Maintenance of Property – Issues for the Investor in Germany
So you have found an investment to make, done all the hard work, put the finance together and are in a position to work out the cashflow for your investment and move forward to purchase. We often say that there are only 2 risks to consider in making property investments around the world. Risk 1, you can find a tenant and your property will not remain empty for any long periods. Risk 2, the building requires unplanned maintenance and reduces your cash flow. So, let’s look at the second risk and focus on the German market to help give some more guidance on evaluating and controlling this risk.
Ways Maintenance is Planned
Typically, property is owned under 2 structures in Germany – either as a complete apartment house or commercial block or as a single unit within a larger block or development. Let’s take the former case first, and look at how maintenance is planned.
When owning the whole block, it is the responsibility of the owner to maintain the common or communal parts to the property, namely roof, staircase, common heating system if installed. Additionally, the fabric of each unit, unless specified in a commercial contract, is also the responsibility of the owner. Typically units are leased on an unfurnished basis with no kitchen, lighting etc. So the extent of the maintenance within an apartment extends to windows, plumbing and heating, electrical installation and perhaps flooring. It is most common for the tenants to be responsible for the maintenance of the decoration of the property, returning an apartment or commercial space back to its original condition at the end of the lease. Most investors will employ a property manager to care for their investment, and plan together with the owner a schedule of works to ensure the safe and efficient running of the property. Typically, the manager and owner will agree a schedule of tasks at the beginning of the investment, and make regular review against the plan and discuss maintenance tasks as they arise. Routine maintenance is common parts are planned by the manager, ensuring the servicing of elements such as the heating system and lift is carried out on an annual basis. These routine tasks are funded from the ancillary costs paid by the tenant, so not out of the investor’s cashflow. More non-routine works will be identified and a plan drawn up.
When owning a single unit or apartment within a block, the maintenance tasks needed to the building are identical, it is such how they are managed and executed that a difference occurs. Due to the multiple-ownership arrangement, owners [either investors or owner- occupiers] need to be brought together under a so-called “condominium arrangement”, whereby the maintenance of the common parts of the building are planned and usually budgeted for in a yearly plan. To ensure that monies are in place to carry out non-routine tasks, it is typical for a maintenance or “sinking fund” to be set up, where all owners contribute a monthly sum depending on the size of their property and works paid in this way.
Typical Maintenance tasks
So, we have mentioned the typical routine maintenance tasks, servicing of the heating and lift systems. In addition, routine small maintenance tasks such as fixing door handles and changing light bulbs are carried out automatically by the house management company [like a caretaker].
Non-routine tasks, as the properties are usually let on an unfurnished basis, would usually include:
• Maintenance to roof or guttering, or renewal of roof or guttering systems when they come to the end of their useful life.
• Renewal of parts to heating systems, or replacement of boilers at the end of their life.
• Updating or refurbishment of windows.
• Updating of flooring, typically between tenancies.
• Updating of bathrooms, usually between tenancies.
• Painting and refurbishment of staircase area.
• Upkeep and development of garden areas.
It is almost impossible to put an exact price to each maintenance task you will face. In general, you would wish to take up 2-3 quotations for works to ensure you achieve value for money of course. To provide some guidance, a typical apartment house in average condition will require around 1% of the property value each year to ensure it is kept to the right standard to ensure tenants are given a good property and new tenants can be found easily.
Breaking some typical costs for the tasks listed above, as a guide:
• Maintenance to roof – patching can be done on a piecemeal basis. Renewal of a roof to a standard size apartment house will cost around 30.000 Eur, and a roof has a natural life of around 40 years.
• Renewal of boiler, let’s say to an apartment house of 10 units, will require around 8.000 – 12.000 Eur, depending on model chosen and particular installation.
• Updating or refurbishment of windows – a new window double glazed unit will cost around 600 Eur to be fitted, around 300 Eur to be refurbished if only the wooden frame is to be repaired.
• Updating of flooring – the installation of laminate flooring costs around 25 Eur per sqm including material and labour. Costs rise of course the higher the quality of flooring that is chosen.
• Updating of bathrooms – around 6.000 – 8.000 eur, depending on quality of suite and number of tiles required etc.
• Painting and refurbishment of staircase area. – very variable, depending on the style of apartment house and if any decorative features are to be maintained. Typically, a full redecoration of a stairway to a 5-level apartment house will cost around 5.000 Eur, up to double that if wooden staircases and steps are to be repaired or re-lacquered.
Two tips here, first off at the start of the investment and then during the hold of the property.
First off, it is wise to get a good handle on the general maintenance state of the property prior to purchase. Any significant issues should be identified and reflected in the purchase price of the property. A good idea, if the property has been refurbished more than 5 years ago is to instruct a technical survey of the property. This will highlight any costs you will face in the first 10 years of ownership and allow you to plan. Typically the costs of this survey will be around 800 Eur, money well-spent to ensure you pay the right price and have peace of mind.
Secondly, a good manager should be appointed to work with you to make a plan for maintenance tasks in the short to medium term. Regular reviews, perhaps quarterly should take place and tasks planned, budgetted for and carried out. Good managers will embrace this approach, and tenants will thank you in terms of longer-staying and paying of the market rental for the property. Poor managers can be less-active in this area, and so will need a more pro-active input, or new management should be sought in the last case. So, there is much to consider on this topic and we hope to have outlined some of the keys points for consideration.
Do get in touch with the team at Proventure to discuss over this issue further if planning to make an investment or looking to improve the maintenance situation in a property you currently hold.