What If My Property Requires a Lot of Maintenance?

Posted by Ed McKnight on 25/03/20
Property Investment Maintenance
Introduction

Maintenance – Fears that stop people from investing

In this article we're going to talk about a major worry that stops regular people from becoming property investors – the fear of maintenance.

This makes sense because the cost of repairing the roof on a rental property can be in the region of $20,000!

Avoiding these expenses is important because if you face these as an investor you may be forced to sell your property early, which means missing out on capital gains over the long run.

That's why we'll go through how much you need to budget for maintenance and the different approaches.

Why You Need to Budget for Maintenance

Why Budget For Maintenance at All?

Nothing irks tenants more than reporting maintenance issues to their property manager, only to have the defect ignored by the landlord.

Something as simple as a leaking tap has two issues:

  • if not fixed, it frustrates the tenant
  • it can snowball into an even bigger (and more expensive) problem

In most cases your property manager will have a limit on what they can spend on maintenance each week, usually around $350.

Any expense above this needs to be signed off and agreed to by the landlord.

If you haven't budgeted and put money away for that maintenance, there's a good chance that you'll put off agreeing to that maintenance spend.

This frustrates tenants and can lead them to not taking good care of your property, or being more inclined to vacate.

Perhaps a fitting mantra is “happy tenants, happy life”. Doesn’t have the best ring to it, but it could not be more true.

Also, you want to maintain the value of the property. Letting a property fall into disrepair is not a sensible strategy.

While this may work for someone ‘land-banking’, this is irresponsible as an investor and unfair as a landlord.

Not dissimilar to putting away a kitty for unforeseen vacancies, you should be equally prepared for unpredictable repairs.

Limiting Maintenance

So How Do You Limit the Amount of Maintenance Needed?

The most significant choice you will make as a property investor, which will impact the amount of maintenance required, is 'product selection'.

That is: choosing your property.

If you choose to invest in a brand new property you'll have much lower maintenance because everything is so new it is unlikely to break from wear and tear.

Conversely, if you invest in an existing property you'll need to budget for more maintenance.

Another factor to look at is whether you invest in a standalone house, townhouse or apartment.

When you invest in a standalone house you are responsible for all the maintenance and upkeep of landscaping and the exterior of the property.

That's not the case if you invest in an apartment or townhouse, where you will pay a fee to your body corporate or residents’ association for them to complete this maintenance for you.

In that case you'll spend more on body corporate and residents’ association fees, but these expenses are more predictable than maintenance which is sporadic by nature.

Budgeting for Maintenance

How Much Should You Budget for Maintenance?

Ask a different property investment company how much to budget for maintenance and you'll likely get a different answer.

We at Opes Partners tend to take a conservative approach and recommend budgeting $500 for maintenance in the first year and then increase this by 2% every year, for a brand new property. That works out to about $10 a week.

For an older property, this should increase to $1000 - $1500. If we’re talking really old properties, you should keep at least $3000 aside for upkeep costs (or about $60 a week).

Other property coaches who also recommend new properties will structure this differently. One property coach in our industry recommends budgeting $150 for the first 3 years, $300 for every other year, and a one-off of $3,500 in year 6 for a mini-refurbishment.

In our view, while this might make the cashflow projections appear more stable, it also carries more risk as repairs and maintenance do arise unexpectedly, even for new properties.

Interestingly, in his book 20 Properties in One Year, Graeme Fowler doesn't budget for maintenance because he sees it as something you can't budget for.

This highlights the differing views in the industry given that Fowler primarily invests in higher yielding, older properties that would typically require more maintenance.

This probably works for Fowler, who has a significant portfolio (over 60 properties), with similarly significant cashflow. This is likely to make budgeting for these expenses less crucial than it is for Mum and Dad investors.

Under-Budgeting

What If I Haven't Budgeted Enough?

Unfortunately, it can go the other way with older properties.

I recently shared on the Property Academy Podcast that he has had to spend $10,000 on a single property over a 12-month period.

This is for what is known as 'deferred capital maintenance'.

That's where a property has slowly got older and needs to be tuned up, whether through the replacement of a new roof, hot water cylinder, or rewiring. These aren't small touch-ups. Rather, they are one-off 'capital' improvements that need to be made every decade or so.

These typically aren't budgeted for day-to-day, but can be 'capitalised' against the property.

Usually, when faced with this type of expense, an investor might top up the mortgage (borrowing against the property) to pay for the work.

This means you can turn a large one-off expense into a small weekly expense through your mortgage repayments.

It's important to add that the maintenance environment has changed dramatically over the years. Where previously fixing a roof might have set you back $10,000, with greater health and safety regulation (requirement of scaffolding, for example), you may be facing a bill of twice the size.

Healthy Homes Act

How will the Healthy Homes Act impact this?

Capital improvements may become more important over the next few years given the new Healthy Homes Act.

This new act requires an increased focus on insulation, heating, and ventilation, which landlords have 2 years to comply with, or they'll potentially face fines if a litigious tenant takes action. If you don’t comply, tenants have an incentive to complain - your $4000 fine goes to them.

Conclusion

What does this mean for you?

So, no need to fear – just prepare.

Maintenance is likely to be a regular occurrence over your investment, but if you are diligent, a leaky tap will not spell the end of a tenancy or result in a hefty fine.