We’ve all seen well maintained apartment communities and we’ve also seen the eyesores. Owners of both want to make money on their investment property. Generally speaking, the owner of the eyesore looks to increase monthly cash flows by reducing expenses related to lawn and landscaping, exterior paint, concrete repairs, garage doors, litter control, etc. A strategy like this can work for brief periods but is not sustainable. Eventually the paint has peeled, the concrete has crumbled and the nicely landscaped yard is now overgrown shrubs and weeds.  This owner has lost sight that cash flow is the difference between expenses and income (Cash Flow = Income – Expense).

Cost control is important, but not at the expense of lost income. In any competitive market (really any market), it doesn’t take much to lose a prospective tenant. Everything else being similar, does a prospect rent an apartment with colorful flowers and fresh mulch, or the one with loose handrails and cigarette butts on the entry stoop? A 5% decrease in income is far more expensive than what reducing costs 10% saves.
 
Taking it a step further, which owner is in better position to increase rents as soon as market conditions allow?   Wouldn’t it be great to attract the best clientele for your property, eliminate leasing concessions because the product stands on its own and maintain a better than market tenant retention rate? This happens when it’s evident the property is well maintained and cared for. There is strength, comfort and security in the tenant’s mind when they see painters freshening up the trim and janitorial crews cleaning halls. Collectively, these are income drivers.
 
In contrast, the owner declining the fine finishing touches and defers maintenance will attract tenants that aren’t concerned with the care of the property and are more likely to bend the rules, not pick up litter and further detract the best prospective tenants. Simply stated this is how most death spirals begin; deferring maintenance and drastically reducing expenses.
 
After reducing overall expenses, with less income due to higher vacancy and lower relative rental rates, an analysis of expense-to-income ratios continue to look bad. Commonly, the mentality suggests expenses are too high again. Remembering the exterior concerns remain unaddressed, ownership often begins to put off tenant maintenance requests.   What’s the best way to ensure the worst tenant population? Don’t address tenant concerns. Over time, the only tenants renting are the least likely to pay and the most likely to increase costs. Movement within the death spiral is now in warp speed.
 
Class A properties can decline quickly, older properties even faster. The example does not consider the most important component of the investment; the value of the property at the time of a sale. This is the single largest cash flow the property will produce and it has been slashed. Buyers discount value (correctly so) due to deferred maintenance, high vacancy rates and low rental rates. The cost to cure deferred maintenance is greater than the cumulative expense to make the repairs when originally identified and needed. Maintenance expenses are real and will eventually be paid. The question is: How much extra do you want to pay and how much income do you want to lose in the process?
 
Byron Reed managed properties are managed with a plan that includes necessary and reasonable attention to maintenance.