Your Very Own Cash Machine
You own a cash machine. That machine produces money every month and will continue to as long as you keep it well-oiled and in good working order. It might still produce money if its maintenance is neglected some, just not as much as if it is lovingly and meticulously cared for. Of course, that cash machine is your rental property. We’ll look at how to make that machine shoot money out like a misfiring ATM. It works every time, if you do over and over again what makes it work.
I saw an article recently in Multifamily Executive by Linsey Isaacs entitled “How to Make a Million Dollars.” Of course, I had to read it.
The article is aimed at larger property owners and managers because the example the author uses is a 100-unit building. You may or may not own that many units, but three of the points Isaacs made apply to every rental owner. They have to do with rents and tenants.
We make our money from tenants. No tenants, no rent. It’s as simple as that. The more (good) tenants we have, the more rent we bring in. The higher our rents, the more money we bring in. Well, duh. It sounds simple, and it is, but it’s not easy. It requires attention and work. So get out the oil and the tool box.
Raise the Rent Isaacs adds “intelligently.” We need to know what the properties comparable to ours are charging for rent. Obviously, we can’t charge significantly more than the competition, but we sure can charge less. And so many landlords do. Rents that are too low don’t help the cash machine work to its highest efficiency.
A rule of thumb is that if practicable we need to raise the rent every year. Here’s why. Suppose we decide not to raise rents when in fact the market shows that we can. Suppose rents could go up 5 percent a year. After five years of not raising rents, that’s 27.63 per cent we would have to raise rents to catch up. Tenants will move out in a flash if we “gouge” them with upwards of a 25 percent increase. They most likely won’t for 5 percent, though, especially if we send a letter explaining why it is important to raise the rent and bragging a little about the property.
In the meantime, those five years where we didn’t raise rents, other costs went up and we have less money for maintenance and upkeep, not to mention for our own income and savings. As properties show deferred maintenance, they look shabby. Good tenants don’t rent shabby-looking homes. The cash machine creaks, groans, and spits out less and less money.
Maintain Occupancy What is the ideal occupancy for a building. For a large, multi-unit building it may be 95 percent. For a single-family, duplex, four-plex and such, it may be 100% because of the amount of money we lose when there is a vacancy. It’s 100% vacant when there’s no tenant in a single-family home, 50 percent in a duplex.
Keeping units full is essential to the efficient functioning of the cash machine. That means marketing, marketing, marketing. Use every available technique to ensure people who would be interested in your property can find out about it. But those marketing techniques are for another column.
Keep Tenants One way to avoid having to find new tenants is to keep the old ones. Tenants do move, but if we value them and let them know we value them, they move less often. If we take proper care of our existing tenants, we have to do far less marketing to find new tenants. It costs a lot less, too.
One technique is saying “thank you.” Another way is meticulous maintenance. Do preventive maintenance and keep everything looking like your ideal tenant could not wait to move in.
You know how to do those things. But here’s another wrinkle. Think of your existing tenants as customers who pay you upwards of $10,000 a year. If you owned a small business and had a customer who spent that much money with you every year, think how much you would appreciate him or her. Make sure your good tenants know how much you appreciate them.
The extra added benefit to raising rents, keeping units full, and keeping good tenants is property value. The value of rental property is a function of income. When appraisers take out their calculators and work they magic to put a value on an investment property, they look mostly at the income it generates. Mostly that is done by the cap rate, which is figured by dividing Net Operating Income by the prevailing cap rate. Cap rates now for rental properties are about 7 percent. Thus, if your rental property nets $10,000 a year, the value is just under $143,000. If it brings in $15,000 a year, the value is just over $214,000. Net Operating Income is calculated by subtracting operating expenses from gross rents. Operating expenses DO NOT include mortgage payments, by the way.
Do your own calculations for your properties and see how much more money the cash machine can bring in. Take your total gross rents, subtract operating expenses, and divide by 7 percent.
The cash machine works like a charm if you keep it in excellent working order. Find out what works best for your properties and do that over and over. Plug in the cash machine, keep it oiled, and watch it produce income. A cash machine in good working order dispenses enough money every month to pay all the bills, pay ourselves, put dollars in the bank, and some to put away to keep our properties in even better condition.
ROBERT L. CAIN
Reprinted by Permission. Copyright 2014 Cain Publications, Inc. Robert Cain is a nationally-recognized speaker and writer on property management and real estate issues. For a free of the Rental Property Reporter call 800-654-5456 or visit www.rentalprop.com.