Four Steps to a Successful Property Investment
By Kathleen Wilcox, EMBA
At the very beginning of a new property investment, an investor with a buy-hold-manage strategy is likely to have a vision of what that investment will become in the future. The challenge is taking the right steps between the date of purchase to the date of sale so that the vision becomes a reality.
Step 1: Set Major Goals
Each investor and investment is unique. That being said, articulating major goals for a new investment property in a measurable, objective way is a great first step towards achieving any investor’s vision. Here are a couple of examples:
Vision: This new property will be an income source for me.
Goal: My new property will provide me with $250/month after all current and long term expenses are paid.
Vision: I will get a good return on this new investment property.
Goal: Gross revenues at my new property will increase 5% per year for the next 10 years.
Step 2: Develop a Plan
Turning a major goal into a reality can be overwhelming when one thinks about everything it will take to achieve it. But, considering that major goal as many smaller activities may make it more manageable. For example, activities that contribute to an increase of 5% gross revenues per year for the next 10 years could include:
1. I will increase rent rates by at least 5% [or rent controlled allowed amounts] as lease terms end.
2. All new lease agreements will state that the tenant is responsible for all utilities.
Developing a budget that begins at closing and using it in your assessment of whether or not your activities are leading to goal attainment periodically are important activities as well. I know “ budgeting isn’t exactly a fun activity, but believe me “ comparing what has been planned (your budget) with what’s actually happening with a new investment is an excellent strategy.
Step 3: Establish Important Relationships
I learned in business school that most businesses that are successful over time pay heed to six major areas:
¢ Internal infrastructure
¢ Customers
¢ The competition
¢ Vendors
¢ The industry
¢ Macro-economic trends
In the world of the small investor, it’s a lot to ask that one person manage relationships and have expert knowledge of every aspect of every area. But getting to know the people who have a direct or important association with your new building is an important activity.
Tenants, governmental agencies, vendors and the competition (yes, even the competitors) are all relationships that will have an impact on your property’s success. ‘s probably a good time to say that no single personal has all the time required and most of us are not that interested in complete mastery of all of the six areas mentioned above. That’s why a network of experts, industry colleagues and trusted friends is so important to long-term success. [Join AOA, attend workshops, seminars and utilize all the services to help you make this business of landlording easier, more profitable and more enjoyable!]
The most important relationship that directly affects a new property’s potential for profitability is with current tenants. They can help to increase gross revenues and decrease expenses “ or vice versa, depending on how you establish and maintain your relationship with them.
Revenues from tenants that positively impact the bottom line can include laundry facility use, third party utility billing, and reserved parking fees, in addition to the traditional monthly rent. But disgruntled, tenants can increase a building’s expenses in any number of ways, i.e. increasing legal expenses due to evictions or other notices, increasing maintenance expenses due to property defacement or increasing utility costs due to inappropriate use of dumpster or recycle containers.
So don’t make the mistake of focusing only on the numbers “ the property investment business relies heavily on developing support relationships with people in many areas.
Step 4: Stay the Course
They say that the only thing constant in life is change. In every area of business listed above, this is true. And quite often, frustratingly, these changes are outside your control. You may see the economy tank, maybe a tenant develops personal problems, your trusted handyman may move to the San Juan Islands ¦ the list is endless.
You’ll be able to cope, though, by thoughtfully adjusting your activities to take advantage of the changing landscape “ for instance, revisiting your budget, or in certain circumstances “ your goals.
This is important to long-term success “ stay the course regarding long-term vision for your investment. This is the reason you invested in the property in the first place and drives the actions you take over the lifetime of the property and the benefits you reap at the end of the investment.
Kathleen Wilcox, EMBA, is a principal oat Lamplight Enterprises, LLC. Reprinted with permission of the Rental Housing Association of Puget Sound.