Fix or Replace Broken Appliances? Factoring in Sunk Costs at Carowinds

 

I remember several years ago my out-of-town, 6-year old niece was coming to visit.  My wife wanted to make sure that she had a great time, so we were brainstorming a list of activities:

 

Bowling?  No, that could be done anywhere.

Movies?  Same thing.

Family board games?  No, she might beat us…

Hiking?  Not a bad plan, but…

 

How about going to Carowinds, the local amusement park?  Yeah!  It’s a bit pricey (around $50/person) but Carowinds is a legitimate, massive amusement park and would provide fun for the entire day.  And this would make her trip memorable.  It was decided!

 

The big day came and we excitedly ushered my niece to Carowinds.  It went well at first; the first few rides were a blast!  But then 30 minutes into our adventure, my niece says (something to the effect of), “Well, that was fun!  Where are we going next?”

 

This was not a question I was expecting.  Of course, the real answer was (something to the effect of), “There is no “next”.  For 50 bucks a person, we are staying at the amusement park for the next nine hours.  In addition, you are going to love every moment of it and be bragging for years about how visiting your Charlotte-based aunt and uncle was your childhood’s crowning experience.”

 

However, from a marriage perspective, I recognized that “my real answer” and “the real answer” given to my niece could possibly be different; I wasn’t sure what my wife’s appetite for niece appeasement was yet.  And from an economic perspective, it was close to immaterial.  The Carowinds tickets were a sunk cost regardless (we already bought the tickets).  If we left the amusement park and went hiking (free), it was a wash.

 

To me, this story feeds into how we handle broken appliance repair calls from tenants in our Charlotte property management company.  When we get these calls, we are left with the choice to either send an appliance repair person or just buy a new replacement appliance.  What’s the best way to handle them?  Sunk costs are part of the decision-making process. 

 

The economic analysis on these starts with the appliance repair company.  The way they bill is that it costs roughly $100 for them to show up at the house and diagnose the issue (this is the sunk cost- we bought it when we called them).  If we choose to approve the quote for their recommended repair, the $100 is credited towards the repair.  If we think that an appliance is too costly to repair, we can just thank them for the diagnosis, refuse the repair recommendation, and pay them their $100 service call fee. 

 

Lower-end appliances in the Charlotte market usually cost somewhere between $500 - $1,000 when shipping, taxes, installation, and old appliance removal fees are factored in.

 

Some of these decisions are common sense.  If a new stove costs $800 and an older stove is found to need $700 in repairs to fix, we’re going to replace the stove.  However, for math purposes, the cost for a new stove is really $900 ($800 for a new stove + $100 appliance repair company diagnostic fee).  Tacking on the sunk cost of the diagnostic fee will make replacing appliances cost more.

 

In turn, the math goes down when repairing appliances.  If the same stove is found to need $250 worth of repairs, the real differential is $150 (the first $100 is a sunk cost).  This usually makes repairing appliances a better proposition unless there are other mitigating reasons to replace them (beat-up looking, opportunity to homogenize mismatched colored appliances, etc.).  $150 versus $800 makes taking the chance that the repair would keep the appliance operating for a while very appealing.

 

The harder decisions are when the cost of the repair is 50% of a new appliance.  I tend to go towards the repair.  It requires less money outlaid initially and I’ve found that older appliances seem to be built better than the newer, low-end ones.  The only problem is when an older, repaired appliance breaks down near-term for a different reason and I’m left eating the loss on the larger sunk cost of the repair (and holding a bag of regret). 

 

Smart landlords factor in sunk costs when in appliance “repair or replace” dilemmas.  Smart uncles also factor them in to assuage anger when one is unexpectedly hiking Crowders Mountain after paying to ride the Fury 325.

 

Happy Landlording!

Sportsbook & Tenant Application Gambling- Now Both Live in NC!

 

Sports betting became legal in North Carolina on March 11.  This may be news to non-residents.  To residents, it’s been hard to miss the blatant and ubiquitous advertising bombarding us both in real life and digitally.  My 10-year old son starting asking me about sports gambling after repeatedly seeing billboards on the interstate.

 

Son: Dad, what’s a 5-team parlay?

 

Dad: It’s a type of bet that either turns your college fund into a full ride or enters you into an indentured servant relationship with the college of your choice.

 

Son: Oh… Thanks…

 

Gambling is a funny thing.  In the back of your mind, you know you’re going to lose.  Logically, casinos and sports gambling entities don’t become massive conglomerates by paying out more than they take in.  Quite the opposite!  They know that if they can keep you gambling, you will lose.  So why does anyone choose to gamble when the odds are that your money is going to find a new home?  I mean, it is an optional activity that millions of people choose to participate in every day.  What’s the appeal?

 

Well, some people do win big, cash out, and have a lot more money than when they started.  The rest just write off the expected losses as an “entertainment expense.”

 

But what about when it’s a real-life situation and you need to win?  It’s not about entertainment; it’s about having a house for you and your family to live in.  And I’m not talking about sports gambling, but about tenant rental applications.

 

Especially now, many tenants do not have good credit, good reports from former landlords, and/or sufficient income to afford higher-priced rental homes.  But they need to have a place to live.

 

So, tenants with substandard credentials are submitting rental applications that cost around $75 per adult.  They know, especially with homes marketed by property managers, that it will be an uphill battle; most will uncover negative information and have standards that the tenants know they cannot meet.  And there are not enough owner-managed homes where there is little tenant screening and where they can give a “down-on-my-luck” narrative and get a sympathetic owner to approve them (and this does not often work either).  So they have no choice but to gamble and keep applying, though it is draining their finances one turned down application at a time.

 

But what if they could stack the odds in their favor and win?  That would be appealing!  And this what we’re seeing and hearing about.  Don’t have good credit?  Buy a false credit and criminal report.  Need income?  Photoshop paystubs that show more.  Need a former landlord to say something nice?  Create fake landlord reports. 

 

It’s raising the stakes.  If a landlord winds up approving a wayward applicant, the costs can be significant if the tenant reverts to previous ways and does not pay.  Not only is there a loss of rent, but now there are court costs and attorney fees for filing for eviction.  To boot, public tax dollars are funding pro bono lawyers to congregate in the courthouse to train tenants to appeal the rulings regardless of whether justice was served or not; this can make the process go on indefinitely as cases enter an overwhelmed court system, while the tenants stay in the rental houses.  And when a court victory eventually happens, the landlord is often left with costly fix-up of a battered house.

 

The prospective tenants may be gambling on false rental applications ($75), but the real gamblers are the landlords who are not screening their tenants thoroughly ($10K+).

 

Legal sportsbook gambling may be new to NC, but attempting to illegally improve the odds is not a new concept.  Smart landlords will run their screening checks thoroughly or outsource to a property manager whose job it is to keep up on the latest schemes.

 

Happy Landlording!

Crushed by Cumulativeness: Rent Increases and Why the NFL Player Didn’t Sign Your Kid’s Football

 

“What a jerk!  All he has to do is just sign his stupid name to ONE football and it would mean the world to Little Johnny.  But instead he needs to hurry to the locker room to recount his millions of dollars!”

(Reaction of many parents after their child’s autograph request is snubbed)

 

I was talking to a local college football player (a kicker, if you must know) about what he was doing after he graduated in May.  He said he was starting to figure that out being that he finally had some time to think about it.

 

Some time?  He’s in college!  I was thinking of how wasting time was sort of what my friends and I did during our undergraduate tenures…

 

“You don’t have any time?  How did you get so scheduled out?”

 

He pulled out his team-issued iPad.  “Do you see this?  I had to look at this every day for the last five years; it told me where I was supposed to be and what I was supposed to be doing every hour of every day… Now, honestly, I’m adjusting to doing life without it.”

 

Wow!  That sounds pretty demanding for a college kicker at a small-time football school.  If I were him, I think I would have opted for intramural soccer.

 

Now let’s think about NFL players.  There are even more football activities than college.  They are travelling for training camp and games.  If they don’t do well, they can be cut at any time.  If they want to get better, they need to take the time to practice, lift weights, and study the playbook and game tape on their own.  Then they have family, faith, friends, financial, and other real-life commitments- and everyone likes them and wants to be near them because they are wealthy and famous.  They are super busy! 

 

And then there are constant, on-going demands for their time.  Want to be on a weekly talk show (aka NY Jets quarterback, Aaron Rodgers)?  Make sure you cut an hour or two of every week for that.  Endorsements?  Autograph shows?  Dinner with your wife?  Your kid’s basketball games?  Team functions?  Mailing back football cards kids send them to sign?  Your college wanting you to come back to accept an award on an off-week during the season?

 

If it was signing one football, that would be one thing.  But it is signing one football in addition to an overpacked schedule.

 

So how does football player busyness fit into rent increases in today’s world?

 

A landlord may be heard muttering, “If a tenant can’t come up with an extra 5-10% for rent every year, maybe they shouldn’t be in the property in the first place!”

If it was just $100.00/month extra for rent every year, that would be one thing.  But rental increases are not happening in a vacuum.  Tenants have been absorbing increased rents in addition to increased costs for almost everything else they consume.  Food, gas, car prices, car insurance, plane fares, restaurants, NFL tickets (another 4% increase in ticket prices was just announced by the worst team in the league, Carolina Panthers), etc..  Netflix just went up by another $2.00/month, for goodness sakes!  Like small papercuts that keep happening, the bloodletting becomes very real eventually.

 

Cumulativeness can be crushing! 

 

Property managers and smart landlords need to balance potential rental increases with killing the golden goose.  Good tenants are an asset that maintain the property and pay down the underlying debt.  Dumping another increased expense on them can be detrimental to both parties, especially if the tenant moves and the property needs to be repaired and put on the market again.

 

Good news!  The college and NFL players don’t hate your kid.  If they had an iPad with lots of empty time slots and/or few other commitments, I’m sure they would happily sign footballs most every time!  And if rental increases are measured, good tenants will be able to absorb them and continue to be a reliable monthly partner.

 

Happy Landlording!

 

What Vacant Rental Home Fix-Ups Should a Landlord Do (or Not Do)?

 

My wife and I were looking at renovating our primary bathroom so we had someone come in and give us a quote.  We weren’t looking for anything overly-extravagant; I’d say it was much more on the practical side of replacing some older bathroom pieces.  I thought the proposed work was relatively basic and was more concerned about the inconvenience than the cost.  Then the quote came in around $50K.

 

To me, the quote was a lot; $50K for a practical bathroom renovation is significant.  For that, I’m thinking heated tiles, a sweet hot tub, and a roomy, rainwater shower equipped with a state-of-the-art entertainment center.

 

If we take this out of the “splurge on myself” category (where things like this are sometimes justified on a personal residence- note: not in this case…) and put it into the “rental home investment” category where the numbers need to make actual sense, we could do a quick calculation of making this potential investment:

 

With a renovated primary bathroom, we’ll say the rent can go up an additional $500.00/month; that seems high to me, but we’ll go with it.  At $6K extra rent coming in annually ($500 for 12 months), we’re looking at the payoff time for a $50K bathroom investment to be roughly 8 years (8 years multiplied by $6K = $48K).  That’s a long payoff period, especially if a destructive tenant moves in and degrades it quickly.

 

This type of repair figure, post-COVID, is not crazy though.  The question then is how much home fix-up is a justifiable expense for a landlord?   That’s a tough question as it is really an answer that has to be made on a case-by-case basis.

 

But philosophically, my answer would be to spend as little as possible with several caveats if the rental home is a long-term hold:

 

1. Don’t skimp on preventative maintenance
2. All home systems need to be functioning per the lease agreement
3. The home needs to be desirable to rent near the market rental rate (no major red flags aesthetically)
4. The home needs to be very clean and pest-free

 

This is much more of an art than a science.  The issue is that when new things are installed in an older house, it makes the older things look even older.  For example, if one room gets fresh paint, the rest of the unpainted rooms scratches look even worse.  Replacing one appliance can make the other ones look 10 years older.  What not to renovate can be more important than what to renovate.

 

And different aesthetic issues are going to make the home unrentable to certain people; it helps to be a bit thick-skinned if some potential tenants are critical of certain aspects of the home.  New construction and/or complete renovations appeal to everyone!  But most owners and tenants are either not willing or able to pay for that.

 

I want to be clear- a home is always easier to rent and will rent at a higher rate if everything is renovated.  If the financials can be made to work, this is the best option by far.  It is really nice to offer rental homes that have the best of everything!  It makes a property manager’s job much easier!

 

However, for others, $50K of renovations may not be a viable investment strategy; the numbers are usually tough to justify on a standard rental home.  Smart landlords learn to be judicious in what they choose to fix-up (or do not).

 

Happy Landlording!