Virtually NO Maintenance Reserves Needed for Property Analysis!

[Kyle H.]

Hello everyone - I am starting this topic because I am curious to know 2 things:

1)  Is there anyone out there doing this with success?

2)  What your thoughts are around this subject, in general.

My uncle owns (outright) 24, 4-family townhomes that he has acquired over the last 25 years. He basically owns an entire street, and he was able to payoff the mortgages faster because he puts $0...THAT'S RIGHT...ZERO DOLLARS...into a general maintenance account. Most people put, on average, 10% per month into a maintenance account, but he never has. He has always taken the extra 10% and has applied it toward the principal of his loan balances. Now he owns $2.5mm in real estate, cash flowing $108,000 per year. Keep in mind - this is not to be confused with a CAPEX account. He does save money for large items such as a roof, building structure, etc. However, most investors do both. But, WHY was he able to achieve this success?

I sat down with my uncle to learn about his success, and here is his secret. He met with a real estate attorney and developed a lease that forces the renter to take care of the general maintenance of the property. For example, if a light bulb needs replaced, the lawn needs cut, snow needs to be removed, someone breaks a window, etc., then the tenant is responsible for the caring of the property. This allows him to be virtually hands-off from his properties, and he doesn't need to pay a property management company on a monthly basis. If a tenant moves out, he will bring in his contractor to fix up the place, but he doesn't have to give away 10% of his rents to a maintenance account or property management company. However, just to reiterate, he does put money away for CAPEX. He is responsible for the bigger ticket items like plumbing, electrical, roof, etc. By writing this stipulation into his lease, he has been able to pay way more money on his principal every month, hence why he was able to payoff $2.5mm in just 25 years.

I asked him to show me a copy of his lease, and I ended up writing this into mine as well.  What this does is give the tenant "some skin in the game".  They are actually invested in the property, not just living there.  Of course, this isn't fool proof, but he hasn't had any issues in the last 20 years.  I have owned 2 properties since May, and I haven't had to visit either of them yet.  It is written in the contract that if any of these conditions is not met, then the owner keeps the security deposit in full.

Has anyone else out there head of this?  I haven't seen it in any forums, but my uncle and I have been able to get away with dumping another 10% of capital on the mortgage every month.