Do any of you do your own repairs?
Property Manager · Passaic, NJ · Member since 2008 · 369 posts · 83 votes
Since I mostly just look and give instructions to the Super, it was a real "turn back the clock" moment for me recently when I was trying to meet an inspection deadline-not enough manpower to get everything done. There I was installing cabinets, painting apartments, etc. I had forgotten what it felt like at the end of each day coming home covered in paint with tired aching muscles.
The most interesting aspect of the whole thing was the psychological effect it had upon my tenants. I suddenly lost my "image" of the landlord that only cares about getting the rent and doing nothing. (Little do they know). As I sweated my butt off and they watched me, they acquired a renewed respect for me and those harsh landlord/tenant lines seemed to fade away.
Dan, I didn't mention it because it is a difficult concept to explain to others. But, you are correct. The real cost of contracting out a $100 repair is about $65 once the dust settles and tax returns are filed.
This is why split testing is your friend in this type of analysis.
Holy Moses!!! Two manweeks to rehab a kitchen in a rental???? The last one I did with all new cabinets, new vinyl floor, and new paint took 2 days. That's another advantage to doing the work yourself. When a contractor does the work, there's too much goofing off to please me. When I work, I WORK! No breaks, no shooting the crap, just work!
Mike
I liked some of Gary's analogy. There are lots of things in this world I could do for myself and would probably save some money if I did it. But, like I said before, it isn't always about the money.
Quite the contrary, THAT IS THE POINT! Even with your number of a $3,900 savings, that's a lot of money for two days work! This is an excellent example of why I do the work myself. To me, it would be incomprehensible that a contractor could turn $2,000 in materials in a kitchen rehab into two manweeks of work! However, we've all seen it happen. A little work, a lot of talk. An hour for lunch. Frequent breaks. RIDICULOUS! Anytime I can save $3,900 or $6,000 for two days work, I'll take it!
Actually, that was about 3 years ago when I was working LONG hours building my business. However, that's really a silly comment in that is shows a complete lack of understanding of the rental property business, or maybe more accurately, it shows an employee mentality.
I do not punch a clock. Even with my business semi-stabilized today, I don't have to work a set number of hours. Right now, I'm averaging about 16 hours per week. However, I don't have a boss and I am not required to work exactly 16 hours per week. When we go on vacation, I don't work at all for nearly 2 weeks. If I don't have much going on one week, I can work more than 16 hours if I want to. When I'm feeling lazy or had fun things to do, I may not work hardly at all some weeks. All that is really required is that I keep up with the maintenance, which is a minority of my work. The majority of the work is of course rehabbing units and turning them between tenants.
Mike
Also, no one is talking about "over paying" we are talking about whether you do it yourself to save the labor costs or for other reasons.
I think this thread has really highlighted the differences between two different models for REI. I'll call them the "Investor model" and the "Owner model".
Here are some observations, do with them what you will.
Investors seem to approach REI as an asset class, like stock, bonds, mutual funds or hard money lending. The end is achieving their personal investment goals. Investors strive to maintain liquidity and tend to withdraw profits often so that they can "reinvest" that capital in other assets that may or may not be in the same asset class. Capital appreciation and cash flow both factored into their calculations of return. They see the beauty of REI as the ability to influence their return on investment directly through active management, much like Warren Buffet only invests in companies in large enough volume to get a say in how they are run. Therefore, Investors are less likely to do their own maintenance because they've run the numbers and already factored in the cost of outsourcing repair work.
Owners seem to look at REI as a career path or alternate income stream, like a small business owner. The see their properties as their livelihood and are constantly trying to minimize their expenses. Owners tend to value cash flow over capital gains (for rentals) because their intent is to live off of the income produced by their properties. Owners are less likely to invest in other asset classes, even if greater returns were likely because they are hesitant to give up control of their livelihood. Owners are more likely to do their own repairs because it reduces their expenses (thus increasing net cash flow), increases job satisfaction and possibly reduces their risk.
I'm new at this but those are my observations.
ntokb3, you are exactly correct. I hope you don't mind if I borrow it and cite it in an article. I'd like to give you recognition for it if you will send me how you would like the attribution to read to me via PM or I can just use the nick.
ntokb3,
I think your analysis is a good one. However, I would throw in one more thing. Managing and maintaining the rentals yourself also allows you to have the same spendable income with less than half the rentals needed with paid management and paid maintenance. In addition, even with paid management, you still need to manage the manager. Been there, done that.
Mike
Mike
However, by having only half as many properties as an Investor whose assets generate roughly the same cash flow stream, you are giving up half of the appreciation and other upside benefits.
He really has nailed it. I am an investor and have no problem sharing the cash flow stream because I don't live off of it.
Let's take an example, okay? To make this real simple let's assume each month your tenants pay their rent on time they are paying off $1 of the underlying loan amounts. Just a buck. Let's also assume the value of your properties will on average increase by $1 a month. Yes, I know, they pay off more than a $1 each month and some years there is no appreciation. But the historical averages are more than $1 a month anyway and this is for simple illustration.
Now, let's assume you have 50 properties generating a cash flow each month. You are doing all of the maintenance, showing the units, any rehabs, taking care of late rents, evictions, etc.
Now, using your half number above, I have 100 properties in my portfolio generating roughly the same net cash flow. I don't do the maintenance, I don't show the units or do rehabs, late rents and evictions are handled by the manager. Yes, I do have to manage the manager, but managing people is easy once you know how.
Each month the value of your portfolio increases by $50 due to principal payments paid by the tenants and $50 due to appreciation. For a total of $100 a month.
My portfolio increases by $100 on the loan pay down and $100 on appreciation for a total for $200 a month.
We are getting the same cash flow but I am building wealth faster. Granted it is not liquid, but it is an asset and down the road if I marked my equity asset value down 20% for a quick sale I still make more on my portfolio.
This is not a swipe against the way you do it. It is just further talking about the differences. I am looking for long term growth, you are looking for income.
In reality, I am rolling my income from my properties into new properties for a rolling snow ball advantage as time goes by.
I'm curious, when you evaluate a deal, do you calculate NOI based on you doing the maintenance and management or on what it would cost if you outsourced it?
Consider this, I've read in several places that "profit is made at purchase". By that same token, if I crunch the numbers on an investment and the only way for me to meet my investment goal is to perform the maintenance and management personally (thus removing labor costs from my NOI calculation) then I'm probably paying too much. You're not buying an investment, you're buying a job, and are thus, an owner
I calculate NOI based on the management and maintenance being hired out. I ALWAYS insist on having a positive cash flow with all the real world operating expenses. I will receive this cash flow whether I do the management and maintenance or hire it done. By doing the management and maintenance, I EARN the management and maintenannce fees in addition to the cash flow. That is why you can have less than half the number of rentals and still make the same amount of spendable money.
Mike
Thanks for the response Mike. Good to know we're looking at this the same way.
How is that different from making the part time salary of a maintenance person and property manager on top of your investment return? Sounds like something that would be worthwhile as long as I weren't incurring an opportunity cost because I'm not doing something more profitable.
I have a day job, it pays pretty well. Assume my hourly rate is twice that of most maintenance people and residential property managers that consider themselves well paid. It wouldn't make sense for me to quit my day job to manage properties. I'm not above changing door locks, A/C filters, pressure washing stuff, etc. in my otherwise free time. If I invest in the right deals and make the right assumptions (like what we agree on) then I can manage this thing like I would any other investment with an appropriate amount of time spent of research, consultation with advisers, monitoring (what you called managing the managers), etc. I'm hesitant to consider manual labor as a requirement to achieving my investment goals. If its just a way of earning an extra buck or two, then so be it.
So maintenance and management labor costs total to half of your operating expenses? Sounds like you were either ripped off or you underestimated the amount of work that needed to be done up front. That sounds really high, then again I don't know where you are. Hawaii? NYC? San Fran?
I agree. If you have a 9-5 job, I certainly wouldn't quit that to manage one or two rentals (certainly not when you're first starting and have a small portfolio). However, on the other hand, you read the description earlier of the kitchen rehab. Is making an extra $3,900 for a 2 day job a good deal? I say yes! Most Americans don't make that much in a month at their day job.
No, that's not quite right. Let's look at an example. Let's take a rental that has gross rents of $700 per month. Paid management is typically about 10% of the gross rents. That's $70 per month. Now, we could probably argue about the maintenance number, but 10% of the gross rents is probably a good number for paid maintenance in a $700 rental. Of that number, certainly no more than half of that would be parts as most maintenance in rentals is fixing leaks, minor electrical issues, and other minor issues. So, right there we have earned $105 per unit per month. In addition, capital expense typically are about another 5% per month and again half of that might be parts. If you do the rehabbing, you are also earning half of that. That would be another $17.50 per unit per month we have earned. So, without anything else, we have earned $122.50 per unit per month by doing the management and maintenance (including rehabbing) ourselves. With a typical cash flow of $100 per unit per month, you can see that you more than double the spendable cash per month by doing these tasks.
Again, with only a few rentals, that would not be enough to quit your day job, although you probably wouldn't need to quit your day job with only a few rentals. With a bunch of rentals, this "extra" income is significant and could certainly allow you to quit your day job.
One other important aspect of doing the maintenance yourself is the savings involved as opposed to hiring a contractor. For example, let's take a typical toilet problem that involves a sticking flush valve. If you call your plumber, you will likely get a $80 to $100 trip charge plus parts (about $10, if not marked up by the plumber). Let's call it a total of $100. If I fix the same problem, it will cost me $10 plus 15 minutes of my time. In this case, I'm making the $90 the plumber would have charged for his labor for 15 minutes work. That's $360 per hour for changing a flushmaster valve!!! You may make more than $360 per hour at your day job, but most people don't. The point is that you will pay through the nose to hire professionals to do these jobs. I can do them for a fraction of the cost and keep the money for myself.
I'm not saying that there is anything wrong with paying someone to do everything for you. All I'm saying is that there is a lot of money to be made (saved) by doing it yourself (and it isn't handyman pay).
As I've also pointed out before, property managers are the most overpaid people in the world, but that's an entirely different topic.
Mike
Spendible cash = AFTER TAX cash.
So, using your numbers and a marginal Federal tax rate of 25% your spendible cash if you hire out the maintenance is $75 + 30.65 = 105.65. If you do it yourself, your spendible cash is $75 + 91.87 = $166.87.
That does not take the state rates into account, but as you can see you are only increasing your spendible cash by $61.22 a month by doing the work yourself.
If your state income tax is 6%, like mine, you are only saving $46.55 a month. So, the question becomes, is that $47 a month worth your time?
If we extrapolate out to a hypothetical investor with 10 properties and a landlord/owner who does their own work with 5 properties both in the 25% Federal bracket and a 6% state bracket...
The investor is netting $106.98 x 10 = $1,069.80 a month in spendable cash by managing the manager, as you put it.
The owner/landlord is netting $153.53 x 5 = $767.65 a month in spendable cash by doing it all themselves.
Over the course of one year the investor is netting $3625.80 MORE than the owner and that does not even take into account the investor is getting double the appreciation, depreciation and other write-offs.
If we are talking 100 units verses 50 units the numbers skew even more in the favor of the investor because the Federal marginal rate would be 28% instead of 25%.
In fact, if my goal was to ONLY make the exact same net spendable cash each month as an owner/landlord, I only need one and a half times the number of properties.
In other words, 75 units will net me the same spendable cash as an owner landlord with 50 units but I still get 50% more appreciation and write-offs.
No matter how you slice it if your goal is to maximize your investments you are always better off leveraging the labor of others.
Of course, you're right. That was a poor choice of wording on my part.
I am NOT a tax expert (in fact I absolutely hate taxes), but at the risk of getting into an EXTREMELY complex discussion of taxes, let me say that I disagree with your numbers and your assumptions, although I agree in principal that if a person actually paid 25% of their income in taxes, that they would be correct. (this is making my head hurt already - please pass the duct tape).
First, the marginal tax rate is not what a person actually pays in taxes. The marginal tax rate is the tax you pay on your last dollar earned. For example, for 2008, if you were married, filing jointly and had a TAXABLE INCOME of $100,000, you would actually pay $17,688 or 17.68% of your income in Federal Income Tax (as opposed to 25%), even though you were at the 25% marginal rate.
Next, you would need to consider the depreciation of the rental property, which will significantly lower (or erase) the taxable income from the rental property depending on your individual circumstances. Significantly lowering the taxable income can change the marginal rate you pay. Closely related to this issue are the personal exemptions you will receive. Combine all this stuff together in a large bowl, add water, beat in 2 eggs, and view it all in a large mirror and your taxes will be a LOT lower than 25%, if you owe taxes at all.
Again, I am not a tax expert and don't play one on the internet. I have a very competent, highly experienced accountant that does my taxes and takes every possible legal advantage of the tax code.
Here are a couple of sites relating to the tax code/marginal tax rate discussion: http://www.moneychimp.com/features/tax_brackets.htm http://www.dinkytown.net/java/TaxMargin.html
I spent all of 15 seconds Googling them and I am not verifying the accuracy of any information on those sites.
Taz, my point is that the numbers you posted were a worst case scenario regarding taxes. However, you were correct that I should have chosen my words more carefully and said that the $122.50 was additional cash you would earn and that you should consider the tax implications relevant to your particular situation.
The bottom line is that you need more rentals to make the same money if you hire out the management and maintenance. How many more? Somewhere between 1 1/2 times (in a worst case tax situation) and more than double (in a no tax situation). You are correct that you will obtain more total appreciation if you have more total rental units, although I don't get too excited about equity through appreciation because I can't spend equity and don't plan to ever sell my rentals. Although it certainly is icing on the cake.
Mike
Yes, of course the marginal tax rate only applies to the last dollar earned.
But, I would not characterize my numbers as "worst" case. The worst case from the standpoint of the owner/landlord is at the 35% marginal rate which pushes it even further in favor of the investor and takes the delta down to only $36.75 each month. This means the investor only needs one and one third as many units for the same cash flow.
And at those levels it is a huge cash flow that no owner/landlord doing everything for themselves could ever hope to achieve. We are talking about adjusted gross income in excess of $200K for single filers and $400K for married ones.
Now, Michael, if you are making that kind of money and doing it all yourself in only 16 hours each week, I will be delighted to buy you a steak dinner anywhere you want; with adequate proof, of course.
According to the IRS, most landlords fall into the 25% bracket with the 15% marginal bracket the next most populous one. That is why I chose the 25% bracket for my example.
If you are living off the income stream and want an adequate standard of living it is not likely you are in the ZERO or even the 10% income tax bracket. Even if your write-offs get you to that point, the AMT kicks in and takes your tax obligation back up. That is what it is designed to do and it hits passive income and expenses much harder than it does earned income and non-passive deductions. Depreciation gets wiped out first and the fastest followed by interest on mortgages all based on the AGI.
Well, I guess you're off the hook for that dinner. If my adjusted gross income ever gets that high, I'll buy you dinner!
I guess I'll be finding out in the next couple of weeks. My 2007 taxes should be done in the next couple of weeks (they're on extension).
Mike
Wow, you mean with those "dozens" of properties you haven't been nicked by the AMT?
Very, very interesting.
I like this analysis. It is important to realize in this discussion a key difference between someone like Taz and someone like myself. Taz funded his investments with the operation and sale of another company. That other company which he eventually sold, he obviously worked in. I am doing the same thing with my real estate company that he did with his tech company. Will I be doing my own repairs in round 2 of investing when I've established 100 cashflowing units and am starting with 1 million plus in cash to invest. Heck no! However, you have to start your investing where you are at and doing my own repairs is key to accelerating the completion of round 1. Taz knew this when he did his round 1 (and probably round 2) in building his tech consulting company. That's why he did it.
I'm also going to take a leap here and "speak" for him. I'm certain there was a lot more love in him for his consulting business than real estate. When you love it, it's a different matter entirely. "Working" on my properties is in some ways laughable for me to even call it work. I come home covered in sweat and dirt and I love it! How many other lines of work do you get to play in the mud and call it investing? :mrgreen: I know I'm putting in heavy hours but seeing it build in front of my eyes is one of the most satisfying experiences of my life.
Tim
Shhhhhhh! Mike you're not supposed to tell them that you can "reside" for next to nothing in flyover country and use so much more of your income to travel to any paradise you want and live like a king without paying king's taxes.....
Well galdum we don't have no steak round here, just Bubba burgers. :lol:
Tim