott:

    @Kyle H. 

    Can you share what the statement looks like in the lease?  I have my tenants take care of many of the normal maintenance issues but I am curious what your uncle's statement looks like. 

    What are the types of items that you have your tenants take care of?  Maybe that will help me understand better what you have and I can compare it to what his might say for those items?

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