02
March
2017

Your Rental Investment Glossary: Maintenance Rates

If you’re just getting into the world real estate investing, you’ve found out quickly just how much there is to learn. This can be great for those who like dive in and be challenged – and have a lot of time on their hands – but most people with full time jobs don’t have the time or energy to sift through the virtually endless amount of information available. Even if you’ve decided on turnkey as your investment vehicle, there’s still a ton of lingo, endless mathematical concepts, and more opinions on the ‘right’ way to do things than you can shake a stick at. At Spartan, we understand that self-education is both the most exciting and most challenging part of the process. To help you along the way, we’ll be posting articles on common turnkey concepts, metrics, and calculations to help you get comfortable with this brave new world.

Maintenance Rates Illustrated

One of the most important concepts to understand when you get into rental investments is the maintenance rate. The maintenance rate for a given property is simply the percentage of the property’s potential annual rental income that must be devoted, on average, to repairs and updates. Here’s a quick example to illustrate:

Suppose a property rents for $950 per month, which is the average rate for a Spartan property. Over the course of a year, therefore, the property should gross $11,400 in rental income. Now, let’s say you own the property for five years and during that time you have to do repairs of various types, as follows:

  • Year One: Standard upkeep – $200
  • Year Two: Standard upkeep – $200
  • Year Three: Burst pipe plus standard upkeep – $800
  • Year Four: Standard upkeep – $200
  • Year Five: New HVAC system, standard upkeep, and roof leak – $5,000

In total, for those five years, you spend $6,400 on repairs and upkeep. For that same period, the cumulative amount of rental income you earn is $11,400 * 5, or $57,000. To determine your average maintenance rate, simply divide the total expenditure by the total rental income:
$6,400 / $57,000 = 0.112, or 11.2%.

Now this is a hefty figure, but bear in mind that the longer you hold a property and fewer high-cost years you have, the lower your rate will be. If you held this property for an additional five years and incurred only normal upkeep costs (you already replaced the HVAC, after all), you average maintenance rate would be reduced to ($6,4000 + (5 * $200)) / $114,000, or 6.49%. The turnkey industry average is about 6-8%, so this would be considered by some to be an acceptable cost for the investment.

Don’t Be Satisfied With Average

Take a look at that calculation again. See that there are two ways to keep your rate low? By holding your investment and by keeping repairs to a minimum. Some providers try to keep costs low year-over-year by deferring maintenance, but this invariably leads to much bigger problems down the road. Don’t want to shell out the cash to fix a leak? Get ready to wrangle with some serious mold in a few years.

Rather than risk the long term value of our properties or the satisfaction of our clients, Spartan keeps maintenance costs low by making sure everything is top-of-the-line from day one. We execute high quality renovations that include brand new tin roofs, new vinyl flooring that looks just like wood and has a 15-year life, new HVAC systems, and granite countertops.

When we buy a property, we do an inside-out assessment of what needs fixing and how we can ensure that it doesn’t become a problem down the road. We also look at things that could become issue later if updates are deferred, and we go ahead and take care of those things, too. This may mean that we put $30-40,000 into a property long before it’s sold, but the result is that our maintenance rate is sitting pretty down at 2.6%. And that’s no estimate, it’s a figure we track and calculate obsessively to ensure our investors aren’t giving away gross income because of things that should have been dealt with before they even set eyes on the property. When you compare that to the industry standard of 6-8%, the choice is clear. If your property generates $11,400 in rental income each year, why give away $684 – $912 when you could spend less than $300 and lose less sleep over when the next big repair will be needed?

Keep Costs Low With Spartan

Love it or hate it, there is always a lot of math when it comes to investing in real estate. Luckily, you can trust Spartan to show you exactly how each number is calculated and how these figures work together to determine your return on investment. The upside of all this math, of course, is that it doesn’t lie. Once you know exactly what each figure represents and how to calculate them yourself, you’ll never be fooled by inflated numbers or overly ambitious pitches again.

To learn more, keep checking our blog for mores lessons on important turnkey metrics and concepts, as well as other informative posts on the rental investment industry, the Birmingham area, and how to make sure your money is working for you.

As always, if you have any questions about what you read here, about the Birmingham market, or about what Spartan Invest can do for you, just shoot us an email at our contact page and we’ll get back with you as soon as possible.

Categories: Blog

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1110 23rd Street South
Birmingham, AL 35205
www.spartaninvest.com
info@spartaninvest.com