Investors: Avoid These Idiotic Mistakes
If you own rental property or income property, or if you are managing rental properties, you may want to increase your cash flow or that may be your intention. I’m going to talk about six or seven points where you can increase your profits by doing little things and by avoiding stupid mistakes. Here they are.
One of the good things about owning a rental property or income property is that just by you owning the property, you are getting richer by the month.
One, because of appreciation, because on average, income properties appreciate every year for the next 30 yearson average, maybe 3%-4% per year.
The second way that you are becoming rich every month is that every time you make a payment you are getting more and more equity.
1.) Screen your tenants before you put them in.It’s very critical these days where there area lot of regulations when it comes to eviction or tenants not paying you. So the first thing you can do before you even put a tenant in your apartment or in your complex is screen them properly. Not only are you going to check their financials, do they have the capability to pay for the next one year or two years, do they have good financial records? Do they have good job records? Do they have good credit reports? Because if you put in the wrong tenant and if they stop paying you, or if the tenant is savvy and does not move out, it may cost you two-six months of rents not coming into you, but it may cost you eviction fees.
And as you may know, most eviction laws in general favor the tenants. Historically speaking.
2.) Have a great or monthly or frequent maintenance on your property. The value of a property is better and more if it’s in good condition or great condition, or in excellent condition, if it’s in poor condition and if you want to refinance or if you want to sell, you will get a lesser value. So by doing little maintenance every month, do inspections or do termite or pest repairs, if there is a small repair on a faucet and if the tenants call you, have it fixed. I’ll give you an example.
Ten years ago I rented a property for a client of mine that I sold the home to and I Told him when I found the tenant, we did an inspection, there was a faucet leak in the bathroom. Unfortunately, the landlord, who was a very nice client of mine, probably forgot to do that or ignored my advice to fix that leak. Lo and behold, two years later the tenants called me and said there is a major leak.The carpets are flooded because the pipe broke and the carpets are flooded, and the water came downstairs. But that was not the only problem. When the plumber came in, they found out that behind the sink, where it was leaking, between the wall and the sink, they found mold.
Now, this mold was a major mold. The tenants had to move out for up to a month and the bill was over $30,000 to fix the mold in the carpet and the vacancy. Of course, some of that the insurance paid, but by not fixing a little faucet leak and ignoring it, knowingly or unknowingly the tab was $30,000. And I’m sure his insurance increased and he had to pay a hefty deductible. So little things makes a big difference.
3.) Have a repair fund or a maintenance fund. A lot of the owners don’t have repair funds reserve funds to fix their properties when it comes due. They are scrambling to find money. So if you have a fund, that’s a great thing to do. Maybe every month that you get income, let’s say you have four units and you’re getting $2,000 per unit, that’s $8,000 a month. Maybe you want to put away $500 a month and create a reserve fund.
So when you have a major roof leak or maintenance issue, or the tenants find out that the carpet was messed up and you have to change the carpet, that could cost you $3,000-$6,000 for all units. You already have a reserve fund, and you don’t have to go borrow money from your line of equity or from your credit cards, et cetera, which additionally adds credit interest to your payments.
So having a reserve fund is a really great way to keep your property maintained at all times, especially when it’s needed. And there is always going to be an emergency. One of the rule of thumb is that you want to keep 1% of your purchase price in reserves.
So let’s say you buy a duplex for, let’s say, $500,000. So 1% is $5,000. So you may want to keep a reserve $5,000 handy, and at the same time add another $100 a month, $200 a month every month from each unit, so that your fund is always there in emergencies or when a major repair or issue comes up. And you don’t have to borrow money, which I know alot of people do, and I’ve seen them do it. So have a reserve fund. It’s great.
4.) Set the right rental price at the get go. So let’s say you bought a property for $500,000, and let’s assume that your payment is $3,000 a month, which means that you want to at least have an income of $3,000 a month. Now, if you have an income or the rents in the market are $2,500 and you bought a property and your mortgage payment is $3,000 a month and you rent it for $2500 a month, you are already losing money on it for $500 a month cash flow.
So the one thing is, you don’t want to rent it too low. You want to rent it at least, so that you cash flow. Of course, you’re buying a property for rental income and profits, so that’s one thing you want to do. But on the flip side, you don’t want to overcharge the tenants. You want to charge them the market rents. So in this case, on a $500,000 purchase, and assuming the market rent is $3000 a month in that neighborhood, you probably want to find a tenant that’s going to pay you $3,000 a month.
Of course, in this hot market you may find a tenant that’s going to pay you $3,500 a month because they’re desperate to find something or they are moving. But what happens is if you overcharge the tenants, after a year, they’re going to realize that, hey, they’re over paying and they’re going to move once they move out. Now you incur as a property manager or as a landlord, you incur cleaning cost, moving costs, you have to fix something. At the same time, you may have two or three weeks, maybe a month of rental income gone. Because while you’re cleaning it and finding another tenant and screening them and the moving date, you may lose a month, two months of rent. So by charging the correct rental amount, the market rent, and if your condition of the property is really good, you could get some more. But if your condition of the property is a little bit B class or a C class and the market rents are $3000, you may want to charge less.
So you have to adjust the market rents to your condition of the property or the unit. So that’s very critical. So you don’t lose vacancies or move in and move out costs that will cost you a lot. And if you’re hiring somebody to charge you to find tenants, like in this case a property manager or real estate agents that charge you commissions to find tenants, that’s an additional cost, that’s money out of your pocket and that’s a loss.
5.) Make sure you have adequate rental insurance. Now of course, when you are brand new or when you just bought the property, you’re going to have insurance. Based on your insurance agent’s recommendation, you’re going to get an insurance. But let’s say it’s now five-ten years past that you have the property. Rates have increased, of course, and your rental values have increased or your rental property has increased. So you want to increase your deductibles and the value of your property values accordingly. So always be insured to the right price, never be under insured liability insurance, your comprehensive damages, all those things need to raise it every two or three years. Because your property value increases, the cost of fixing increases.So always keep in mind to have the right insurance coverage.
Don’t fall short when it comes to your insurance because the insurance company, if something should happen, fire or disaster, earthquake, maybe you should have earthquake insurance or if there’s a flood insurance, and if you don’t have adequate insurance, that’s a loss to you. So insurance having the right insurance, keep increasing it or monitoring it with your insurance broker is very helpful to you.
6.) Having great service to each of your tenants.The better customer service you have, the better communication you have. So anytime something comes up, the tenants may call you and say, hey, there’s a leak or something needs to be done. They’re going to be nice to you as well, because you give great customer service. They’re not going to force you to fix it right away or change something.
So the better customer service you have, when they leave, they may give you a great customer review. These days, everybody checks you out of your property out on reviews on Google or property management sites or apartment rental sites. So you want to get good reviews, great customer service. On the other hand, if you don’t have great customer service, the tenants may get mad at you or may not like you, and that can become very disastrous in the sense if there’s something broken, they’re going to call you right away and they want you to fix it right away.
Or if you want to check your unit every six months, they may not allow you inside. So they can become a hassle when they move out. They may damage the property and may give you a bad review, or they may not pay you rent. So always be in good communication. And one way to do that is giving them great customer service. When it comes to communication, when it comes to fixing things, addressing their issues, if there’s another tenant making noise and this tenant calls you next door, then you want to talk to the other tenant.
So anything that comes up and depending on how big your units are, if it’s two units or 20 units, little things make a big difference. Keeping your customers happy with great customer service goes a long way, and that will save you a lot of dollars, even if it’s $70 a unit. If you have 20-30 units and you’re saving $50 doing little things, that can add up to thousands of dollars. So great service always goes a long way.
7.) Have reserve for Vacancies. Now this is a hot market, so a lot of times, landlords, which I’ve seen myself last four or five years, keep increasing their rent because the rents are going up. They’ve gone up 4% on average for the last five or six years. So every time you increase, some of the tenants may leave. Now, while they leave and while you’re cleaning it up and finding another tenant, you have a vacancy. So that’s a loss of $5,000. So I’m not sure why some landlords want to increase $50 and lose a $3,000 a month rent. It doesn’t make sense to me. But whatever the reason, be prepared to have funds for Vacancies. Maybe you want to remodel the carpet. So you want to take all the tenants out and remodel the whole kitchen and the carpeting and the painting and cut out the whole units, because you want to sell it in two-four years and you want to increase the rents.
Well, to do all that, each unit may take sometime and you might have vacancies because they leave or because you’re fixing it or you had a bad tenant. So going back to the reserves, when you have reserves, it will also help you with vacancies. But there’s reserves for maintenance and there’s reserves for vacancies. So if you plan for vacancies, you’ll be good to go and you want to scramble or be in a hurry to put bad tenants or not the tenants that you really wanted.
Hope this helps.