These are things that you need to prepare for, when you're making the transition to ownership. Now this is something that you know, Preventive Maintenance Plan. It comes up when you're buying, taking over the property. You want to be diligent and you want to do everything right. You want to make sure you're showing your investors that you're managing the property correctly.
So you set up a preventive maintenance plan along with your property manager and the maintenance man. In that way, they know that in every single month or every quarter or every six months, they have to go and change filters or that type of stuff.
Kate Dobens will be our freeloader for today. She’ll talk about how we handle preventive maintenance plans. She said,
“Preventive maintenance is probably one of the best lessons I learned when I was with a client consulting client for years. John has about 400 and so units in Chicago and buys in the south side of Chicago. He buys in the worst kind of the toughest neighborhoods. These were older buildings, typically brick with wrought iron and beautiful foyers and things like that. And he would price it into his purchase, essentially, bringing all of the units, cleaning them all up the day he took them over so there was enough cash in the deal.
And there was an economic incentive plan that he understood very well for the city of Chicago that helped him invest in this. I suppose it would be the equivalent of like opportunities on housing now, but he would go in and fix the roof, fix the plumbing, fix the electric, make sure that all of the vital systems work so you'd have no big surprises. And I talked a lot about this years ago too when Doug and I work together. I was a commercial lender for a long time and did a lot of commercial real estate transactions. And the smart thing to do, is to either do the work and then set up a reserve account or through your lender, or even preferably one that you have custody of.
In the event that you need a $50,000 roof repair in one of your buildings, you can just write a check for it. You don't have to wait and figure out and try to hope that the building's not going to get damaged in the meantime.
So understanding that preventive maintenance is part of the day to day business, and preparing for it is the most important thing. Because it's going to happen - things wear out. The older the buildings are, the faster they wear out and the bigger dollar items are needed to repair.”
So how do you do it?
“To be more specific, it is really making sure that you're doing your capital reserves and allocating cost to rehab unit. Like, how much cash should you have set aside so you don't impair your business?
That is the truth in multifamily management. Charlie and I have made every mistake we possibly could have and one of them is not setting aside enough cash. We would wait for cash which would then unable us to turn units as quickly and re-rent them. So, it eventually would have an overall effect on your NOI (Net Operating Income) because of dragging the turn process.”
And the worst thing is, when the property is struggling for cash, and you're calling on the property manager saying hey, why can't we get this unit rented? And just because we can't, we don't have the suppliers to do this, because we're not ready. That's a death now on a property.
She added, “Charlie has said this repeatedly, and this is from our experience. You have to buy the property right, have good engineering up front, good side inspection, be honest with yourself about the capital needs, and structure it right from the outset. I can't emphasize that enough. So it’s not only on the price, but including your capital needs for managing your maintenance.