RENTAL MAINTENANCE ADDS ANOTHER $5 BILLION TO THE SFR INDUSTRY ECONOMY? (Part 8.)

by Tim Herriage

RENTAL MAINTENANCE ADDS ANOTHER $5 BILLION TO THE SFR INDUSTRY ECONOMY? (Part 8.)

by Tim Herriage

by Tim Herriage

Through this series of columns we have discovered the labor and materials economic contribution of SFR Fix & Flip to sell or renovating buy-to-rent houses for 2015 was at least a $31.5 billion dollars to the American economy. Separately, there are costs to “refresh” a property for a new tenant. This annual RECURRING “turn” expense is estimated at a minimum of $18.18 billion based on a 32% annual SFR rental churn rate. This never stops, but how about recurring SFR rental maintenance events?
RECURRING MAINTENANCE
This is a separate and never-ending expense. Whether it’s one investment home or the entire rental inventory of some 23 million homes, maintenance is a massive recurring annual number that grows to cover an additional 950,000 rental homes a year. The expense is a constant but there are a number of strategies an investor can employ to minimize costs, financial impact and inconvenience.
These required expenditures are often driven by an emergency call from a tenant saying there is some sort of plumbing, roofing, air conditioning or other failure that makes the property less than habitable. These calls for help typically require urgent attention and are not an optional repair. Any delay may also lead to further property damage (water) and increased costs to the landlord.
MAINTENANCE RESERVE CUSHION STANDARDS
The recommended solution is to put aside a small sum and build up a reserve for a “rainy day” or other foreseeable event. A reserve fund can make an otherwise unforeseen event manageable and not destroy your rental profitability.
The call for maintenance will occur at the least desirable time, from a tenant comfort and property protection perspective, but with a budgeted and funded reserve account, the financial impact should be minimal.
There are three rules of thumb that can be applied to arrive at the annual maintenance costs for a SFR structure: i.) based on capital cost (expect a 1% per annum equivalent cost,) ii.) SFR square footage times a $1.00 or, in the case of an SFR rental, or iii.) 3 to 5% of the annual rent proceeds.
The first two of these housing rules of thumb are more guides for homeowners but they ignore the fact that your rental is a business with an income dependent on a happy customer/tenant. There should be a heightened urgency to fixing something that compromises living conditions. A rent reduction (subject to lease agreement) could be a consequence of the condition lasting more than “a reasonable time.”
Putting aside 3 to 5% of rental income tends to underfund the reserve account for large items such as a HVAC failure. HVAC replacement on an SFR rental is at least $5,000 if there is no warranty in place. Think in terms of getting ahead of this with a deeper initial renovation investment or performing more thorough turns, otherwise expecting a larger expense in the event of a repair. However there are two ways to mitigate these unexpected expenses.
Theoretically therefore, setting aside 5% of income as a growing reserve against maintenance on 23 million SFR properties generates $4.83 billion a year in maintenance reserves, if not more, that will be spent on repairs and replacement of critical elements. Despite this, the actual number spent on maintenance and repair operations is probably more.
STRATEGIES TO REDUCE MAINTENANCE COST IMPACT?
There are three strategies to reduce ongoing maintenance costs. The first is to aggressively replace and repair systems during initial renovation targeting the prospectively more expensive HVAC, roofing and plumbing issues. And if you do not, second is to set aside a larger initial amount so the maintenance account is funded for at least one of these larger expenses happening early in the ownership cycle. The third strategy is to require a home warranty from any turnkey rental property seller or buy and maintain a home warranty on properties you may renovate and maintain if you are not sure of major components.
The only way to understand which strategy works for you is to put together a spreadsheet to project prospective maintenance requirements over the next three years and then estimate the costs necessary to a.) renovate to reduce exposure, or b.) adequately fund the reserve account and prepare for at least one major issue, and/or c.) obtain a landlord friendly home warranty. As the FRAM Filter ad so eloquently puts it, “pay now or pay later,” but in the case of SFR rentals expect to pay and make your contribution to this at least $4.83 billion national maintenance economic contribution by landlords.
Planning ahead, acquiring a suitable property and then putting preventive strategies in place will ensure surprise maintenance events do not detract from your rental investment profits. If you want more insight into how to structure this for your investments contact 2020 REI. They welcome the opportunity to advise you on how to reduce expenses while raising profits. Comment below, or contact us today.

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