Managing Repair Costs

In rental property investing, there are up and down years when it comes to repair costs. By down, I mean higher costs than anticipated! 2024 is shaping up to be a down year for our portfolio. This year we planned a project to repair the parking area on one of our buildings which was a fairly significant outlay. What we didn’t anticipate was a new roof for a building in Texas with hail damage and a 33% turnover in tenants across our portfolio. We still got six more months to get through in 2024!

While repair costs cannot be predicted with 100% accuracy from year to year as Murphy’s law remains supreme in the rental business, there are ways to mitigate repair costs in order to ensure a rental portfolio remains profitable.

Monthly repair budget. The rental investor absolutely must budget for repairs and maintenance. To not do so could result in a very short career as an investor! Currently we budget $125 per unit per month or $24000 annually for repairs. Repair budget is just as important as budgeting to pay the mortgage, taxes and insurance. Don’t even think about taking an owner draw until repairs are covered!

Our monthly per unit budget has obviously been a moving target over the years as our units age and the price of goods and services increases. Just a few years ago, seemed like we were getting by with setting aside $10-$15k for repairs! While $24k would be adequate most years, this is a down year, and our annual repair bill will cut into our business strategic reserve which is ok because we have a strategic plan.

Develop a strategic repair plan. Beyond the daily unknowns, there are maintenance and repairs that are quite predictable. HVACs will need to be replaced, houses painted / pressure washed, and parking areas resurfaced. We’ve intentionally planned to execute a lot of our big-ticket items now while we have other sources of income versus five to ten years from now when I will (hopefully) be relying on our rentals as a primary source of income. The parking area we replaced this year could no doubt have waited a few more years…but why not do it now (and bump up the rent on the building).

It’s better to replace now than three years from now when those repair costs are higher and even more impactful to the overall portfolio. Bottom line is to look at repair costs strategically over the long term rather than viewing expenses through the lens of a yearly knife fight. Ideally, if our strategy is correct, our repair costs should stabilize as we look for our rental portfolio to be a primary source of income in the coming years.

Do it yourself or use a trusted vendor. If I’ve said it once I’ve said it a million times, a lack of do-it-yourself skills will cut into a rental portfolio’s bottom line. That being said, as I age and time seems to move faster, I find myself calling the pros for repairs more frequently. Thankfully, we’ve refined our preferred vendor list down to a great team that answers the phone when I call and most importantly works reasonably. Second only to having the funds set aside, knowing what to do and who to call is absolutely critical to managing repair costs.

Stay on top of insurance. This ties into developing a strategic repair plan. For the buildings that are going on 20 years old with an original roof, I ensure our wind and hail deductible is set lower than our buildings with newer roofs. It’s not a matter of if, but when a roof will need to be replaced. In the case of our most recent roof replacement, the roof was original to the building built in 2006. I had my deductible set to 1% so although it was a few thousand out of pocket, we got a new roof and saved a lot over a high deductible or an out-of-pocket total replacement. This week’s pic shows the end result! I review my policies at least every six months to ensure we’ve got the right coverages with the right deductibles and with the right monthly premiums.

Some folks say that rental property investing is just covering maintenance and repair costs for a home on behalf of the tenants and banks; the only real money made in rentals is equity in the property. I certainly understand this school of thought but disagree. If actively managed, to include watching repair costs like a hawk, rental property investing is a great monthly income source. Like most things it just takes good planning and patience.

 Looking for a good how-to on wealth building? Check out my book, Millionaire on a Worker’s Budget: Five Financial Truth’s to Build Wealth on sale now at Amazon!

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