How Real Estate Investors Protect NOI and Reduce Maintenance Costs | Andy McQuade

Andy McQuade (00:00)
the goal is not to churn. The goal is not to keep being like, I’m gonna get an extra 50 bucks of rent. Well, cool, you get an extra 50 bucks of rent, but then you’re gonna lose $6,000 rehabbing the thing. How long does it take you to make 6,000 bucks back off of 50? Come on.

Scott Bursey (01:45)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host Scott Bursey. And today we’re diving deep into the infrastructure that supports massive real estate empires. Forget the sizzle, we’re talking about the steel that holds the deal together. Our guest today is absolutely bringing the fuel. He’s a master of structure and strategy, helping investors fortify their assets and scale fearlessly. Please help us welcome Andy McQuade.

from ARM Companies. Andy, thank you for joining us today.

Andy McQuade (02:18)
Thanks Scott, I appreciate the opportunity.

Scott Bursey (02:21)
Andy, it’s awesome to have you on the show. And for those of our listeners that may not be familiar with your journey, how’d your career begin and what’s your main focus now?

Andy McQuade (02:22)
It is a-

Well, my career began in 1997, driving a forklift before I was legally allowed to at a lumberyard and sort of got introduced to a lot of high rollers in real estate. At that point, it was mostly home builders and developers, some, you know, obviously general contractors and subs and different framing trades and whatnot, but kind of fell in love with the industry and found a home there. It was part-time in college, right?

I was looking for summer job, senior year of high school, driving around, dropping off applications, store manager interviewed me and took a shot on 17 year old kid and a few years after that they offered me a full time gig as an assistant manager before I even finished college. I was one of the youngest salaried managers in the company at that point and then a couple years after that I was a store manager at the youngest store manager in the company.

which when you talk in at that time, they had about 400 stores. It was pretty good. And it was also really good money. So I don’t regret leaving college for it. Right. But did that for a few years, did outside sales and then bounced over, got headhunted by the big orange box that everybody knows. Came in at district level, ran district pro B2B for 11 years, kept expanding more territory, went national on a plane every three weeks.

And at that point, that was when I started working with big multifamily operators. So family offices, private equity, REITs. I had some customers that were just big money, not officially a family office, just privately held and real estate is what they did. And shockingly, most of them worked in either mobile home parks or multifamily or both. So I learned the industry.

kind of from the best, right? And when you’re talking about handling millions of dollars of somebody’s spend that’s coming into, yes, Home Depot does sell, like my largest client when I was there was doing between five and $7 million a year with Home Depot. And I was on a plane flying to North Carolina, South Carolina, Texas, Michigan, wherever, wherever they needed me to go, I went. And so I really cut my teeth walking properties for pre-purchase during due diligence, walking properties for rehab.

and I started building systems based off of what I learned from these clients. So one client was really good at a certain thing and they use certain products to hit a certain goal and I stole that shamelessly. And I did it again with another client and again with another client and eventually it became what I do now, which is advising on building systems, structures, processes, and product standards to make sure that these properties max out the amount of NOI when you’re spending money on a rehab.

And it can be a portfolio improvement, just maintenance, changing products, changing vendors, negotiating stuff, or it can be as complicated as going in and doing ground up development and just figuring out how to stretch that timeframe before a complex rehab is needed from five to seven years to maybe seven to 10 years, while minimizing maintenance and minimizing expense of maintenance, which then increases your renewal rate with your

with your tenants, it reduces churn, and it also makes your life easier because you’re not dealing with headaches. Now third party property management companies hate this because they get less money. There’s less maintenance, there’s less maintenance calls, there’s less headaches. So I will say, if you’re using third party property management, there will be pushback. But it works in the owner’s favor, so if you’re investing in or you own properties, it’s kind of a…

a no-brainer provided you have the kind of control that you need to set specs, set vendors, set expectations. And it’s not just taking the advice of a property manager when it comes to your asset management. They’re two separate jobs.

Scott Bursey (07:03)
That’s an incredible path, Andy. You’ve clearly mastered the fundamentals and now you’re building systems that are bulletproof.

Andy McQuade (07:10)
I don’t know about bulletproof, but they’re pretty good. I try. If I ever figure out how to make it actually bulletproof, I’ll let you know.

Scott Bursey (07:15)
So let’s dive right on in. What is the single greatest structural strength that a solid arm company framework provides to a growing real estate investor? Andy.

Andy McQuade (07:26)
It’s really just stretching that NOI. you know, when we look at, in my experience, the longest lasting, highest performing operations are vertically integrated between property management, asset management, construction management, and your general property management maintenance. So, I have all the firms I’ve worked with, the ones who make the most money,

and are the most active are the ones who have complete control of the asset. And they’re also the ones who don’t get involved and don’t have any of this financial problem that we’re seeing in markets right now with all these failed syndications, switching the funds, doing all the other craziness. It’s they buy and hold real estate. That’s what they do when the opportunity comes to sell the real estate down the road for more than they bought it for. They’re not on a clock. They’re not looking for that three, five year hold because they have to exit. They have to return capital to investors.

they can hold it for 10 or 15 years and do a couple of rehabs on it and keep raising rents and doing what they do. Or they can unload it when the market’s hot, like a lot of them did in 2019 to 2022, 2023, and make bank and then just sit and wait for the next opportunity to come where the cycle comes in like we’re seeing today, where there’s opportunities to come in and either take over, you know, bank financing to buy stuff below what market would be.

Hopefully no one ever says below replacement cost because I think at this point it’s a joke. If that’s actually a serious listing from a broker they don’t actually know the business at all and have no business selling a commercial property. Just saying. I’m opinionated. Sorry. I’ve been doing this long enough where I just don’t care. So I hope I don’t offend anybody who’s listening. But I don’t care. Anyway. there’s there’s just there’s just a lot of.

There’s a lot of structural things you can do at the beginning when you’re taking control of a property and you’re getting ready to do a rehab or you’re speccing out products or you’re picking your vendors. There’s a ton of important steps that you can do to insulate yourself, which will help you reduce insurance costs. It’ll help you control. your hard costs out of pocket because you’re going to pay less for your products. You’re going to negotiate stronger because you’re going to understand what the terms are, what to look out for.

And then there’s the products themselves, which make a huge difference in, like I kind of mentioned before, the maintenance and the operations. Labor’s a cost, overhead is a cost, right? The lower you push that, the higher NLI is gonna be. The average apartment just in product has somewhere between two and $300 a door before you get into the averaging out the maintenance costs. So stuff like,

toilets without flappers, right? It’s not about the water savings, but it is, kind of, but it’s about the lack of maintenance. So you got a $15 flapper, but they failed three to five years. Swap that, put in a flapperless toilet, whether it’s low flow, know, .8 gallon, 1.28, 1.6, it doesn’t matter, because that thing’s not gonna leak, ever. So you’re not gonna get the leaky flapper, you’re not gonna get the maintenance call. You’re gonna pay maybe 20 or 30 bucks more for the toilet.

but it pays for itself instantly on that side. Water savings, it pays for itself usually within a couple of years because when you have a leaky toilet, your water bill goes up, your sewer bill goes up, you have no visibility to it unless the tenant picks up the phone and says, hey, my toilet’s running, which they’re not gonna do until either wakes them up at night or it’s running constantly and they can’t flush the toilet when they take a pee. That’s life, that’s how this works. And it doesn’t matter whether it’s at A apartment or whether it’s a D, they’re not gonna call you because they don’t wanna see you. But what they are gonna do is not renew

because their apartment isn’t working right. That’s what happens. So you want lower churn, you wanna fix stuff, you wanna avoid costs, start changing what you’re buying and putting in these apartments.

Scott Bursey (11:46)
Exactly.

You hit it right on the head. The asset protection and clear operational structure is the bedrock that allows pros to sleep at night while scaling aggressively.

Andy McQuade (12:06)
Hopefully they can scale a little bit faster if they’re making more NOI too, but it takes time to prove all that stuff out. And at this point, I’ve been doing this for seven years, I’ve never had somebody call and say, you know, I really wish we didn’t put those toilets that don’t leak into these units, not once. And I stole that from one of my old clients. At the time they had about 12,000 doors and we were putting them into every single apartment that they would buy in rehab and every single apartment complex that they owned.

Scott Bursey (12:24)
Absolutely.

Andy McQuade (12:34)
in at the time I think it was eight states and we just kept after after that we I just converted everybody I used to sell to and now I just recommend hey I don’t care what brand you buy I don’t care who you buy it from you need to be doing this and it’s the same with lighting flooring hardware like there’s so many different items that go in that are customer facing right your customers your tenant there’s so many items that go in that are customer facing that affect not just curb appeal

but actual function that cost you money as a landlord that you need to figure out a way to minimize those costs. As technology increases, right, we’re seeing costs increase. You’re adding, let’s say you’re adding keyless entry to all your apartments if you’re in a B or an A apartment, because that’s the expectation, that was keyless entry. Well, what happens when it gets to be negative 10 degrees outside because you’re in Chicago and all your batteries stop working and your doors don’t open?

Do you have a plan for that? What happens when the battery dies and the tenant doesn’t want to change it and they get locked out? Is that any different than a lockout when they lose their keys? I don’t think it is. LED lighting. For 60 years, the lease has stated, tenant is responsible for light bulb changes. You don’t have any light bulbs anymore. Those light fixtures don’t last any longer than a regular light bulb. They’re, you know, three, five, seven years, depending. You’re not gonna be able to match it.

Scott Bursey (13:28)
Exactly.

Andy McQuade (13:51)
five years from now after you do a complex rehab. So do you have the budget for a complete CapEx renovation just to change light fixtures every five years? Because that’s what you’re gonna end up with. Or you can find a nice looking fixture and pay a little bit more money. Probably the same as the integrated fixture to be honest. You can buy a nice fixture when you do your rehab and make them put bulbs in and push that back on the tenon instead of.

saying it’s their responsibility in the least and then expecting them to do electrical work in your building. Sounds like a really bad plan. And I don’t know anybody who just eats that. So,

Scott Bursey (14:28)
Excellent breakdown, Andy. And where do you feel the biggest opportunity lies right now for the arm companies?

Andy McQuade (15:17)
For us, for me, it’s really just trying to branch out and find a way to take what I do and scale it. I’m a one-man show, right? And my services are expensive, I have to get on a plane, I walk units, I help change business, right? I help people make more money. So I get paid for that, and it’s significant amount of cash. So having a way to get it out to more people, to be able to kind of scale it without becoming a guru.

Because I’m not a guru, I’m not going to tell you how to get rich quick. Nothing I do involves, you know, you’re going to be a real estate millionaire overnight if you change the toilet you buy. That’s not reality, that’s dumb. So, you know, most of my clients have had several thousand doors under management. The smallest has had like 40 or 50. And I do charge appropriately depending on what I’m trying to do for them and what I’m helping them with. But the reality is the guys with 40 and 50 units are not worth, unless they’re going to pay my bill, they’re not…

worth the time invested. if I have something that I can put out there that’ll help these people learn a little bit and change how they do their operations, am I going to be personally involved in it? No, I’m not. But if I can help somebody make a little bit more money and make a little bit of money in exchange for it, I’m good with that. So I’ve got a newsletter I’ve pushed out. I’m working on a school group. And I don’t know what else. It’s just a question of how does a one-man show with a couple of VA’s scale up.

to doing more when really nobody else out there has the job experience that I do and has seen what I do. So it’s key man risk is a big thing. Like I dropped that of a heart attack, this thing dies, right? yeah, it’s interesting. So that’s the plan right now is figuring out how to get more of the common sense, look at the numbers. It’s all about total cost of ownership. So it’s all about doing the math on how this is going to work out long term.

So is your total cost of ownership lower over time? The answer should be yes. So you buy that cheap $99 toilet, it starts leaking in two years. Your total cost of ownership on the first maintenance call is higher than if you put in the flapperless toilet. Doesn’t matter how you slice it, that’s reality. Same thing with the LED fixtures. The minute you have LED fixtures failing, your total cost of ownership goes up because all of a sudden now you’re on the hook to do that replacement.

And again, third party property managers are not fans because the less maintenance you have, the less they get paid. But by the same token, as an asset manager, as an owner, that’s literally your job is to protect the value and improve the value of your property.

Scott Bursey (17:45)
Absolutely, yes. And if you could walk us through this, if you had to choose one factor for long-term sustainable growth using the arm company structure, is it centralization of control or highly defined delegation?

Andy McQuade (18:00)
It’s a little of both, so I call it semi centralized. what it comes down to is the strategy starts at the top in the C suite and they set the standards. So here’s the expectation. You put in control. It’s all about control. So these are the products that you’re going to use. And this is why these are the vendors you’re going to buy from because we’ve negotiated with these vendors and we’ve locked them in on better pricing, better service, better terms. And we build it in so that

They understand what we’re doing, just like we need to understand what they’re doing. So if we can work with them as opposed to making our vendors adversarial in the relationship, find ways to save them money so they can save us money, pass the savings that we give them on to us as a buyer, as an end user. But it’s all about control, which is why I say that the highest performing clients I’ve had have been the clients that

have the control on asset management, property management, construction management across the board. Because if you don’t have that, pieces fall apart, right? And perfect example, you hire a third party contractor, right? There’s a lot of these guys out there. They say, ⁓ we’re going to do everything turnkey for you on this rehab. It’ll be great. It’ll save you a ton of money. Number one, I’ve never seen one actually be cheaper than doing it yourself and hiring local labor. So that’s beside the point.

You hire these people, they usually bring in boatloads of stuff. We have our own products that we make. We imported ourselves or we haven’t made. It’s all to our specs here at All Is. Cool. How do you replace that in two or three years when it gets damaged? Where do you get those parts that match? Where do you buy it? They buy it for the project, they import it themselves. They’re not Home Depot, they’re not Lowe’s, they’re not Menard’s, they’re not HD Supply or…

Scott Bursey (19:38)
and any.

Andy McQuade (19:52)
Central or any of these other companies that make it their business to have stuff when you need it two or three or five or ten years later, right? So what do you what do you do? How do you replace that you don’t you you put together a mishmash and you know eventually your property looks like something that should be a C-minus in the middle of the you know Center center city whereas graffiti is getting scrubbed off the walls every day like that’s not what you want. That’s That’s not good for you. That’s not good for the business

Scott Bursey (20:18)
No.

Yeah.

Andy McQuade (20:21)
Like they talk a great game, they really do. But the reality is if you can’t replace the product when it actually is due to fail, you’re out of luck. And then, let’s say you sign a contract with a contractor, they hire subs. They don’t pay the sub. Or they don’t pay their vendor that supplies material. You get a mechanics lien on your property. That can trigger default if you’re in CMBS loan territory. So hopefully you’re not in special servicing, you’re not doing CMBS loans, but by the same token, some people are.

And that’s the reality of the business. It’s gonna happen. Like, there’s reasons that service exists. But what do you do with that when you get it? Like, do you just pay twice? Because you’ve already paid the contractor, right? Their bill was all inclusive. You’ve paid them. They didn’t pay their vendor. Their vendor has a right to get paid for the product they put in your property. They’re not gonna come pull it all out. Like, I’ve seen that happen. But they’re not gonna come pull it all out. So what do you do with it? You gotta pay them, or…

you know, sue the contractor to pay them or do whatever, but you’re talking about tens of thousands of dollars in legal fees and just can be years of headaches. And if they call your note, because you’re in special servicing, what do you do? You just going to write a check for $32 million? I don’t know anybody who has that kind of capital just laying in a pile collecting dust, right? So there’s a lot of things.

Scott Bursey (21:38)
And on that note,

there is a multitude of things. And I got to ask you this, beyond economic downturns, what’s the most overlooked legal threat to mid to large scale real estate operations today in your view?

Andy McQuade (21:57)
Ooh, legal threat. God, frivolous lawsuits is huge. mean, Atlanta’s looking at 50 % fraud on their applications for their rentals. Like, 50 % is a lot. I mean, and it could be higher, but wow. The problem with AI is anybody can use it and anybody can get access to it. And it’s pretty good at faking pay stubs, income statements, letters of recommendation from

prior landlords, professional tenants are very good at doing really bad things. Not that they’re all that way, but there are some that are out there and they make a living off of living for free. ⁓ And that’s bad. So I would put that out there as the number one biggest risk right now is that it’s getting more and more complex and harder to disprove.

Scott Bursey (22:45)
Unfortunately, yes. Yes.

Andy McQuade (22:55)
However, like all things, there are ways to deal with it. You just have to improve your systems, improve your criteria, do more deep dives, dig a little bit deeper. Sometimes you’re restricted. There are states out there where you’re just not allowed to do certain things to find out real backgrounds on people. But that said, do what you have to do to make the best decision possible. Again, as you scale, more hands in the cookie jar means the more things are gonna fall through the cracks. That’s just life. That’s part of it.

So hopefully you’re making enough money by improving your NLI where you can have a couple losses here and there and offset the issues with the rest of the profit you’re making.

Scott Bursey (23:33)
What’s a golden nugget or a takeaway that you’d like to leave with our listeners today?

Andy McQuade (23:40)
I think the easiest thing to do is just when you’re talking about improving a property, whether it’s, you know, functionally, operationally, whatever, don’t just look at the cost today. Look at the cost two or three years down the road when things, you know, when that contractor leaves your job site, you know, and you either get the tail light warranty, which means as soon as the tail lights fade out of view, there is no warranty. Or if it’s a more reputable builder, more reputable contractor.

Day 366, they’re done. They don’t care. It’s not their problem anymore. It’s your problem as the owner. So when you take it in that light and you’re looking for stuff, don’t complain that the toilet costs 20 bucks more. Don’t complain that the light costs $10 more. Don’t complain that the faucet costs $50 more. Because all that stuff is coming out of that property’s pocketbook when that warranty disappears. There’s a reason why cheap things are cheap.

And it’s not because they last forever. It’s because they’re intended to be thrown in the garbage and replaced every so often. And the more of those things you use in your property, the harder it’s going to hit your NOI. And a lot of it isn’t just the prop, the item itself, right? It’s the labor that goes into maintaining, replacing, repairing, whatever it is. Because when you do total cost of ownership, it includes everything in the process to get that maintenance call satisfied.

So you’re not just looking at the cost of the part and the half hour of labor it takes the guy to replace the part. You’re looking at the overhead for the electrical, the space that the office is in, the computer systems, the software that you pay for, that six figures you pay to Yardy every year to make sure that you’re connected and you can pull accounting and pull and track all of your leases and everything. You have to look at the total cost of getting that maintenance call in from the very first time that tenant calls in.

to when that ticket is resolved, multiple trips to stores, all the diagnostics that have to happen with the maintenance guy who goes in there. And it’s not just a flapper. It’s not just a leaky faucet. It’s something else. And then every time you get a maintenance call, you have to factor in, we know that people renew like 20 to 30 % less when they have maintenance calls that don’t get resolved within 24 hours.

48 in some cases, but really the answer is 24 hours. So what’s your churn? You’re going to have higher churn, especially in a C property, 30, 35 % is not unusual. You get 35 % churn. You’re talking about you have to rehab that unit, or you have to at least do a make ready. You’re talking about $1,600 to $3,000 right off the top. If it’s a full rehab where they’ve done damage or something has gone wrong or it just hasn’t been updated, it could be $6,000, $7,000 to make that unit right.

That’s a couple of years of rent that’s just evaporated after you pay off your operating expenses. I mean, the best thing you can do is think two or three steps down the road for every decision you make. Now, put math on it. Just honestly put math on it. Put the numbers on it. What does an actual maintenance call cost me? What is the percentage chance that this guy’s gonna churn?

What does it cost me to buy this more expensive product now versus putting a cheap one in and then doing three maintenance calls on it before I replace it in 10 years? All those types of things matter.

the goal is not to churn. The goal is not to keep being like, I’m gonna get an extra 50 bucks of rent. Well, cool, you get an extra 50 bucks of rent, but then you’re gonna lose $6,000 rehabbing the thing. How long does it take you to make 6,000 bucks back off of 50? Come on.

Scott Bursey (27:24)
It all boils down to the math. That insight is pure gold, Andy. And thank you for dropping the tooth bombs on the pros. That was very insightful. Before we wrap up, for those of our listeners who want to follow your journey or collaborate with you, what’s the best way for them to reach you?

Andy McQuade (27:42)
I’m everywhere on social media. can check out my websites, but LinkedIn is a great place to find me. I’m most active there on social media. I have an Instagram. It’s AndyMcQuade for both. You can just Google AndyMcQuade. You’ll get the first five pages. It’s pretty much all me. So it shouldn’t be too hard to find as long as you spell my name right. ⁓ But you can…

You can go to the website, can check out the podcast or the newsletter. It’s TCO Method. It’s super easy to find. It’s a substack. So if you want the newsletter, it’s tcomethod.substack.com. If you want to see the podcast, it’s just the TCO Method. And if you’re interested in the business side of things, you want to look at the websites or any of that stuff, you can go to the arm companies or armcompanies.com. Again, you can Google it. It’ll come right up.

Scott Bursey (28:30)
Andy, thank you for joining us today.

Andy McQuade (28:32)
I appreciate it, Scott. Thank you so much for having me. This is great.

Scott Bursey (28:35)
Yes, it was. And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Andy, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.