An apartment building has expenses that must be paid no matter what.
- Mortgage payments (although the principle portion is not an expense it must be paid each month)
- Property taxes
- Immediate maintenance requirements
The critical part of the equation is what is done with the amount that is left over.
The "excess" cash flow if you will. Many owners will put this right in their own pocket. Their apartment building becomes their own little piggy bank. They take the left over cash and spend it on themselves. This "philosophy" of rental property management leads to potential dire circumstances.
Buildings wear out. Rental apartments can wear out fast. If the property owner does not put aside money on a monthly basis for future capital expenditures, and refuses to do the necessary ongoing repairs and upkeep of the property, a downward spiral begins.
At first it's difficult to notice. The owner is happy because his apartment building is throwing off lots of cash each month. Cash which she/he is spending on personal expenses. The small, non-urgent maintenance jobs get put off until later. The common areas in the building start to get tired looking. The laundry room looks unkept and dirty. Tenants start taking their laundry to the laundromat down the street (further reducing revenue). Pretty soon the building needs a fresh coat of paint, but again the owner holds off. They justify it by convincing themselves that a new coat of paint isn't going to make them any more money next month. The landscaping starts to look shabby. The overall rental property management goes south.
And some point along the way the tenants change.
Some physically change as in they move out because the building isn't being kept up. When the owner tries to re-rent the suites she notices that she can't charge as much for rent due to the condition of the building and the condition of the suites. It becomes difficult if not impossible to attract quality tenants.
The tenants that do remain have the impression that the owner of the building doesn't care. They start adapting the same attitude and their respect for the building becomes non-existent. They tell themselves "If the owner doesn't respect her own apartment building why should I".
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