What you need to know about repair and maintenance
Repair and maintenance.
This is probably one of the most overlooked expenses when I speak with an investor about a rental portfolio they want to buy.
And no matter what shape your property is in when you rent it, there will be the eventual maintenance call that you will need to address.
We’ve met with investors who pull out their spreadsheets boasting 15% CAP rate projections with absolutely no (or very little) allowance for maintenance and repair. We politely explain that these projections are simply not realistic. Our hope is that they listen and begin to think through the ramifications of basing investment returns on wishful thinking and not on years of experience.
After buying, selling and renting well over a thousand houses since 2003, we understand a thing or two about maintenance and repair. As a matter of fact we started a maintenance company so that we could manage our own work and make sure the quality was up to gkhouses.com standards.
Based on our experience, we believe most homeowners underestimate maintenance and repairs. The general rule is approximately 1% of the home value per year. So if your rental house is valued at $200,000, you should expect around $2,000 a year in repairs and maintenance.
But in the Birmingham investment market, that’s simply not the case. Most of the time you will be buying older homes that require more maintenance than a newer home in a growing part of the city.
But this article isn’t about how much you should budget, but it’s about making sure you choose the right person/company to help you complete those maintenance calls and repair requests.
Your Contractor…Your Partner
It’s important to think of your contractor – or your maintenance and repair person/people – like a partner.
They’ll be a great person to bounce ideas off of and can help you keep your tenant safe and happy….and hopefully in your home for 20 years!
If your house isn’t ‘rent ready’ then you’ll need to a contractor to help you get it up to par. If it’s already ‘rent ready’ then you’ll need someone to make sure your tenant’s taken care of when they do call.
It’s one of the most important partnerships you’ll make.
Nothing can slow you down (or get you in trouble) more than a bad contractor. Faulty work, slow work, or no work have the potential to bring your rehab or maintenance work to a screeching halt. It also makes you look unprofessional in the eyes of your tenant or prospective tenant.
It’s tempting to find and use a contractor whose prices are the cheapest. And we understand the need to handle your investment dollars wisely…but be careful; you often get what you pay for.
That isn’t to say that low-priced contractors always do a poor job; we’ve met some solid contractors who were at the lower end of the cost spectrum. Still, you need to be careful. Poorly done work can come back and cost you double to fix. We have plenty of stories about that if you want to hear them.
So what do you look for?
It’s extremely important to know if the contractor you partner with is licensed and insured. Why is this so vital? There are several reasons you shouldn’t let someone who is not licensed and insured work on your property:
1. They can get hurt on the job and sue you – What happens if an uninsured contractor falls off your roof and injures him or herself? They can sue and possibly take you to the cleaners. What would that do to your future returns on that property?
2. They can install your equipment incorrectly – If you’re dealing with someone who is not licensed or insured then most likely you are dealing with someone who is not the best at their craft.
Here’s an example from my past – it was around 2007 and I was trying to get HVAC installed on one of my rentals for cheap. I found a guy I really liked and he installed a unit that saved me at least a thousand dollars. It wasn’t until later that summer when my tenant got their enormous power bill ($900) that I realized he had wired the unit wrong. I had to install a new system to replace that one. It came out of my pocket because this part-time HVAC ‘specialist’ didn’t have a warranty. Lesson learned.
3. They can do your work and then disappear overnight – These types of scammy contractors typically aren’t in business long. This will cause problems if you need warranty work down the road and you can’t find them. Or, if they take their initial draw and never show up again. Back in the early days, we learned that the hard way.
Keep in mind that finding a good contractor is a necessity no matter what type of property you purchase. Even if you buy a new house, you’ll eventually have repairs to be made. It’s best to start developing a relationship early so your work will be carried out faithfully and on time when it’s time for a project.
We actually have a maintenance department here at gkhouses.com and our Director of Maintenance monitors everyone’s work and makes sure all of our employees have the proper insurance and designations for their craft.
So how do you know if the person you’re considering in Birmingham is licensed and insured?
Here are some helpful tips:
- Call the Alabama Home Builders Licensure Board and ask for a list of contractors that carry a license.
- Ask the contractor you’re considering to show you their card proving they are state certified. These cards typically have a hologram on them that cannot easily be fraudulently reproduced.
- For Liability Insurance and Workman’s Comp it’s best to have the insurance provider fax or email you the full Acord Form directly. This will eliminate the opportunity for an uninsured contractor to provide you with fraudulent documents.
There are plenty of warning signs that you may be dealing with a less than reputable contractor. In the beginning of our real estate career we used these fly-by-night contractors because they were cheap and we thought they were saving us money.
In the short term, maybe…but over time we ended up spending more money repairing their repairs and we lost several good tenants because of shoddy work. The extra repair work and the additional months our houses were vacant put us behind on our investment goals.
Learn from our early mistakes and find a contractor you can trust to be your long term partner. Doing this on the front end will give you a massive advantage in achieving rental house success!