Property Management Blog
As a real estate investor in Austin, are you prepared to meet any large operating costs to properly maintain your investment for the long-term? Today’s blog post will examine the area of capital reserves for investment properties and how to proactively fund them.
First, some basics: Capital reserves are used for capital expenditures. Capital expenditures or capital expenses are defined as funds spent to upgrade or materially improve a property. Typically, these are one-time major purchases. Capital expenditures are much different from routine operating expenses or routine maintenance and repairs. For tax purposes, a capital expenditure must be depreciated over the useful life of the asset (talk to your CPA for specifics). A routine operating expense will be entirely deducted in the tax year it is incurred.
Replacing an entire heating and air conditioning system or replacing a roof are examples of a capital expenditure. A plumbing service call, a minor AC call or touch up painting after a tenant moves out is examples of operating expenses. A single family real estate investor doesn’t need a complicated budget to figure out how much money to set aside for capital expenditures.
The best way to determine how much to hold in reserve for your property is to take a look at the remaining useful life of the “big ticket” items in your property. Here is a partial list (from the National Association of Home Builders) and an estimate of useful life:
Asphalt shingle “3-tab” roof: 15-20 years
Asphalt shingle “Architectural” roof: 20-25 years
Windows: 30 years
AC condensing unit: 15-20 years
Heating furnace: 20 years
Wood siding: 20 years
Countertops: 20 years
Decks: 10 – 15 years (depending on upkeep)
Vinyl siding: 25 years
Carpet: 5 – 8 years (depending on grade)
Exterior paint: 5-10 years
If you have a property that has a lot of big ticket items that are nearing the end of their useful lives, you need to set aside more than if you have a new construction property.
While there is debate about “how much” one should have in reserves, I find that on average, an investor should expect to budget 8-10% of gross annual rent toward capital expenditures. So, if you have a property that rents for $1000 a month, you should budget $960-$1200 a year for capital expenditures.
However, capital expenditures don’t typically happen every year, and when they do happen it’s typically a lot more than $1000. For example, the cost to replace an HVAC system (compressor and furnace) might range from $4,000 – $8,000 in a typical single family property. A new roof can cost $8,000 - $15,000 or more
By evaluating the age of the capital assets of your investment property, you should be able to arrive at a number you feel comfortable with to put aside for capital expenditures. The important idea here is to have an idea of what systems might need replacing soon and to be prepared to pay for the replacements when needed.
You don’t want to have $0 in capital reserves when the 20-year old HVAC system dies in the middle of the hot Texas summer, nor would you want to only have $1,500 on hand when your 25-year old roof finally gives is beyond cost affective repairs .
We are perplexed when owners seem caught off guard by these types of expenditures. Think of the age of your investment, if it's in the age range of the end-of-life of some of these items you should be planning for this expense. We tell owners “it's not a matter of if but when” these items are going to fail beyond repair. Additionally, if you replace these items proactively instead of reactively, you will save money. For example, water heaters don't break down Monday morning at 8:00am, they break down on Friday of the 4th of July weekend and the tenant has a house full of company. Or they start leaking on the long weekend that the tenants are out of town and the tenants discover their house has water on the floors on a Sunday evening. Remember, happy tenants are more likely to renew their lease.
Keep your asset in tip-top condition for the long-term by maintaining proper capital reserves to make needed and necessary repairs and upgrades. Your tenant will thank you, your property manager will thank you and you’ll be thankful you did when it comes time to sell!
Property management Austin Texas
The Texas Association of Realtors® has approved our Property Manager, Diana Cuero, to receive their newest designation, the Texas Residential Leasing Specialist or TRLS®. This Texas-specific state-wide certification shows her commitment and dedication to the specialty of leasing and residential property management. The required course work aided her in gaining further knowledge and training on current business issues impacting leasing, how to properly handle a lease transaction, and the in's and out's of the Texas Association of Realtors® residential Lease Agreement. She is part of a group of the first agents in the state to receive this industry specific designation. Owners and tenants want the services of a real estate professional who understands their needs and can guide them through the process. This commitment to education means higher quality services to our clients, their investments and their residents.
Investor insurance is inherently more complex and much less standardized than your average homeowner’s insurance products that you are most familiar with. That’s why it is crucial that property owners understand what they need to purchase to mitigate coverage holes, otherwise they risk losing hundreds or thousands of dollars. Below is a suggested list describing essential coverage options that should be include on every investment policy. Many of these coverage enhancements are not available with a typical home and auto insurance company. That’s why it is imperative that owners discuss this with a licensed Texas insurance professional that understands the unique needs as a Texas real estate investor. If they say “you don’t really need that” then call us and we can get you connected with an agent that knows the industry and your need for risk protection.
- 100% Replacement Cost
Minimum coverage of $80-$95 per square foot in Texas is suggested in order to ensure your same property is rebuilt completely in the event of total loss. Do you have replacement cost or actual cash value? There is a huge difference if you have a claim.
- Landlord Liability Protection
Did you know that many basic policies only over up to $100,000 of liability per property? This may barely be enough to pay legal fees, much less to indemnify for actual damages. Coverage of at least $300,000-$500,000 is required. You’ll be surprised how little additional liability coverage actually costs
- Accidental and Sudden Discharge of Water or Steam
Coverage for hot water heater bursts, pipe breaks, and other common plumbing issues are regularly left off basic policies and are some of the most frequent claims payouts.
- Dwelling vs. Homeowner’s Policy
If you have a homeowner’s policy on your investment property, you will need to switch to a dwelling policy immediately. Your current policy has a provision in it that excludes coverage if you do not occupy the home.
- Lower Deductibles
Unlike most companies who require a deductible of 1% of the value of the dwelling, investment type policies will have a flat $1000 (on in that range) for all perils.
- Vacancy Clause
Most dwelling policies exclude coverage for any property left vacant for 30 - 60 days. If your home is vacant, you need to be temporarily switched to a vacant home policy in order to be eligible for a claims payout. Investor policies can have up to 180 days of coverage.
- Optional coverage, Loss of Rents
If your property is significantly damaged due to a covered claim, your tenant will move out and more than likely not pay rent. With this endorsement, the insurance policy pays you rent for a certain period of time while the home is being repaired / rebuilt. How long will the rebuild be if it’s a fire? Investor policies will sometime be up to 24 months.
- Ordinance Law
Ordinance law is coverage for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Older structures that are damaged may need upgraded electrical; heating, ventilating, and air-conditioning (HVAC); and plumbing units based on city codes.
The landlord’s insurance agent should periodically provide a policy check-up review. You could provide a value added service to encourage this. Here are some essential coverages to meet the minimum threshold for an adequate landlord insurance policy:
• Personal injury that covers wrongful eviction and invasion of privacy ($1M limit suggested)
• Get enough coverage to rebuild your whole property, not just a part of it! Check out the “Coverage A” limit and be sure it’s a reasonable estimate for total reconstructing cost.
• Extended Replacement Cost – covers reconstruction cost overruns – get a minimum of 125%
• Building Ordinance and Law – adequate limit to covers the additional cost of rebuilding old properties to be compliant with modern building code • No exclusion for marijuana grow houses
• No Exclusion of the landlord’s vicarious liability from tenant’s pets (known or unknown to the landlord)
A good robust policy should also have these coverages, though they may still be more difficult to find in the insurance marketplace:
• Sewer back up
• Extended Fair Rental Value
• Property Manager listed as “additional insured”
• Service Line and Equipment Breakdown
If you have not already done so, this is the time to do a small audit in your rental home to make sure your space has been “winterized”. A surprising amount of wasted energy and costs can be reduced by simply following some basic tips.
These tips will show you how to be more energy efficient and save energy, money, and will go a long way to improving the environment and making it more comfortable.
1. Open your blinds during the day, close them at night
If your windows are facing the sun, let the sunshine in and turn on nature’s heater! Likewise, close blinds at night to add an extra layer to keep the cold out.
2. Keep doors closed.
If you have a large closet or any other rooms that aren’t heated (and don’t need to be), keep the doors closed to minimize the space requiring heating.
3. Make sure your heat sources aren’t blocked.
This may seem obvious, but make sure your furniture is not blocking any vents or radiators! This can have a big impact on how efficiently your home or apartment is heated.
4. Use the ceiling fan (if you have them).
If you think ceiling fans are just for cooling, think again. If you run fans in reverse, they’ll push warm air downward, to where you can enjoy it.
5. Turn thermostats up when you’re at work
This may seem obvious but we can’t tell you how many times our maintenance tech has told us of homes that are “toasty warm” when he goes to perform a maintenance request and everyone is at work.
Second home owners can now enjoy total peace of mind, knowing that their property is safe and secure while benefitting from our affordable and reliable services.
Have you wondered what the best way is to care for your other home while you’re living elsewhere? Despite power outages, extreme weather, and the normal effects of time, we can eliminate your fears about the ongoing upkeep and management of your valuable assets....... while you're away.
Whether you call it your vacation home, second home, or "let's hang out in Austin" home, the last thing you want is worries about “what’s happening at my property?” "Is there a leaking water line?" "Is the yard being properly maintained?" "Are newspapers and flyers piled up on the porch?" "Is the heating and air conditioning operating properly?" and on.
Noticing a home disaster is easy . . . preventing one is extremely difficult, even for the experts. With Rollingwood Management on your team, an experienced property manager is looking after the home in a methodical and professional way to help ensure that disasters are avoided and your investment is well protected.
Periodic surveys that are emailed to you help mitigate the set of risks that are unique to this part of the country . . . like high winds, curious raccoons, high summer temperatures and humidity, torrential rain storms and potential vandalism. With Rollingwood Management’s complete "Second Home Management program”, owning and enjoying a second home has never been easier . . . so our clients tell us.
For a breakdown of the different areas of your home that we will be surveying, visit our second home management services page.
If you are an investment property owner and want to help lower your risk at your property, purchase the right kind of rental property insurance policy. Start by calling and discussing your property insurance coverage with your agent. This would be especially true if you don't have a policy that was written specifically for rental property. This should be done at least annually.
Occasionally, we find insurance insurance agents that don't have experience with rental property coverage writing a policy with inadequate coverage for our owners. This puts the owner and their property at risk should something go wrong. The correct policy and coverage is the most important thing you can buy for your property. Here are a few examples of items you should ask your agent about. Does your policy have:
• Coverage for vandalism?
• Coverage for water damage?
• Coverage for Ordinance Law (see last month's article)?
• Coverage if the property is vacant for more than 30 days? Most policies DO NOT provide coverage if a home is vacant for more than 30 days!
• Coverage for Loss of Rent. If there was a fire, repairs could take many months. Would your policy pay you rent while being rebuilt?
• Coverage amounts that would rebuild the property if there was a fire? The cost of construction has gone up, are you covered?
• Enough General liability coverage if there was an accident at the property?
Nobody likes to pay insurance premiums, but proper insurance is a critical part of properly managing your property. After 30 years in the property management business, we've seen owners who were glad they had proper types of coverage and coverage amounts, as well as owners who wished they'd purchased the proper coverage. A wise use of your investing time includes a review of your coverage with an experienced agent who knows investment property.
The Texas Association of Realtors® has approved our Leasing Coordinator, Chris Francis, to receive their newest designation, the Texas Residential Leasing Specialist or TRLS®. This Texas-specific state-wide certification shows his commitment and dedication to the specialty of leasing and residential property management. The required course work aided him in gaining further knowledge and training on current business issues impacting leasing, how to properly handle a lease transaction, and the in's and out's of the Texas Association of Realtors® residential Lease Agreement. He is part of a group of the first agents in the state to receive this industry specific designation. Owners and tenants want the services of a real estate professional who understands their needs and can guide them through the process. This commitment to education means higher quality services to our clients, their investments and their residents.
Rental Property Video Tours. Several months ago we discussed the recent addition of a Leasing Coordinator to our team. One of the Leasing Coordinator’s responsibilities is producing a digital video tour of a property once it is vacant. Video tours have quickly become the preferred viewing method of choice for potential renters. The best part of this new service is that we are providing this service to our clients at “no cost”.
Why video tours? While still photos provide an idea of the home, they cannot capture the property’s appeal. The best part about a video is that it gives a potential renter a more accurate view of the inside of the property, especially when it comes to layout of the home. It allows people to see the depth of rooms, the width of hallways and other spaces, and also gives us a chance to narrate and highlight some of the properties great characteristics. Pictures definitely can’t do all that!
More efficient showings. With Austin’s continued growth and traffic, traveling across town has become more and more time intensive. As discussed above, by providing potential tenants an avenue to get a real feel for the home and its layout, it saves them (and us) an unnecessary trip to a property. It is not uncommon for tenants to want to see a listing, only to not like the floor plan once they get there.
Appeal to more people in the market. With a number of people moving to the Austin area, the video tour allows them to lease a property “sight unseen” and be more comfortable with their choice. It is much more desirable for new arrivals to have “buy in” on a property they have leased than to have them move in and be unhappy for 12 months because the property isn't what they thought it was going to be. Some property management companies won't lease a property sight unseen. We see an opportunity!
Our new video tour service is giving our properties more exposure to the leasing market than ever before. More exposure means shorter vacancy time and that helps our client's bottom line!
Designation from the Texas Association of Realtors. The Texas Association of Realtors® has approved our property manager Peggy Smith to receive their newest designation, the Texas Residential Property Manager or TRPM®. This Texas-specific state-wide certification shows her commitment and dedication to the specialty of residential property management. The required course work aided them in gaining further knowledge and training on current business issues impacting property management, how to mediate tenant and owner relations, and the in's and out's of the Texas Association of Realtors® Property Management Agreement. She is part of a group of the first 100 agents in the state to receive this industry specific designation.
Designation from the Texas Association of Realtors. The Texas Association of Realtors® has approved our property manager Peggy Smith and Michael Francis to receive their newest designation, the Texas Residential Leasing Specialist or TRLS®. This Texas-specific state-wide certification shows their commitment and dedication to the specialty of residential property management. The required course work aided them in gaining further knowledge and training on current business issues impacting property management, how to mediate tenant and owner relations, and the in's and out's of the Texas Association of Realtors® Property Management Agreement. They are part of a group of the first 100 agents in the state to receive this industry specific designation.
Rollingwood Management Inc, was awarded the prestigious CRMC (Certified Residential Management Company®) designation from the National Association Residential Property Managers (NARPM®) at it's national convention. This prestigious designation is held by only forty-six property management companies nationwide and is reflective of the professional commitment made to the residential property management industry by Rollingwood Management. This professional designation is awarded to property management companies that have completed the highest levels of achievement including specific courses as well as service to the NARPM® organization.
- Capital Expenses Need Capital Reserves
- Property Manager Receives Texas Residential Leasing Specialist
- Proper Investment Property Insurance is Crucial
- Five Tips for Tenants to Winterize
- Michael Francis