I Love Numbers!
Baseball Numbers: "No question, Babe Ruth is the greatest hitter to ever live! Lifetime average .342, on base % .474, slugging % .690, 2213 RBIs. One home run every nine at bats! No steroids either!"
Fantasy Football Numbers: "Peyton Manning, the sure first ballot Hall of Fame quarterback has a quarterback rating of 106, completes 67% of his passes, 7.19 per yard, 32 touchdowns only 9 interceptions this season. What's not to like?"
Money Numbers: A computer salesperson who invests in real estate explains his finances. "In 2011 my W2 was $57,500, owned 3 rental properties worth $560,000 with a $73,000 loss carry forward from the rehab so I got back $9623 in federal tax, equity was $176,000. In 2012 the W2 was $62,000, $10,200 federal tax returned, now 5 properties worth $920,000 and equity of $296,000.
Health Numbers: A patient visiting a doctor for the first time. "I'm 5'10", weight 172, blood pressure 125/60, heart rate 71, cholesterol LDL 99, HDL 51, total cholesterol 174, glucose 107, triglycerides 96."
Numbers are the matrix through which we interpret and attempt to understand our world. They are tools to measure and then judge if our thinking and intuition is grounded. Numbers define your business past, present and forecast its future. Numbers are worldwide, are only meaningful relative to other numbers, and are fun--even exciting!
If you are not numbers-oriented - that's okay. Real estate's numbers are grade school simple. You can become acquainted and compile the necessary numbers by hand, by computer, or have a bookkeeper/accountant do it.
Remember, numbers are the signposts guiding you at midnight along an unmarked, unlighted, constantly changing journey. I urge you to use numbers, as Archimedes used his lever, to boost your power and fuel your profits.
Numbers Talking in Real Estate
The following is how I use numbers in my rental business. I'll give you the headings for some of my most-used Excel spreadsheets. The spreadsheets are updated in pencil by hand on our bulletin board as need be, then updated on the computer monthly. They have the date of the latest update on the bottom.
Tenant Spreadsheet: The basics on the tenant. Rating (1-2-3), Address, Tenant Section 8/cash, Phone #, Rent, Caseworker/phone #, Original lease date, Anniversary date, Municipality CO expiration
Rental Spreadsheet: Follows each tenant's monthly payment history. Address/Tenant/Security Deposit, Rent Amount, Month, Rent paid, Date on envelope, Late and other fees (for each month). (Date on envelope is date of payment.)
Mortgage Spreadsheet: Basics on your mortgage. Address, Mtg. Company, Acct. Number, Int/Years/LTV/OrigMtgAmt/Date, Current Amt Owed, P&I/Tax&Ins/Total Mtg Pmt, Taxes, Ins escrowed?, Mortg Holder
Big Spreadsheet: The mother of all spreadsheets. Invaluable as a management tool. Most data is entered once and done. # of Property (by date purchased), Address, Purchase price/date of settlement, closing costs, Improvements, Refi costs, Total cost, Appraised value, Assessment, Refi terms %/yr/LTV, Orig Mortgage Amount/Date, Mtg. Amount as of 1/1/xx, Capital Invested, Current value as of 1/1/xx, Equity as of 1/1/xx, Mort Pymt-Prin/Int per mo., Taxes/mo/Condo fee, Insurance/mo, PITI, Rent/mo, Gross margin, Adm/Mktg/Repair/Vacancy (Expenses are 17% of gross), Total Monthly Net, Annual Net, Cash on Cash %
Bankers Spreadsheet: I cut out many columns of the Big Spreadsheet so I don't confuse the bankers and mortgage brokers. I give them just what they need, no more.
Property Statistics: Everything about the property down to the size of the HVAC filter. Address, Yr. Built/Made of, Sch. Dist., Type/Stories, Lot/Roof, Int/Sq. Ft., Bed/Bath, Bsmt F/U/RecRoom, Sump or Fr. Drain, Clean out, Heat gas or oil/air or radiator, Filter, CA, Wtr. Htr. G/E, WD Hookup/where, Stove E/G, Other Appl, Trash Day, Garage Dimen, Deck/Shed, Frt Yard/Back Yard
Three Important Numbers to Focus On
A) Occupancy Rate: Mine is 95.6% in 2012. What's yours? Don't know? Let's figure it out.
Occupancy Rate: Total number of months available for rent of all your properties divided into the months you have substantial rental income. Months between tenants, while doing a Tenant Turnover Rehab, or vacant in various stages of disrepair or any other reason count as "available".
Example: 68 houses x 12 months = 816 months available for rent
Months of income = 780 months
780 ÷ 816 = 95.6%
95.6% is good. My goal for 2013 is 97%. For 2014 - 98%.
Note: I rent 4-5 bedroom HOUSES (mostly Section 8) in good school districts. I also do student rentals and garages. One and two bedroom apartments generally have a higher turnover and vacancy rate.
B) Vacancy Rate: The opposite of Occupancy Rate. My vacancy rate is 4.4%. 100 % - 95.6% Occupancy = 4.4% Vacancy Rate
C) Tenant Turnover Rate: The number of tenant turnovers, for any reason, divided by the number of units. A vacancy always starts with a Tenant Turnover. Generally, the more Tenant Turnover the higher the Vacancy Rate.
Example: I had 14 Tenant Turnovers (move outs under any circumstances) divided by 68 houses = 20.6%.
This statistic paints an important picture. 1 out of 5 of my tenants moved. Extrapolating this 20% means we have an average length of stay of 5 years. Our goal in 2013 is 10 Tenant Turnovers for a 14.7% rate, which would give us an average stay of 6.8 years.
By far, the number one expense a landlord faces is Tenant Turnover and the ensuing rehab and vacancy. The number one gross income (top line) reduction is vacancy. Therefore, tenant turnover is very important to your mere survival!
I suggest you follow the above three numbers on an annual basis, comparing year to year, as they will to a large extent define your profitability.
How do you minimize Tenant Turnover? It's not easy. It's many things. Let's go over them in order of importance.
1. Tenant Choice. The most important factor affecting Tenant Turnover is Tenant Choice. Do you rent to slobs, deadbeats and hoarders that you then must evict? Or unhappy, disagreeable, uncooperative people who move every full moon? We rate our current tenants 1 (excellent), 2 (good), 3 (poor) and by far those rated 3 cause most problems and are the movers. So don't let the 3s in. Sherlock Holmes the application. And visit their current home!
2. Have Something People Really Want. High demand and low supply to a defined (Niche) prospective tenant. With a waiting list. Our motto is "Dream houses for rent". Amenities such as nice kitchens and baths (2) with ceramic, spacious, and refinished hardwood floors.
3. Niche Rental. More of #2. We rent amenity-rich 4-5 bedroom houses in good school districts mostly to Section 8 tenants. We also have student rentals and garages. Tenants don't move if they already have what they want and are well treated.
4. Good Service. Emergency calls go to my cell phone and are responded to the same day. Normal Maintenance Requests receive prompt response time with a "Do it once...Forever" philosophy.
5. Personal Attention.
When speaking with a tenant I ask about their family and their kids' activities. I compliment those who deserve it.
Send birthday cards, anniversary cards with a graduated (longer with us/higher amount from $10-$50) Walmart gift card, Christmas card with a $10 Walmart card.
All cards have a handwritten "Thank you for being such a great tenant" or "We hope you say in your home forever", are signed by a person, and generally mention something or ask a question personal to that tenant.
That's enough for now. My book, Buy & Rent Foreclosures (Amazon.com) includes more on this crucial subject.
Current (14) and Projected Tenant Turnover (TT) Numbers - Vacancy starts with a TT. Cut TT and cut vacancy.
A) 14 Tenant Turnovers 14 Tenant Turnovers (20.5%)
Tenant avg stay 5 years x $7500 (cost per turnover)
68 houses $105,000 Total cost for 14 TT
20.5% Tenant Turnovers
B) 12 Tenant Turnovers 12 Tenant Turnovers (17.5%)
Tenant avg stay 5.7 yrs x $7500 (cost per turnover)
68 houses $90,000 Total cost for 12 TT
17.5% Tenant Turnovers (save $15,000 from 14 TT)
C) 10 Tenant Turnovers 10 Tenant Turnovers (14.7%)
Tenant avg stay 6.8 yrs x $7500 (cost per turnover)
68 houses $75,000 Total cost for 10 TT
14.7% Tenant Turnovers (save $30,000 from 14 TT)
D) 8 Tenant Turnovers 8 Tenant Turnovers (11.7%)
Tenant avg stay 8.5 yrs x $7500 (cost per turnover)
68 houses $60,000 Total cost for 8 TT
11.7% Tenant Turnovers (save $45,000 from 14 TT)
What does a 1% or 2% increase in occupancy rate give your bottom line? My current occupancy rate of 95.6% gives a Vacancy rate of 4.4%
A) 4.4% Vacancy B) 3.4% Vacancy C) 2.4% Vacancy
83,000 gross mo rental income 83,000 83,000
x 12 months x 12 months x 12 months
996,000 996,000 996,000
x 4.4% vacancy x 3.4% x 2.4%
43,824 money not collected 33,864 23,904
Save 9,960 Save 19,920
Numbers: Use them. They are your unpaid assistants!
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