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Maintenance of Residential Rental Property: An Empirical Analysis

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Thomas M. Springer at Clemson University
Thomas M. Springer
Neil G. Waller
Neil G. Waller
Neil G. Waller
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Abstract

The maintenance costs of 137 residential rental properties in northwestern South Carolina are analyzed. The results show that maintenance cost per square foot increases with property age, tenant turnover, certain amenities, and for higher-rent properties. Compared to other property types, apartments exhibit higher maintenance costs per square foot with larger complexes showing lower per square foot maintenance costs than smaller complexes. This cost economy suggests added value to rental housing for larger complexes. Owners of multiple properties are found to pay higher maintenance costs. Finally, there is no observed relationship between absentee ownership and the level of property maintenance.
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Introduction
Real estate investors and property managers alike have an interest in monitoring the level
and the costs of property maintenance. In the short run, property maintenance increases
operating expenses and lowers profitability. In the long run, maintaining a property
stabilizes the quality of the structure by reducing the rate of economic depreciation, thus
supporting future rent levels. Knowledge of the level of maintenance activity leads to a
better understanding of rental housing quality management by property owners and their
agents.
In this paper, a model of rental property maintenance activity is developed and
empirically tested using annual maintenance cost as a proxy for the level of maintenance
activity. The data describe characteristics of 137 rental properties, including apartments,
condominiums, single-family houses, and townhouses. Maintenance cost variability is
attributable to physical property features, local rental market characteristics, tenant-
related factors, and property management considerations.
The results show that maintenance costs vary considerably with many of the variables.
Increases in maintenance costs are consistent with increased age, higher tenant turnover
rates, the presence of air conditioning, more bathrooms per unit, higher rent per square
foot, and the subcontracting of the maintenance work. Apartments have higher
maintenance costs per square foot than other property types. Housing complexes with
more units exhibit lower per square foot maintenance costs than those with fewer units.
Also, maintenance costs are higher for properties whose owners own multiple properties.
Finally, the results show that the number of rental units per project under the same
management and absentee ownership do not significantly affect maintenance costs.
THE JOURNAL OF REAL ESTATE RESEARCH 1
89
Thomas M. Springer*
Neil G. Waller**
Maintenance of Residential
Rental Property: An Empirical
Analysis
*Department of Finance and Real Estate, Florida Atlantic University, 777 West Glades Road, Boca Raton,
Florida 33431.
**Department of Finance, Clemson University, 314 Sirrine Hall, Clemson, South Carolina 29634-1323.
Date Revised—July 1994; Accepted—December 1994.
Abstract. The maintenance costs of 137 residential rental properties in northwestern South
Carolina are analyzed. The results show that maintenance cost per square foot increases
with property age, tenant turnover, certain amenities, and for higher-rent properties.
Compared to other property types, apartments exhibit higher maintenance costs per square
foot with larger complexes showing lower per square foot maintenance costs than smaller
complexes. This cost economy suggests added value to rental housing for larger complexes.
Owners of multiple properties are found to pay higher maintenance costs. Finally, there is
no observed relationship between absentee ownership and the level of property maintenance.
A Model of Residential Property Maintenance
Whether by direct participation or indirectly through a property manager, a rational
wealth-maximizing real estate investor monitors and controls property rent and expense
levels. A properly motivated property manager has the goal of maximizing the wealth of the
owner/investor. Improper managerial motivation, whether the result of a poorly designed
property management contract or a consequence of the physical separation of ownership
and management, can lead to a divergence of the goals of the manager from those of the
owner.
1
Maintenance activity, as influenced by the wealth-maximization strategy and
managerial motivation, is a crucial part of residential real estate investment in both the
short run, with its impact on profitability, and the long run, with its effect on quality.
The level of property maintenance and the associated maintenance cost interrelate with
housing quality and rent levels. A higher level of quality is associated with higher rents
and requires more maintenance activity. Many academic studies of housing depreciation
(see, for example, Dildine and Massey, 1974; Read, 1991) analyze the relationships
between housing quality, rent levels and the level of property maintenance. Rent is a
common proxy for housing quality. Ceteris paribus, a decline in rent evidences a decline
in housing quality, and vice versa. Factors that affect rent logically affect housing
quality.
2
The quality of housing, Q,
Q
5f (C
0
, I
t
, M) , (1)
is a function of C
0
, physical property characteristics at the time of construction; I
t
,
additional capital investment since construction; and M, both current and past levels of
maintenance activity (Arnott, Davidson and Pines, 1983). Because C
0
is variant, changes
in Q result from investment decisions (I
t
) subsequent to the time of construction and
ongoing maintenance activity (M), which affects the physical deterioration of C
0
.
At any time, maintaining a desired level of quality, Q
d
, requires a given level of
maintenance activity. Changes in the demand for rental housing affect rent and can cause
changes to Q
d
, thus affecting the level of maintenance activity. Economic theory (see, for
example, Vorst, 1987) suggests an optimal level of maintenance activity at which the
owner’s wealth is maximized. This optimal level of property maintenance varies over
time, as economic conditions change and as the housing unit depreciates. Assuming that
the desired level of housing quality, Q
d
, is optimal to maximizing the wealth of the
property owner, the associated level of maintenance activity, M
d
, of the landlord is
M
d
5f (Q
d
, C, D, Mg) , (2)
90 THE JOURNAL OF REAL ESTATE RESEARCH
VOLUME 12, NUMBER 1, 1996
Exhibit 1
Breakdown of the Data by Property Type
Property Type
Single-Family
Apartments Houses Condominiums Total
Observations 38 42 57 137
Units 269 42 57 383
Source:
Authors’ analysis
where C are physical property characteristics; D are current demand characteristics; and
Mg are factors relating to property management.
While optimal maintenance is a goal, actual activity can reflect either under-
maintenance or overmaintenance of the rental property. Some maintenance costs are
unavoidable and independent of the level of quality. For example, maintenance expenses
required to maintain habitability, namely health or safety concerns, are nondiscretionary
unless termination of the rental activity is the wealth-maximizing choice. Other
maintenance costs are incurred voluntarily and reflect a conscious attempt by the owner
to enhance rents by increasing either the quality of the housing stock or the level of the
offered amenities. Assuming that all owners operate at Q
d
and that maintenance costs per
square foot, MC, proxy for maintenance activity, M
d
, we test the model:
MC 5f (C, D, Mg)1e , (3)
where C, D and Mg are vectors of property, market and managerial characteristics and e
is a random error vector.
3
Determinants of Maintenance Cost Variability
Many factors contribute to the variability of maintenance costs across residential rental
properties. These factors include physical characteristics of the property, including
structural features and optional amenities; demand characteristics, including certain
features of the local rental market; and property management factors. Property
management factors can include differences in both actual management practices and the
relationship between the manager and the property owner.
Age often proxies for the economic depreciation of a real estate asset. The relationship
between age and housing quality, and the consequent relationship to maintenance
activity, varies with the type of property and both the time and method of construction.
For example, apartment units are typically smaller than single-family houses and are
expected to have higher maintenance costs per square foot. Vintage effects (Randolph,
1988), resulting from variability in construction techniques across property types over
time, cause properties to age differently.
4
For instance, flimsier construction depreciates
more rapidly and requires a higher level of maintenance activity to sustain the quality of
the rental property. Conversely, better quality construction requires less activity to
maintain the same relative housing quality.
As properties age they become more costly to maintain. Also, holding housing quality
and demand constant, an older property generates less rent per square foot relative to a
newer property. A landlord must continually decide whether to maintain quality and
incur higher costs or to increase short-term profitability by reducing maintenance activity
and lowering quality. The landlord’s decision evolves from the trade-off among housing
quality, rent and maintenance activity.
The injection of additional capital into an older property alters the relationship
between age and maintenance costs. The renovation of an older property can impact both
the quality and the appearance of the property. However, the impact of a renovation
upon property maintenance costs is unclear because the renovation can be intended to
reduce future maintenance costs or to upgrade housing quality to increase competitive-
ness and rental income. Randolph (1988) notes the impact of renovation on the age/rent
MAINTENANCE OF RESIDENTIAL RENTAL PROPERTY 91
relationship as another apparent example of a vintage effect. Rosenberg and Corgel
(1990) incorporate capital expenditures as a proxy for the age effect and find that
operating expenses increase with capital expenditure, thus with age.
The amenity package included in the rental unit affects maintenance costs. Amenities
can include appliances and quality space. By choosing to provide amenities in the rental
package, a landlord must consider whether the additional costs, including the
incremental increase to maintenance costs, are justifiable in comparison to increases to
rental income. For instance, given that the value of the incremental rent increase justifies
the investment, the addition of an extra bathroom may not be justifiable when potential
increases in maintenance are considered. Frequently, the addition of the amenity does
not increase rent but serves to keep the property competitive at existing rent levels. For
instance, in many markets air conditioning is considered virtually essential.
Clientele characteristics, such as the type of tenant or characteristics of the local rental
market, can affect maintenance expenditures. A property whose tenants turn over more
frequently requires more maintenance. Also, rental housing demand is segmented by the
level of rent charged for a specific housing unit. The rent of a housing unit not only
proxies for the quality of the property and the neighborhood, but also for tenant income.
However, a high rent may also be coincident with more tenants per unit. Rosenberg and
Corgel (1990) find that both tenant turnover and rent levels have a positive impact on
rental operating expenses.
The local rental housing market may be segmented by property types, as well as rent
levels. Maintenance costs per square foot are expected to be higher for apartments not
only because of their typically smaller size, but because they serve a different clientele.
Differences may also exist for condominiums, single-family homes and townhouses.
Finally, within the localized market, there may be neighborhood effects. Properties,
located in neighborhoods that are perceived to be of better quality, may require greater
upkeep. An example would be the effort dedicated to yard care and landscaping or the
frequency of exterior painting. Wang, Grissom, Webb, and Spellman (1991) study
differences in selling prices between single-family rental properties and single-family
residences within the same neighborhood and find evidence for both quality deterior-
ation of rental properties and a ‘‘neighborhood’’ effect whereby the density of rental
homes has a negative effect on selling prices.
Agency costs can arise from the contractual or physical separation of the owner from
the manager.
5
In the case of geographic separation of ownership and management, the
owner’s costs of monitoring and control increase dramatically with the distance
separating the owner from the manager. Also, because the property manager, as a leasing
agent, receives income when an apartment is initially rented, the manager is motivated to
higher tenant turnover, not necessarily to an optimal maintenance policy or to a tenant
base that is less risky.
Agency effects may also arise when a single property owner has multiple properties
under the same property manager. Owners of multiple properties tend to be more
sophisticated in their real estate and investment knowledge. They are more likely to exert
their influence on the property manager and to maintain the property optimally.
Although the monitoring costs of ownership are higher because of the multiple owner-
ship, the per property monitoring costs are lower with the use of a single manager.
Whether or not the property manager subcontracts the maintenance work may affect
the level of maintenance expenditures. Inefficient documentation of expenses can result in
92 THE JOURNAL OF REAL ESTATE RESEARCH
VOLUME 12, NUMBER 1, 1996
understated maintenance costs for work performed internally. Also, in-house
maintenance employees may not report many tasks. However, in-house maintenance
employees often are assigned to make-work projects or may otherwise be under-
employed, resulting in overmaintenance and higher maintenance expenses. Finally, with
the variable expense structure coincident with subcontracting, maintenance priorities
may change so that only major problems are handled, thus resulting in a quality loss.
Finally, there is a possible economy-of-scale effect when a manager has multiple units
under a management contract. The manager can lower maintenance costs because of
increased operational efficiency. Economies of scale are also expected for large housing
complexes relative to smaller complexes or solitary housing units. Rosenberg and Corgel
(1990) find mixed results for the impact that the number of units per project has on
operating expenses.
The Data
To estimate the residential rental property maintenance model, data were collected from
137 rental properties, including apartments, condominiums, single-family houses, and
townhouses, located in northwestern South Carolina. For each rental property, the 1990
annual maintenance cost and other attributes were collected.
The 137 rental properties include a total of 383 rental housing units (see Exhibit 1).
Fifty-seven of the observations are houses. Thirty-eight apartment complexes having a
total of 269 rental units are represented. The remaining 42 observations are for
condominiums and townhouses. All of the properties are professionally managed by one
of three local real estate firms. Several rental housing complexes have multiple managers,
reflecting condominium ownership of individual units.
The independent variables are:
Air Conditioning 1 if air conditioning is present, 0 otherwise;
Age the age of the property in years;
Appearance 1 if the condition and appearance of the property is rated
good or better by the property manager, 0 otherwise;
Appliances 1 if the unit contains a dishwasher, a clothes washer and
dryer, a refrigerator, and a range, 0 otherwise;
Bathrooms the number of bathrooms in the rental unit;
Renovated 1 indicates evidence of renovation, 0 no evidence;
Apartment 1 indicates an apartment, 0 other housing type;
Condominium 1 indicates a condominium, 0 other housing type;
Townhouse 1 indicates a townhouse, 0 other housing type;
Large Complex 1 indicates a housing complex of thirty or more units, 0
otherwise;
Neighborhood 1 if the neighborhood where the property is located is
rated good or better by the property manager; otherwise
0;
Rent/Sq. Ft annual unit rent per square foot;
Turnover the annual frequency of tenant change for a rental unit;
Absentee Owner 1 if owner lives more than seventy miles away, 0 other-
wise;
MAINTENANCE OF RESIDENTIAL RENTAL PROPERTY 93
Multiple Properties the number of properties in the sample owned by the
same owner;
Owner/Manager 1 if the property is owned by the property manager, 0
otherwise;
Subcontractor 1 if property manager subcontracts maintenance work, 0
otherwise;
Units Managed the number of housing units under single management.
6
Specifically, maintenance costs are the costs of maintaining a housing unit and do not
include property taxes, utilities, insurance, replacement reserves, advertising expenses,
and capital expenditures.
7
Maintenance costs are expected to increase with increasing,
Age, Bathrooms, Turnover and Rent/Sq.Ft. For the binary variables, Air Conditioning,
Appearance, Appliances, Apartment, Neighborhood, and Absentee Owner are expected to
have positive coefficients. Maintenance costs are expected to decrease with increasing
Units Managed, for larger housing complexes and if the property shows evidence of
having been renovated. The data are summarized in Exhibit 2, with Panel A showing
summary statistics and Panel B the correlation matrix for the nonbinary variables.
Results
The model of residential rental property maintenance is estimated using the previously
described data. The dependent variable is the 1990 maintenance cost per square foot. To
account for nonlinearity, the continuous variables, Age and Rent/Sq.Ft are modeled in
the logarithmic form. A revised covariance estimator (White, 1980) corrects for
heteroskedasticity with a Breusch-Pagan test statistic verifying the correction.
8
The
impact of outliers is assessed by reestimating the model after removing extreme values of
Maintenance Cost and Rent/Sq.Ft. The outliers do not substantially affect the results.
The stability of the model is evaluated by testing alternative specifications. Generally, the
following results are stable with respect to the signs, significance and the relative
magnitude of the coefficients.
The results (Exhibit 3) show that the selected variables effectively represent the factors
influencing the variability of maintenance costs across rental units. The F-ratio for the
model is statistically significant, indicating rejection of the null hypothesis that the
combined influence of the variables is zero. The coefficients for ten of eighteen
independent variables are significant at better than a 10% significance level. Excepting
Appliances, all of the significant coefficients have the expected sign. As evidenced by an
adjusted-R
2
of .394 the model explains approximately 40% of the variability in rental
property maintenance costs.
The positive coefficient on Age shows an age effect consistent with expectations.
Maintenance costs increase with age, but at a decreasing rate. Sensitivity analysis using
the results shows that ceteris paribus, for properties over eighteen years of age, based on
the impact of age alone, expected maintenance costs as predicted by the model increase
less than $.01 per square foot per year of age. Surprisingly, the results indicate that
renovation of a property has no significant impact on maintenance costs. The
insignificance of Renovated may be a result of measurement error. The variable accounts
for evidence of a renovation, but does not consider the timing, the extent, or the quality
of the renovation. Theoretically, additional capital investment, such as renovation, shifts
94 THE JOURNAL OF REAL ESTATE RESEARCH
VOLUME 12, NUMBER 1, 1996
MAINTENANCE OF RESIDENTIAL RENTAL PROPERTY 95
Exhibit 2A
Descriptive Statistics of the Data
Std
Mean Dev. Minimum Median Maximum Units of Measure
Maintenance Costs
.5637 .6677 0 .3318 4.7640 Dollars per sq. ft per
year
Air Conditioning
.9124 .2837 0 1 1 1 if present
Age
19.9120 15.3730 1 15 91 Number of years
Appearance
.4453 .4988 0 0 1 1 if good or better
Appliances
.1971 .3993 0 0 1 1 if present
Bathrooms
1.6946 .6162 1 2 3 Number per unit
Renovated
.0949 .2941 0 0 1 1 if renovated
Apartment
.2774 .4493 0 0 1 1 if an apartment
Condominium
.2117 .4100 0 0 1 1 if a condominium
Townhouse
.1022 .3040 0 0 1 1 if a townhouse
Rent/Sq.Ft
5.8882 4.3821 1.9940 4.7957 49.0900 Dollars per sq. ft per
year
Neighborhood
.4599 .5002 0 0 1 1 if good or better
Turnover
.4872 .4440 0 .5 1 Percentage of units
turned over
Absentee Owner
.4745 .5012 0 0 1 1 if owner lives more
than 70 miles from
unit
Multiple Properties
1.3869 .9255 1 1 5 Number per owner
Owner/Manager
.0365 .1882 0 0 1 1 if the owner is the
manager
Subcontractor
.7226 .4493 0 1 1 1 if management is
subcontracted
Large Complex
.1606 .3685 0 0 1 1 if complex has more
than 30 units
Units Managed
2.7956 5.0848 1 1 32 Number per manager
Exhibit 2B
Correlation Matrix of Selected Nonbinary Variables
Maintenance Rent/ Multiple Units
Variables Costs Sq.Ft Age Bathrooms Properties Managed Turnover
Maintenance Costs
1.000
Rent/Sq.Ft
.446 1.000
Age
2.000 2.289 1.000
Bathrooms
2.097 .187 2.314 1.000
Multiple Properties
.258 2.125 .151 2.275 1.000
Units Managed
.056 .047 2.059 2.300 .253 1.000
Turnover
.177 .062 .082 2.077 .062 2.084 1.000
Source:
Authors’ analysis
96 THE JOURNAL OF REAL ESTATE RESEARCH
VOLUME 12, NUMBER 1, 1996
Exhibit 3
Estimated Results for the Property Maintenance Costs Model
a,b
Variable Coefficient (Std Error)
Intercept 22.6475*
(.5625)
Physical Characteristics (C)
Air Conditioning
.2423*
(.1434)
Age
.1750*
(.1055)
Appearance
.0127
(.1501)
Appliances
2.4369*
(.1699)
Bathrooms
.1801*
(.0993)
Renovated
2.1174
(.2066)
Demand Characteristics (D)
Apartment
.2902*
(.1502)
Condominium
2.1810
(.2872)
Townhouse
.1193
(.2714)
Large Complex
2.3505*
(.2105)
Rent/Sq.Ft
1.0863*
(.2377)
Neighborhood
.0153
(.1267)
Turnover
.2779*
(.1109)
Property Management Factors (Mg)
Absentee Owner
.1026
(.0959)
Multiple Properties
.1309*
(.0500)
Owner/Manager
.1676
(.3085)
Subcontractor
.2281*
(.1218)
Units Managed
2.0125
(.0078)
a
Standard errors, corrected for heteroskedasticity, are in parentheses. The Breusch-Pagan
Chi
-
squared value is 78.49 with 18 degrees of freedom. An asterisk (*) indicates statistical significance
at 10% or better.
b
The model has an adjusted-
R
2
of .394. The
F
-statistic has a value of 5.92, with 18 and 118 degrees
of freedom.
Source:
Authors’ analysis
the property to an earlier point on the age, or depreciation, function. Given evidence of
the stabilization of maintenance costs beyond a certain age, the most critical factor of the
renovation may be its timing. That is, if the renovation is done on a property that is
sufficiently old, reductions in maintenance costs may be either negligible or for a shorter
duration.
The physical property characteristics describing amenities show mixed results. A rental
unit with air conditioning has higher maintenance costs relative to one with no air
conditioning. Also, additional bathrooms increase maintenance costs. A somewhat
unexpected result is the wrong sign of the Appliances coefficient, especially given its
relatively large magnitude. The results suggest that a complete set of modern appliances,
namely a dishwasher, a clothes washer and dryer, a refrigerator, and a range, lowers the
maintenance costs of a residential rental property. An analysis of the subset of the data
including properties having a complete set of appliances shows that, relative to the full
sample, these properties are newer, in better condition, located in better neighborhoods,
and less likely to be an apartment. Given these characteristics, Appliances seems to proxy
for better maintained or higher quality rental units, in which case the estimated
coefficient has the correct sign.
Maintenance costs (per square foot) are significantly higher for apartments relative to
other property types. The additional maintenance cost per square foot is not surprising
given the smaller unit size of apartments relative to the other property types included in
the sample, namely townhouses, condominiums and single-family homes. The apartment
subset shows, that relative to the full sample, apartments provide fewer appliances, are in
a perceived worse condition and are located in neighborhoods perceived to be of lower
quality.
9
The results provide evidence that scale economies exist for large housing
complexes (Large Complex). The combined effect of these two variables, Apartment and
Large Complex, implies that as the number of units increases, maintenance cost per
square foot increases at a decreasing rate. Our results provide support for Rosenberg and
Corgel’s (1990) finding that operating expenses per square foot are higher for smaller
apartment projects.
Higher tenant turnover significantly increases maintenance expenses. All else held
constant, sensitivity analysis shows that a doubling of tenant turnover from the average
increases maintenance costs per square foot to $.878 from $.743 (the estimated
maintenance cost at the data means), an 18% increase, while halving tenant turnover
reduces maintenance costs to $.676 per square foot, a 10% decrease. Because tenant
stability reduces maintenance costs, this result provides justification for rent reductions,
or restrictions of rent increases, for continuing tenants relative to new tenants.
10
The results suggest that when a subcontractor is used, maintenance costs are
substantially higher than when the property management firm does its own maintenance
work. Reporting and accounting methods could explain the differences. Perhaps, ‘‘in
house’’ maintenance employees of the property management firm fail to record many of
their minor activities. The results show no differences in maintenance costs for properties
that are managed by their owner.
Finally, based on the insignificant coefficient for Absentee Owner, the model suggests
no geographic agency effects. It is likely that any agency effects from absentee ownership
would be evidenced by increased tenant turnover or more damages. Because managers
are often compensated based on securing a lease, there is potential motivation towards
faster tenant turnover, which corresponds to accelerated leasing activity. Also, because of
MAINTENANCE OF RESIDENTIAL RENTAL PROPERTY 97
geographic separation, property managers may not be monitored sufficiently to promote
careful tenant screening and selection standards. The net result would be evidenced by
increased property damages, relative to increased maintenance costs.
Although there is a strongly significant and positive relationship between rent and
maintenance costs, an overly specific interpretation of this result is impractical because
Rent/Sq.Ft can proxy for many property, demand and property management factors.
Also, compared to the observed scale economies associated with large apartment
complexes, there is no statistical support of reduced maintenance costs from scale
economies to the property manager resulting from multiple units under management
(Units Managed). At least from this sample, it is apparent that large property managers
are no more operationally efficient than small property managers.
Conclusions
The results of the model of maintenance costs for residential rental properties show that
the variability of maintenance costs across rental properties can be effectively explained.
The model shows that maintenance costs per square foot increase with age, increased
tenant turnover and the presence of certain amenities. Apartments and rentals charging
higher rent also exhibit higher maintenance costs per square foot.
Notably, there is no evidence of agency problems associated with absentee ownership.
That is, there is no significant difference in maintenance cost between local and absentee
owners. Also, larger apartment complexes exhibit economies of scale evidenced by lower
maintenance costs per square foot. There is direct implication that large ownerships, such
as large apartment complexes, add value to housing. Finally, owners of multiple
properties evidence a higher level of maintenance costs. This result suggests that either
the owners are more attentive to the properties or that there is a tenant selection
difference compared to owners of single properties.
The results of this paper lead to a better understanding of housing quality
maintenance, maintenance expenses, and property manager decisionmaking. A possible
extension of the work is to collect a time-series and estimate a generalized model
incorporating contemporaneous changes. A significant contribution would be a similar
model estimated with more diverse data, perhaps collected from a major metropolitan
area. Also, tenant damages, which are more tenant-specific, can be compared to
maintenance costs, which are more property-specific.
Notes
1
The finance literature is replete with papers on agency relationships and costs. See Solt and Miller
(1985) and Rosenberg and Corgel (1990) for real estate applications.
2
The literature extensively covers the determinants of real estate rent. See Sirmans and Benjamin
(1991) for a relatively current review.
3
We relax the maintenance of housing quality assumption commonly used in the literature (for
example, Rosenberg and Corgel, 1990). Thus, Q
d
varies given different property, market or
ownership characteristics.
4
Randolph (1988) interprets age as an estimate of depreciation that is biased because of vintage
effects, which occur when age-invariant rent determinants correlate with the year of construction.
To the extent that housing units age differently because of these vintage effects, the same bias exists
in this study.
98 THE JOURNAL OF REAL ESTATE RESEARCH
VOLUME 12, NUMBER 1, 1996
5
Rosenberg and Corgel (1990) conclude that agency costs exist and are consistent with improper
financial motivations not handled by existing standard management contracts. These agency costs
relate to the concentration of ownership of the apartment complex and the degree of competition
for property management services.
6
Single-family homes take a value of 1. For housing types occurring in multiple unit complexes, the
variable describes the number of units under single management, not the number of units in the
complex.
7
To our knowledge, our maintenance cost measure is consistent with Rosenberg and Corgel’s (1990)
operating expense measure except that we do not include advertising costs. The MSA effect studied
by Rosenberg and Corgel is invariant because all properties are in the same geographic area.
8
We used LIMDEP to estimate the model. The heteroskedasticity correction is an additional
command.
9
Also, as indicated by the number of tenants signing the lease and higher turnover rates, apartments
are used more intensively relative to the other housing types. An excess of missing values precludes
including the number of tenants per unit as explanatory variable.
10
We also separated the sample into high and low turnover properties. A comparison of the
regressions on the subsamples show some differences. Notably, for low turnover properties, the
number of units managed is significant and positive and, for high turnover properties, Age is
insignificant.
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A previous version of this paper was selected as the winning manuscript in the IREM Asset
Property Management Research Manuscript Competition for papers presented at the
American Real Estate Society Annual Meeting, 1993. The authors would like to thank the
Editor, Dr. G. Donald Jud, as well as two anonymous reviewers, for helping to improve the
paper.
MAINTENANCE OF RESIDENTIAL RENTAL PROPERTY 99
... Building maintenance impacts investment value and depreciation, the ability to generate income, the overall condition and appearance of the property and surrounding properties in the neighborhood, and the use, safety and life cycle of the building (Ali et al., 2010;El-Haram & Horner, 2002). Previous research has noted the balance between maintenance expenditures and profitability in the short-run, and maintenance expenditures and depreciation in the long-run (Springer & Waller, 1996). Extant literature has explored construction and maintenance decisions in filtering models and the rate of depreciation, the relationship between housing quality, rent rates, and maintenance activity, and has built models to reflect optional maintenance strategies for the owner (e.g., Arnott et al., 1983;Dildine & Massey, 1974;Harding et al., 2007;Knight & Sirmans, 1996;Randolph, 1988;Read, 1991;Vorst, 1987;Wilhelmsson, 2008). ...
... Furthermore, to the authors' knowledge, no study to-date has analyzed work order data at the unit level. Only a few studies have analyzed determinants of maintenance costs at the project level (e.g., Rydell, 1970Rydell, , 1971Springer & Waller, 1996). The body of research on determinants of variation in maintenance costs was conducted through surveying property managers or maintenance supervisors and is based on theories or perceptions instead of actual expenditures based on work order data with material and labor costs. ...
... The articles that have empirically tested the determinants of variation in maintenance costs typically have small sample sizes and have not been able to conduct the analyses at the unit level. The smallest unit of analysis used to-date has been conducted at the property level and only by a few researchers (e.g., Rydell, 1970Rydell, , 1971Springer & Waller, 1996). The contribution of this study is to build on previous work that has laid the foundation for potential drivers of maintenance costs and empirically test a set of building and tenant characteristics at the unit level using work order data with a large, diverse set of rental properties. ...
Magnitude and variation of maintenance expenditures in rental properties in the United States
Article
Full-text available
  • Mar 2025
  • J Hous Built Environ
There is limited empirical evidence regarding the differences in maintenance costs across units and building types and how much tenant wear and tear contribute to these costs. Yet, certain residential buildings are costlier to operate, and anecdotal evidence suggests some tenants are responsible for higher maintenance costs during their tenancy and for unit turnover. Recent advancements in property management software allow landlords and property managers to track maintenance materials and labor costs at the unit level. This paper takes advantage of these advancements and uses unit-level work order data merged with building and tenant characteristics for 1,745 tenancy spells from four different housing providers to uncover the factors associated with variation in maintenance expenditures during occupancy and at turnover. The findings reveal that unit and building characteristics have a greater impact on maintenance costs than tenant characteristics. The factors associated with variation in maintenance costs across units and building types allow for improved expenditure planning and budgeting and informs decisions regarding asset management and whether to invest in or divest from certain property types.
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... There are, however, some exceptions. Springer and Waller (1996) found that maintenance costs per square foot increase with property age, tenant turnover, and the presence of specific amenities, and are also higher for more expensive properties. Additionally, they observed that apartments generally have higher per-square-foot maintenance costs, although larger complexes tend to experience lower costs compared to smaller ones. ...
Assessing the impact of maintenance condition on multifamily rents: an integrated approach of machine learning and hedonic modelling
Article
Full-text available
  • Apr 2025
  • J Hous Built Environ
Multifamily housing serves as a crucial residential option for millions of households across the United States, with maintenance being an essential component. However, there are limited studies examining whether maintenance factors are reflected in multifamily rent prices. To address this research gap, this study employs an integrated method combining computer vision, machine learning, and hedonic modeling to investigate the determinants of multifamily rent prices. Specifically, we utilize computer vision techniques and Google Street View images to evaluate outdoor maintenance levels. Additionally, we use violation severity index data from a recent micro-level multifamily housing survey to assess indoor maintenance levels. By implementing a multilevel linear model and machine learning techniques, specifically random forest, we examine the influence of both indoor and outdoor maintenance on multifamily rents. Our findings reveal that both indoor and outdoor maintenance significantly impact rental prices. These insights have important implications for property owners, renters, urban planners, and policymakers focused on housing issues.
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... However, the scope of the study did not cover the effectiveness of filing of eviction notice and dialogue approach and other rent recovery strategies that the current study examined on residential property in Ibadan, Oyo State, Nigeria. Maletswa and Boshoff (2015) and Thomas and Neil (1996) suggested the advantage of adequate maintenance on residential rental property in South Carolina and South Africa accordingly. The empirical studies revealed that the property manager must have an understanding of the level of maintenance activity because it enhances a better perception of rental housing quality management. ...
Effectiveness of rent recovery strategies on residential real estate in Ibadan, Nigeria
Article
  • Jan 2022
  • Property Manag
Purpose The upward rise of the prolonged payback period and the inability of the project to generate estimated income that has been linked with the irregular rent payments has been a major problem confronting real estate investment. Given the fact that real estate investment is a risky investment venture with a highly uncertain future stream of income, this paper examines the effectiveness of rent recovery strategies in the emerging Nigeria residential real estate practice. Design/methodology/approach The study employed an exploratory research design. The study identified the five recovery strategies adopted by the estate surveying and valuation firms in Ibadan Metropolis, Nigeria. The study adopts a purposive sampling method to select 52 registered estate firms in the study area and a questionnaire using a five-point Likert scale was used to elicit information. The data obtained were analyzed using descriptive and inferential statistics. Findings The result showed that the rent recovery strategies adopted by the respondents include email approach, rent reminder notice, adequate maintenance, eviction notice and dialogue approach. The perceived top-rated strategies that could influence estimated income were dialogue and rent reminder notice. Also, the findings showed the factors that influence the choice of strategy are property type, company policy and the proportion of rent to the tenant's income. Practical implications The study has an implication for real estate investors and property practitioners regarding the willingness of the investors to invest in real estate investment. Originality/value This paper is relevant given the fact that the rental property market is prone to risk that could impede the regular streamflow of income. This serves as a need for examination of the effectiveness of adopted rent recovery strategies as it relates to real estate property management practice and investment viability.
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... 1 The literature on the rents of units of newly-constructed versus existing apartment buildings is scarce; however, ''newness'' matters with respect to property age. Bible and Hsieh (1996), Smith and Islam (1998), , and Allen, Rutherford, and Thomson (2009) Springer and Waller (1996) provide evidence that residential maintenance expenses increase with property age and home features. During the first several years of home ownership, houses are likely to require little maintenance and renovation, minimizing expenses for maintenance items such as repainting, flooring replacement, repair of HVAC units, roof replacement, and plumbing and electrical work. ...
Commission Splits of Real Estate Agents with Affiliated Firms
Article
Full-text available
  • Jan 2013
The commission split between real estate agents and their affiliated firms represents an important incentive mechanism. A study of 1,477 agents indicates that total commission revenue generated during the year affects the subsequent commission rate more than volume of residential sales or transactions. Profit sharing and independent franchise firms offer higher ending commission splits while larger firms offer lower commission splits. The ending commission split for commission agents compared to agents on a 100% payout contract, however, is not influenced as much by profit sharing, firm characteristics, and the economic environment.
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... 1 The literature on the rents of units of newly-constructed versus existing apartment buildings is scarce; however, ''newness'' matters with respect to property age. Bible and Hsieh (1996), Smith and Islam (1998), , and Allen, Rutherford, and Thomson (2009) Springer and Waller (1996) provide evidence that residential maintenance expenses increase with property age and home features. During the first several years of home ownership, houses are likely to require little maintenance and renovation, minimizing expenses for maintenance items such as repainting, flooring replacement, repair of HVAC units, roof replacement, and plumbing and electrical work. ...
New House Premiums, Market Conditions, and the Decision to Purchase a New Versus Existing House
Article
Full-text available
  • Jul 2019
In this paper, we examine how the new house premium has changed over time. We propose that the new home premium can largely be attributed to the “lemons problem” from Akerlof (1970). Recent research suggests that the growth of the Internet has significantly reduced the lemons problem for many products. Our results suggest that the new house premium is about 5.6% without considering time-on-the-market (TOM) and has been declining. This premium ranges from 14.6% (1998) to −2.8% (2010). The average new house premium is 13.3% considering TOM, and ranges from 22.5% (1998) to 5.0% (2010). A trend analysis reveals that new house premiums have fallen 0.8%–0.9% annually, consistent with the Internet, information sharing, and reputation feedback mechanisms reducing the lemons problem associated with asymmetric information.
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... Cooperative size should negatively impact monthly fees if economies of scale apply to the management of the property. Springer and Waller (1996) Lastly, the second hypothesis is tested in model 4 in which the monthly fee is estimated to increase with 3.4% for each year that passes from the conversion, compared to the general market. Model 4 provides strong support for the second hypothesis. ...
Housing Tenure and Informational Asymmetries
Article
Full-text available
  • Apr 2018
The paradigm shift of focus from rental apartments to owner occupied units on the Swedish property market has led to a substantial number of rental apartments being converted to cooperative apartments. Such conversions are typically done at prices below market value. This provides a setting with strong financial incentives for tenants involved in such a conversion to take advantage of their informational advantage regarding the financial management of a cooperative, compared to less informed neighbors and buyers on the general market. This setting also provides a reliable way of estimating the persistence and effects of such an informational asymmetry through nearly 200,000 apartment transactions in Stockholm, Sweden, during the period of 2005 through mid-2014. We find evidence supporting that insiders take advantage of an informational asymmetry; as newly formed cooperatives set monthly fees artificially low in order to increase the probability of a conversion as well as apartment values. However, market participants seem to discount this informational asymmetry as recently converted apartments sell at lower prices.
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Co-Living at Its Best—An Empirical Study of Economies of Scale, Building Age, and Amenities of Housing Estates in Hong Kong
Article
Full-text available
  • Oct 2023
Co-living is commonly considered as an arrangement for rental housing. However, co-living in housing estates by sharing common amenities among co-owners has been practiced for many years in high-density cities. Yet, there have been very few empirical studies on the estate premium and the economies/diseconomies of scale effect on house prices, probably due to the lack of data. This study is a novel attempt to examine the economies/diseconomies of scale effect using the hedonic price model to estimate the impact of the number of housing units in a housing estate on house prices, ceteris paribus, using Hong Kong housing transaction data. The results confirm the hypothesis of estate premium and the economies of scale effect of co-living in housing estates. Economies of scale are observed, with larger estates commanding a premium of up to 5031 units, beyond which the effect declines, hinting at potential diseconomies. Building age moderates this effect, as we observe a larger scale effect in especially younger estates with lower maintenance costs. Additional tests confirm the positive correlation between amenities and prices, with an optimal amenity number enhancing prices, while excess amenities lead to diminishing returns. A case study reinforces these findings, demonstrating a general trend of decreasing management fees with increasing estate size, supporting the notion of economies of scale. Overall, this study contributes valuable insights for developers and homebuyers, emphasizing the importance of balancing estate size and amenities for cost-sharing advantages and effective management in co-living housing estates.
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Real Estate Management IT Tools
Chapter
  • Oct 2022
Real estate investment requires time managing the assets owned to maximize achieved results. Real estate management activities are based on the information collected, professionals and companies that can help manage the asset, and the medium- and long-term strategy defined for each asset owned.This chapter focused on proptech’s services that can be requested for both transaction-intensive and Judgment-intensive projects. It will also evaluate the support provided in constructing the medium- and long-term investment strategy for the portfolio of assets owned.KeywordsReal estate riskRisk managementTransaction-intensiveJudgment-intensiveStrategy
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Are Home Warranties Worth It? A Study in the Richmond Housing Market
Article
  • Jan 2020
We are the first to show that home warranties are beneficial by providing a valuable form of insurance to home buyers, which home sellers then (partially) extract in the form of price premiums and faster sales. The benefits of offering a home warranty differ among homes, with older homes tending to receive larger price premiums and lower-priced homes tending to sell faster. For the average home in our data that is priced at 236,000and28yearsold,offeringahomewarrantyisassociatedwithapricepremiumofatleast236,000 and 28 years old, offering a home warranty is associated with a price premium of at least 4,000 and a reduction in time on market of at least 2.5 days. Additionally we find some evidence of principal-agent conflicts in the home warranty market.
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Determinants of Market Rent
Article
Full-text available
  • Feb 1991
Recent empirical work has investigated substantial lists of factors that have been employed to explain market rents for residential income property. These factors range from physical attributes to vacancy rates. To better understand the myriad factors that have been demonstrated to affect apartment rent and, in turn, the valuation of apartment complexes, this paper reviews the existing literature on the apartment rent determination process. Our analysis extends the extant contributions by discussing some of the consistencies and the unresolved issues concerning the factors employed in estimating apartment rent. This survey should provide information for appraisers who make market-derived rent adjustments, for property managers who set apartment rents, and for developers who design apartment projects.
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Optimal Housing Maintenance Under Uncertainty
Article
  • Feb 1987
In this paper we give the optimal maintenance policy of a building where we let the rent depend on the quality of the building. We assume that the quality of the building can be described by a stochastic process on which the maintenance policy has an influence. Furthermore we give rules for when the landlord has to sell the building or when he has to rent it. From these rules it follows that under uncertainty the landlord is more prepared to rent the building than without uncertainty.
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The impact of rental properties on the value of single-family residences
Article
  • Sep 1991
This study examines the effects that single-family rental properties in a residential neighborhood have on the value of single-family residences in that area. The analysis blends real estate valuation concepts with evidence found in the housing maintenance literature and urban succession theory to develop testable hypotheses regarding the property-specific, proximity-related, and neighborhood-wide impacts of rental properties on property values. The data used to test the hypotheses include the tenure status of 23,119 single-family residences and 1,162 single-family sales. Regression results support all three hypotheses. Although numerous studies on the value impacts of other externalities have been published, this is the first study to examine the separation of property rights. The results of this study provide additional insights into housing maintenance and also have implications for neighborhood zoning regulations.
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Maintenance, Housing Quality, and Vacancies under Imperfect Information
Article
  • Jun 1991
  • R Estate Econ
A model of a rental housing market is presented in which landlords economize on the maintenance of housing quality to profit from tenants imperfect information. In a partial equilibrium model that describes tenants by their distribution of minimum acceptable (reservation) quality for units priced at an identical rent, these profits induce entry of new units, resulting in rental vacancies. The equilibrium number of landlords and the market vacancy rate are derived in a free entry, imperfect information equilibrium in which the distribution of rental unit qualities range from the competitive quality to that which would be offered by a monopoly landlord. Copyright American Real Estate and Urban Economics Association.
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Agency Costs in Apartment Property Management Contracts
Article
  • Feb 1990
  • R Estate Econ
Because fees for property management services are based on gross rental collections rather than on net operating incomes, property managers may not always act in the best interest of property owners. This study is an examination of the agency costs that result from the conflict of interests between owners and managers. A nationwide proprietary sample of 242 apartment properties is analyzed to compare agency costs of four distinct types of ownership structures. Agency costs, measured as operating expenses per square foot, are found to be significantly higher for institutional owners than for noninstitutional owners, but not significantly higher in cases where no competition for property management services exists. We conclude that agency costs of property management contracts are significant and the fee provisions of standard property management contracts should be changed to better align the interests of managers and owners. Copyright American Real Estate and Urban Economics Association.
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Managerial Incentives: Implications for the Financial Performance of Real Estate Investment Trusts
Article
  • Feb 1985
In the face of informational asymmetry, REIT equity investors may bear the costs of agency. Hence, it is in shareholders' interests to pay incentive fees to induce managers to utilize their superior information and to take suitable actions that reduce these costs. In this paper, the relation between financial performance and fees paid, and between fees paid and contractual incentives, are examined to determine whether equityholder interests are being served by the decisions of REIT managers. The data reveal that fees paid and financial performance are positively related, indicating that financial performance is at least partially endogenous with respect to managerial action. Moreover, the evidence also suggests that the industry fee structure has changed over the period in a manner that appears to have reduced the agency costs borne by equityholders, and by the end of the sample period the fees paid in general seem to reflect incentives that are consistent with the wealth maximization goal of equityholders. Copyright American Real Estate and Urban Economics Association.
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Housing Quality, Maintenance and Rehabilitation
Article
  • Feb 1983
  • REV ECON STUD
This paper investigates a representative landlord's profit-maximization problem in a stationary economy. The landlord must decide on the quality of his housing units at the time of construction, maintenance expenditure over the life of the building, and the time of demolition or rehabilitation. The analysis can be applied to other problems with similar economic structure, notably equipment and durable good maintenance, overhaul and replacement.
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