Every investor wants to maximize cash flow. However, achieving this goal can sometimes be counterintuitive. For instance, you may think that because you have tenants paying below current market rent that you should automatically raise their rent to full market value when it comes time to renew their lease. While this may make you some extra money in the short-term, it could cost you over time.
Now, I’m not saying that you shouldn’t raise rents. It is often a prudent thing to do. However, if you have really good tenants who take good care of your property and pay on time every month, you may want to rethink the rent-raising property management strategy in the interest of turning them into long-term tenants.
What many investors fail to consider is how frequent turn-over in their rental houses costs them more than a few months worth of lost rent dollars due to vacancy. Every time a tenant moves out, in addition to the standard clean up costs that you should be able to deduct from their security deposit (if they didn’t already forfeit it by breaking the lease), you will likely face some deferred maintenance and updates to make your unit appealing once it is back on the market. You will need to pay a locksmith to re-key the doors. You may need to replace the carpet and will likely need to paint the walls. All of these routine items cost you money and you need to do most of them whether your former tenant lived in your property for two years or ten years.
If you stop and think about it, isn’t it better to be faced with painting and carpet replacement every ten years than every two years? Your cash flow reserves can easily get wiped out, and you will likely have to come out of pocket to get a house rent ready again if you’re losing tenants every couple of years. If there are longer intervals between move-outs, not only will you spend less money on fixing up your property over time, but you will have built up greater reserves from your positive cash flow to avoid coming out of pocket when you finally do have a tenant move out.
Now, there is no magical way to find tenants who will occupy your units for the long-term. Things happen: people get transferred, divorced, have children, move-on, etc. But you can learn better property management (link for our Real Estate Investor Bronze Members) strategies to increase the likelihood of finding and retaining good, long-term tenants.
Until my next post,
James
P.S. Enjoy our Secret Property Management Tips and Tricks real estate course (free download for a limited time only).
An important thing to consider when hiring a property manager to take care of your rental properties is the amount of experience they have and the available resources they will be able to draw upon to take care of your investment.
First off, experience matters. You want someone who is knowledgeable and knows all of the legal requirements for managing properties (and there are more than you might imagine). However, I don’t necessarily think that someone who has been doing property management for 20 years is automatically better than someone who has only been doing it for 2 years. Let me explain.
20 years of experience could mean 20 years of bad habits and sloppy practices, just as easily as it could mean 20 years of refining their management system until it runs super smoothly. My point is this: the number alone can’t tell you if they are going to do a good job or not. It can tell you that they’ve been around for a while and will likely be around tomorrow to continue to take care of your properties, but it does not guarantee the best performance.
When considering what kind of resources your property manager can draw upon, I am referring to a few things, but primarily, I mean time. Is property management the focus of their business or is it a side-show to their main occupation of selling real estate? (Remember that property managers are required to hold real estate licenses in most states.) You really want a company that does property management full time, so that all of their resources are devoted to keeping your properties occupied, in good working order with paying tenants. Think of it this way, if you were diagnosed with a brain tumor, and your family doctor told you that he dabbled in brain surgery on the side, would you really want him to be the guy cracking open your cranium and slicing into your gray matter? Probably not.
Time should also be thought of in terms of the total man-hours available. Is your property manager a one-man show – so that when he gets sick or goes out of town, nothing gets done? It’s important to know that you are hiring a team of at least two, preferably more, active agents who will be getting stuff done for your properties.
Lastly, resources can be thought of in terms of your manager’s business practices. Do they operate with standard systems and checklists to make sure everything gets done right and on time, or do they wing it and run into problems down the road because of possible oversights? Don’t be afraid to probe a little bit into your prospective manager’s procedures and practices. If they don’t appear organized to you… they probably aren’t and won’t make a good property manager.
To sum it all up: you want to hire a manager with a reasonable amount of experience who is dedicated full-time to property management and who has adequate resources in terms of staff and well ordered systems to manage your properties exceptionally well.
Until my next post,
James
P.S. Download the Secret Property Management Tips and Tricks real estate course audio program (free for a limited time) or access all our training materials with Real Estate Investor Bronze Membership.
I am amazed at how many real estate investors don’t do the simple math to determine if spending money to fill a vacancy is better than having a house sit vacant. You may be in a city that is experiencing a strong rental market or you may be in a city that is seeing high vacancy rates for rental properties. Either way, if you sit down and do the math, it definitely pays to spend some money to get your houses filled, and filled quickly.
There are two ways to spend money to get your vacant houses occupied quickly: improve the condition of the property to make it more attractive to potential tenants and increase your marketing to get more people to see the property.
I recommend you spend money on both.
Take some time to figure out what ALL your expenses are when you have a vacant property. Of course, you will include your mortgage payment, taxes and insurance, but many investors overlook expenses like utilities and maintenance – such as snow removal or lawn care. I think you will realize that once you know what your expenses are you can easily justify spending some money to fill your vacancy. It is really a matter of spending it now to get it occupied or spending it later to pay more “holding costs” of having a property vacant.
Now, I don’t recommend you indiscriminately spend money on fixing up and marketing your property. I do recommend you spend money in the areas that will get you the highest return for your money. Here are some common sense areas to spend money.
Clean houses are rented far more quickly than dirty houses. Yard signs are cheap and effective ways to generate calls about rental properties. Free classified websites only cost you some time. The curb appeal that attracts potential tenants driving by can mean the difference between a call and no call, so make sure the house looks good from the outside. The general rule for carpet in a rental property is, “would I let my young children roll around on this carpet?” If the answer is no, you need to either clean or replace them -whichever gets you a yes answer to that question.
In general, it is far better to overspend a little on getting a house ready and marketed so that you can select the BEST tenant and not just the first tenant that comes along.
Until my next post,
James
P.S. Sign up for our free real estate investor mailing list and download a free one hour course called Secret Property Management Tips and Tricks (for a limited time only). Or, get access to all over a hundred of our real estate courses plus on-going training and free consulting with our Real Estate Investor Bronze Membership.
