Real estate investors can see great gains when purchasing an investment property. Unfortunately, there are some major perils that can befall a house and put a serious dent in the value of that asset. These costly repairs can come at you much like a school bully on the playground. Many of these perils are much more insidious than a fire or natural disaster.
Monthly residual cash flow can be attractive incentive to become a landlord. Landlords collect rent each month, pay their mortgages and pocket the rest of the cash. What the public doesn’t see, however, is that successful property management involves managing people, forecasting repairs and maintenance, covering untimely losses and unexpected costs. This includes monthly maintenance. Landlords can keep their properties in tip-top shape and tenants happy by reinvesting a portion of rental income and performing monthly maintenance.
Costly home repairs that can seem like a school bully
1) Foundation: If you have bowed basement walls, cracks in walls or floors or a tilting chimney, you may be aware that these are signs of a problem foundation. But many tenants don’t realize that difficulty opening and closing doors and windows can also be early signs that the home is shifting. And whether you have a new home or an old one, foundation problems often require major repairs – and a big cash outlay. Foundation problems can be caused by the type of soil the house is built on, an improperly laid foundation or drainage problems. Whatever the cause, a bad foundation is bad news and, depending on the severity of the problem, can cost the landlord well over $10,000.
2) Mold: Unlike major water damage, such as that caused by flooding, minor or hidden water damage in your investment property, perhaps from a defective water pipe, hot water heater or window seal, can cause just as much damage – and you may not notice it right away. Similarly, if your property suffered through a flood in the past and did not adequately dry out, mold can also thrive. And the more humid the area in which you live, the harder it will be for you to get rid of mold and keep it from coming back. According to the Environmental Protection Agency, if the mold growth in your home is larger than 10 square feet or was caused by sewage or other contaminated water; it’s time to call in a professional. Although insurance may cover some of the costs depending on your policy, the cost of mold remediation is about $3,000 per wall and that doesn’t include the cost of replacing any mold-infected materials such as drywall, carpet or ceiling tiles.
3) Water Damage: If your investment property isn’t water tight, this isn’t something you can ignore. Beyond the possibility of mold, long-term water damage can cause rot, which can lead to all kinds of expensive repairs to the structure of your property. It’s difficult to estimate the cost of this type of repair, but it can easily run into the thousands depending on how much wood needs to be replaced and how intrusive the repairs are.
4) Sewer Line Problems: The portion of the sewer line that extends out from a home and onto city property is often the homeowners’ responsibility when it comes to repairs. Sewer line problems are most common in older neighborhoods, where the line may have sagged or has been damaged by tree roots. If your property has slow running or gurgling drains, frequent backups in your plumbing system or sewage smells outside, these may be indications of a problem. Again, your insurance policy may cover this cost, expect this doozy to cost anywhere from $5,000 to $15,000 for a 100-foot sewer pipe.
So how do landlords prepare and minimize the damage done by these “bullying” home repairs and even smaller monthly maintenance and repairs? While there are no hard and fast rules on monthly maintenance costs for rental properties, Fannie Mae suggests a property owner allocate 2 percent of the property value annually. That means if a property is worth $150,000, the landlord should save a minimum of $3,000 for maintenance costs. Landlords should include anything that keeps the property in livable condition for occupants as a maintenance cost.
Allocating monthly maintenance costs includes first reviewing monthly expenses outside of the landlord’s mortgage, taxes, insurance, external property management fees and utilities. Routine maintenance includes monthly costs to maintain the exterior curb appeal and interior common areas of the property, if it applies. The property owner should include landscaping, exterior and interior cleaning, garbage and recycling collection to his monthly maintenance costs as well.
Landlords should plan to include additional costs that arise periodically to the monthly maintenance budget. This includes repairs to the building’s heating, cooling and electrical systems, plumbing, and roofing. Landlords should include minor carpentry, window repairs, occasional painting and cleaning costs as tenants move in and out. Any supplies purchased on a regular basis should also be included like air filters, hardware fixtures or light bulbs.
Monthly maintenance is one of the anticipated costs of ownership for landlords and property managers. A rental property owner also should plan to set aside cash for emergency repairs, rental vacancies, and capital replacements of the roof and heating and cooling unit depending on the property’s age. Depending on vacancies, they may set aside money for infrequent costs such as advertising and tenant screenings. Be prepared for these unexpected costs and don’t get stuck losing your lunch money to these unwanted home repair bullies!