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Good property managers often encourage landlords to practice preventive maintenance, but is it really worth its weight in gold?
In a recent masterclass hosted by Smart Property Investment’s sister brand REB, Your Empire’s founder Chris Gray said that while it certainly entails additional costs, preventative maintenance is all about maximising money.
He explained that if we look at the vacant properties in the market today, most are one or a mixture of the following: “the wrong property, property not in the right condition, property with too much rent, or property with the wrong property manager.”
“All of that stuff can be managed. If you’ve got the right property and it’s well maintained, it’s got light, it’s been renovated, and you’ve got the right property manager, there should be zero vacancy,” he said.
“All of these things can be fixed. It’s the bad properties that are unrenovated, with the poor or the cheapest property manager, that have the problems.”
For Mr Gray, most of his property purchases come with a renovation and almost immediately.
His strategy is “do it once, and do it properly”.
“Rather than do a cosmetic one, a lot of the time, we’ll do it back to bare walls. Do it once, do it properly. Then, between the tenancies, you just need to steam-clean the carpets, get it repainted, and then it’s almost like brand new again,” he highlighted.
While most landlords opt to do away with preventive maintenance due to the associated costs, Mr Gray explained that good property managers will convince them of its importance.
LJ Hooker’s head of property management Marc Crisafulli said that they make it a point to discuss opportunities to renovate during routine inspections and in between tenancies.
“During a routine inspection, we’ll note things that need to get done, preventative works as well. And then, whenever tenants do vacate, we do a pre-vacate inspection. That gives us a real heads up on what the property’s looking like at that point and what we need to do,” according to Mr Crisafulli.
“We’ll communicate that back to the landlord and we’ll have a plan in place that, if work needs to be done, this is what the scope of works is, so that as soon as it’s available, we’ll get in there, reduce the days vacant, and re-advertise that property looking like a million dollars again, all while maintaining a very small average days on market.”
For those still hesitant to spend for preventive maintenance, Mr Crisafulli spelled out the benefits using numbers.
He reiterated the possible damage of an extended vacancy to the property’s earning potential, and then did a comparative analysis of other properties in the same market to find out why they remain tenanted despite a market downturn or why they garner higher rents.
“Look at the average days on market and what that property is going to be rented for currently. What does it look like compared to other properties in that one market? In our area, it’s closer to 38 days vacant and rents have dropped. We’re seeing rents 10 years ago that we were getting for two-bedroom units at the moment in our area,” Mr Crisafulli said.
“So, if the property’s not well-maintained, the owner’s going to use all that 30 days or 40 days worth of lost income. That could have gone to do some renovation within one or two weeks, have the property back on the market and be receiving income.
“You’ve got to spell it out. The numbers will tell you what you need to do. That’s what it comes down to. You’ve got to go through that education process with the landlord and actually show them what needs to be done.”
And according to Mr Gray, this education has to go on consistently for years in order for it to become fully integrated into the mindset of the landlord.
Landlords who fully understand the benefits of preventative maintenance through years of education often don’t hesitate to spend $30,000 to $40,000 or up to $100,000 to $1,000,000 on renovation, he said.
While COVID-19 has definitely affected the market, Mr Gray said that, contrary to popular belief, it’s not always the best option to sell and get out of the market.
Even though rents are down, he encouraged investors to focus on the relationship between rent and mortgage instead.
“It’s actually about the difference between the rent and the mortgage. So, 20 years ago, $500,000 property was $500 a week. So, that’s 5 per cent yield, but we were paying 7, 8, or 9 per cent mortgages. So, we’re basically losing 3 or 4 per cent on gross rent,” he explained.
“Whereas now, we’re getting 3 or 3.5 per cent rent, but our mortgages are 2 or 3 per rcent, which means they’re actually positive 1 per cent. So, who cares if rent’s down? We’re actually more positive cashflow now than we’ve ever been.”
Further, the anticipation next year is that the market will achieve up to 10 per cent growth.
“So, if you’ve got a million dollar property, that’s $50,000 or $100,000. So, who cares if you drop $5,000 or $10,000 in rent? You’re gaining $50,000 or $100,000. That’s what property investing’s about. It’s not about the cash flow. It’s about getting that $50,000 or $100,000 growth from your property,” Mr Gray concluded.