Part II — Projecting Operating Expenses On Real Estate Investment Property

Let’s spend some time with the ever popular line item — Repairs & Maintenance. (R & M) This particular expense is the most flexible. It’s one figure when you’re a buyer lookin’ at the seller’s income/expense form. It’s another when it’s on the tax return. It’s yet another when a seller’s real estate agent is ‘projecting’ income and expenses. See what I mean? Flexible.

San Diego real estate investors know all about what it takes to keep property in shape. Many of them still haven’t ever owned an income property younger than they are. Is your hometown the same? Mostly older properties, some WAY older? When you look to buy older properties, it matters a great deal just how well the previous owner(s) viewed maintenance. Was it what I call the ‘Just in time’ method? You know, after the fifth tenant complaint something was repaired using a couple clothes hangers, duct tape, and prayer?

Or even worse, did they use the 3 Monkeys approach? They never saw, heard, or spoke evil of anything ’till it was time to call 911? This type owner often has the tenant who’s a ‘handyman’. (apologies to real handymen everywhere) This arrangement was mostly between the lines. The tenant doesn’t complain, fixes his own and his neighbor’s units various problems, and the owner doesn’t raise his rent. This works well, until it doesn’t, and there’s almost always very little transition time from the former to the later.

Even on properties under 10 years old, including new ones, we tend to assume R & M will end up at something near 5% of actual collected income, though we still insist on looking closely at each property’s unique factors. Life happens. The older the property, the more R & M there will be. Please show some control and don’t say Duh! too loudly.

There’s also the principle most investors choose to ignore. Regardless of how well you maintain your income property, wear and tear goes on. It’s like the tide — it’ll do what it’ll do, always winning over the long haul.

BawldGuy Axiom: Ignoring the long term and inevitable consequences of normal wear and tear is much akin to the farmer and the old mare. ‘Bout the time he got her to work without eatin’? She died.

In the last four decades or so most investors haven’t felt the need to hold properties for relatively extended periods of time. That still may hold today, but the odds are higher for longer relative holding periods. There are several major factors that come into play when properties are held for years and years. One of them is the need to replace, not repair large ticket items. Heating/cooling, roofs, sometimes even solving the occasional functional obsolescence. This is even looked at differently on your tax return. It becomes a capital expenditure, eligible for depreciation rather than an expense item. Huge difference.

Still, the principle remains — ignore either one at your peril. When selling/exchanging your income property, ill-maintained units will not attract the prudent investor. Well, they will, but only the ones lookin’ for bargains they can fix up. You don’t wanna be that seller.

So much of what we advise our clients has to do with the condition of their units. Whenever you as an investor think of maintenance, think of it this way — Maintaining the value of your property. It’s usually not an increase in value, but the ability to sell quickly, especially in the kinda market we’re now experiencing. Sooner is better than later. The whole gettin’ more thing is a bonus.

Just ask the sellers whose listings have been studiously ignored the last six months. Investors on the prowl want shiny properties, not rehab projects, at least most of ‘em. ‘Nuff said.

One last thing — give me a call. I need a fix. 619 889-7100. Have a good one.

Related posts:

1. Projecting Operating Expenses On Real Estate Investment Property
2. Income Property Operating Expenses — Are You In Denial?
3. Income Property: Saving On Expenses While Lowering Income And Value
4. A Test For Real Estate Investment Property Owners — Especially Those In San Diego
5. Test Your Real Estate Investment Property’s Relative Market Value — Hello San Diego