Asset Management

Managing an SFR Asset

• by Vincent Deorio
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Save Money Through a Preventative Approach By Vincent Deorio As so many know, the end goal of asset management is to maximize net operating income (NOI). There are three primary ways to achieve a high NOI — increase revenue, decrease vacancy, or decrease expenses. During the period of resident occupancy, above all else, increasing resident satisfaction through effective property management is the most valuable approach. This means not only being responsive to property maintenance requests, but also to any other resident inquiries. This focus on resident retention will always be a preeminent factor for asset management in a wide variety of housing typologies. According to John Burns, the average single-family rental (SFR) REIT has an annual turnover rate of 23%. This means the average resident stays for just under five years. This is a good indication of the “stickiness” of typical SFR residents. In 2018, the average turnover was 33% which is a three-year average tenancy. As residents stay longer, it is important to deliver a home with durable systems and sustainable materials and landscape design choices. And it is also important to perform ongoing asset management efforts even while existing residents are in place. One of the most important best-practices seen in the single-family rental market is that of the midyear checkup. These recurring six-month inspections allow property owners to have an improved peace of mind and allow property managers to stay ahead of maintenance challenges. Conducting a pre-inspection prior to move out is also a key step to reducing turn times. The Five Key Building Systems For Long-Term Success There are five major components that drive the success of any single-family rental: The roof, plumbing, electrical, structural, and HVAC systems. Within each category there are items which require preventative maintenance in order to best manage the asset. For example, gutters need to be cleaned regularly, especially in the Fall and Winter seasons. If not, water can back up and impact both the roof and structural systems. An HVAC system with R-22 refrigerant should be monitored carefully. R-22 is no longer produced, which will lead to high repair bills. As a result, it is wise to replace the entire system rather than spend $1,000+ on a temporary repair.  Water intrusion is the single biggest risk which can quickly deteriorate a home. Water can enter via plumbing challenges, structural problems, and certainly via faulty roofing systems. One such example is that of negative grading near a home, which can cause leaking into the basement. If not addressed, water intrusion could cause major damage to the foundation of the home along with ruining the interior finishes. Damage from this scenario could easily reach the tens of thousands of dollars. The Atlas Real Estate team found this recently at a brand-new rental home where the soil was not properly compacted at landscaping, causing a miniature sinkhole. The foundational implications could have been catastrophic to the asset if not found through proactive inspection. Preparing For Resident Turnover Ultimately, managing turn times is critical to decreasing overall vacancy. In order to achieve this, asset managers should inspect the property prior to resident move out to generate a preliminary scope of work. This inspection should be conducted very shortly after notification of lease termination and should be conducted by a team of hands on, qualified systems experts. Any pre-moveout inspection should begin with an assessment of the five major systems listed above to evaluate their expected remaining useful life. If any component has less than five years left of useful life, it is a candidate to be replaced, due to the resident “stickiness” mentioned previously. The useful life of systems depends on market, maintenance, and material cost and availability, so this step will take a qualified professional to assess. After the systems are evaluated, managers should then review paint, flooring, appliances, countertops, and fixtures, with an eye toward lining up crews during and after the resident moves out. A primary goal during any resident turnover is to replace high-wear items, such as carpet, with longer lasting hard surface flooring such as vinyl plank. While this generally costs more up front, these materials are proven to bring higher rent rates and last significantly longer. Carpet has an expected useful life of seven years and is often viable for less time in high traffic zones. Vinyl plank flooring can last for at least 20 years for only a nominal upfront cost increase compared to carpet. Replacing laminate or tile countertops with quartz also generates a high return on investment. Further, quartz will last through many turns, whereas laminate often needs replacement every one or two turns. The historical industry rule of thumb for SFR unit turnovers is one day per $1,000 of cost. At Atlas Real Estate, our team has been able to deliver turnovers below that cost, at an average of $4,500 and five-days per turnover. In today’s market, flush with labor and material shortages, very few operators are achieving the historical standard, so this achievement is particularly noteworthy. The Atlas team attributes much of this performance success to the smart decision making and proactive measures made before and during resident occupancy. A preventative approach, instead of a reactive asset management approach, will save money and decrease headaches for both the manager and the resident in the long run; and, of course, the property owner most of all.