By Cliff Hockley
A few months ago I had the opportunity to address 100 real estate investors at a dinner meeting. It was a great evening of give and take. My goal was to help them focus on improving the profitability of their real estate investments. We discussed the following:
We addressed common causes of lost rental income:
- Rent that is too low
- Rent that is too high (and delays the rental of a property)
- Rent concessions
- Reluctance to increase rents of existing tenants on an annual basis
- Not charging fees or deposits
- It takes too long to rent a unit, because the landlord does not have time to clean, paint, advertise or show the property.
We also discussed some real scenarios to help clarify these concepts.
Scenario 1: One of our friends recently inherited five units. Four of the five units were vacant. They were vacant because her father had gotten too old to clean, paint, or rent the units…even though he lived right on-site. He just did not trust anyone to do it the way he would have done it. His daughter did not know what to do, sell the property or keep it? I suggested she hire a property manager and keep it. It was owned free and clear. What better way to obtain a rental property. The point is, he lost years of income and profits that could have made his life easier. I understand the hesitancy to hire a property manager because property management costs money, but it could make you money. The pragmatic thing to do is not be afraid to get help.
Scenario 2: James and Melinda own a sixty unit apartment property. They have an on-site manager and train and set the direction for the manager. They are no policies regarding the cleaning and turning of units. They typically have six units vacant at a time. It takes the manager a month to clean paint and get the units ready to rent. Units typically should take no more than one week to get ready to rent, unless they have been really damaged. James and Melinda are leaving a significant amount of money on the table, just because they are not turning the units fast enough.
We also discussed how expenses affect the bottom line and how better management of expenses can improve the bottom line. In addition, the following expenses can get out of hand very quickly. They deserve a particular close review on a monthly and annual basis:
- Property Taxes
- Water and Sewer expenses
- Turning expenses
- On-site staffing expenses
Investors might want to consider:
- Shopping major categories of their expenses
- Comparing their expenses to competitors in the market place
- Planning capital expenses into the future
- Setting aside reserves to pay for capital expenses
- Plan a three year horizon for your investments
- Make property improvements while you have tenants before a property/unit vacates
Don’t forget, bad tenant screening increases your expenses. Bad tenants:
- Damage property
- Don’t pay rent
- They are hard to collect rent from
- Create vacancy of adjoining units by scaring neighbors
- It can take up to three months or more to evict a bad tenant and cleaning up damages after they are gone
What really surprised me when I polled the investors at the meeting, is that very few kept track of their investments. In other words, they did not prepare annual budgets nor did they prepare monthly financial statements, and they did not review their financials on an annual basis. They had no idea how their properties operated. They had a limited handle on their expenses, and no net income goals.
As an owner of investment real estate, it helps if you develop an annual management plan and budget. Real estate investors must focus on profitability, set annual operating goals and create monthly financial reports. Investors should not be afraid to be accountable. Remember that profits are made by keeping your eye on the bottom line all of the time.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).