7 Sure-fire Mistakes
Your rental property is a business!
This may not be the most profound statement you have heard all day, but it is nevertheless critical to your success as a residential rental property owner.
And that means you must be vigilant to manage your business in the pursuit of cash-on-cash return plus increased asset value of your investment. As a business, your “inventory” is floor space. You sell it via rent payments.
The balancing act is to periodically determine rents that are fair to both tenants and to you – the investor. As the investor your objective is to generate positive cash flow after debt service, taxes, insurance and maintenance. In business terms … this is your net profit.
Your rental pricing considerations and analysis are essentially the same in deciding a first-year rent as well as increases over time. Rent is the lifeblood of your investment, so it demands serious attention in your pursuit of positive cash flow.
Be alert to the current rental market in your area. That means do your homework to become expert in competitive rental comps and trends. Some questions to start your research:
• What are current vacancy rates and demand for rental units?
• How do your current rents compare to similar properties?
• If your rents are generally higher, does your property include amenities that justify the difference?
The law of supply and demand was not formulated based on residential real estate. That said it is very much a reality when it comes to pricing of rental units … whether in multi-family residences or single-family homes.
Renters drive the demand side of the equation. Landlords create the supply. Seasonally each of these elements is affected as described in the following section on Tenant Attraction and Retention.
Seasonal Considerations: Renters’ seasonal moving preference is summer. That time of year is motivated by three practical considerations:
In contrast, the final quarter of the year has as its hallmark the fewest moves given the expenses of getting kids back to school plus the anticipated financial and time commitments of the upcoming holiday season.
So, tenants exhibit seasonal trends in both their search for rentals as well as the physical move. Alert Landlords understand this seasonal fluctuation and formulate marketing and pricing strategies to successfully respond to the seasonal preferences of renters.
Your Target Tenant Audiences: In broad terms, your target tenants will fall in one of three categories:
Do your homework! Be sure to seek prospective tenants whose housing needs are in synch with your residential rental offering. Each of the above groups have different expectations as to location, neighborhood conveniences, residence amenities and safety.
Tenant Retention: Increases in rent over time are essential for you, the landlord, to keep pace with inflation as well as upticks in maintenance, utilities and other operating costs. Without that option, your business is likely to become a losing proposition. You need to deliver value to your tenants while realizing a fair return on your asset … both in positive cash flow and appreciation of your property
Take away the “surprise” factor of rent increases. Regular, modest raises in rent are more easily digested by tenants than one massive increase after none for over a year or longer. Most people are aware that cost of living increases is a fact of life. Additionally, include a rent escalation clause in your lease agreement that specifies how often and by how much rents may be raised.
Responsive maintenance is a major issue and should be emphasized as a genuine “value-add” for renters as well as a further incentive to renew their lease.
This is the number one cause of cash-flow hemorrhaging! Each month your rental is vacant means your expenses are not offset by rental revenue. The two major reasons vacancies persist are:
Your rent is too high: If you overprice your property, it won’t matter what kind of amenities you offer or renovations you’ve made. Tenants will check to make sure your rental rate is in-line with similar properties in the neighborhood. If not, your unit sits empty.
Your job is to be brutally frank as to how much you can charge to realistically be successful in attracting a tenant in the next 30 days. Your assessment may conclude that you drop the rent a bit to get cash flow rolling in. Do the math. Contrast suffering from months of no rent with reducing your asking price by $50 or $100. Remember … your rental property is a business!
Something is wrong that needs fixing: This comes under the adage, “You never get a second chance at a first impression”. When combined with the issue of rent being too high, well over two-thirds of prospective tenants are turned-off instantly upon visiting the rental. The visual culprit may be as seemingly benign as the color of wall paint to more serious issues such as faulty electrical outlets or leaks.
Your guiding principle, if your mom wouldn’t move in … you have work to do.
Next to the financial scourge of vacancies, the cost of tenant turnovers runs a close second. Here is a sampling of costs landlords incur to prepare a rental unit to be in shape for a new tenant.
Since tenant turnover often results in your property being vacant for some period, it’s worth a review of Sure-fire Mistake #4 above. Bottom-line is that one of your hidden costs as a residential rental investor is a reserve for turnover costs. Additionally, mentally prepare for the demands on your time unless you have staff support or an outsourced property management resource.
Maintenance costs can transform a “winning property” into a money-pit. Upkeep of appliances or replacement of a roof or driveway can set you back thousands of dollars. And then there are the unending lists of expenses associated with Sure-fire Mistake #5 above.
Even good tenants will want your full and immediate response when their toilets back up or there is a major break in a water line. That’s your moment-of-truth … how will you respond promptly and with maintenance resources that don’t break the bank? If you don’t have internal handyman staff, you are either at the mercy of contractor pricing or doing it yourself … neither is a particularly attractive option.
So, if you are a seasoned landlord, your reaction to the above is probably, “Been there, done that … wish I hadn’t”. A wannabe or newbie residential rental investor likely finds the above a rather daunting profile to build a profitable rental real estate portfolio.
DIY and “learn as you go” is a perfect formula for disaster in protecting and enhancing your investment.
That said, here’s a question for you. What’s the highest and best use of your time … personal management of your properties or turning those responsibilities over to a professional with the internal resources, experience and staff to handle leasing & marketing, tenant relations, maintenance, operations and accounting?
If your answer is to turn to an outsourced expert, that will relieve your time to build the asset-value of your investments rather than juggling the day-to-day details. That means accelerated time to build your portfolio, enjoy predictable positive cash-flow and anticipate the option to one day sell your properties with the hope of substantial capital gains.
If you are a business owner or otherwise fully employed, you’re already wearing several personal and professional “responsibility hats”. Ladling in a myriad of property management details is probably not an attractive option. If you are a seasoned investor, you recognize and embrace the highest and best use of your time as a landlord in expanding your investment asset base.
Property managers’ primary responsibilities are to keep residential rental investors and their tenants happy. That means satisfaction by both parties in the condition of the rental unit, the grounds and maintenance services. While the manager works for the owner, the needs of the tenant are paramount to retain quality, long-term, profitable renters.
Additionally, a capable property management firm will relieve you of the hassles of advertising, leases, tenant disputes, collection of rents and evictions. All of this, plus your peace of mind, is delivered at a cost of 10-15% of rents with the balance remitted to your bank account.
Given the above, engage in a bit of soul-searching.
Certainly, it’s worth a conversation to see if your best interests will be served by seeking assistance from a property management professional. Give us a call or drop an email. We’ll respond promptly and relieve your stress to evaluate your property management options.