What Makes Us Money?
As landlords sometimes we wonder if anything makes us money. It seems as if the money is always going out. If it doesn’t fly away to your mortgage company and the tax collector, it goes to pay for cleanup from bad tenants and maintenance problems. In planning for success in the rental property business, a solid appreciation of where money comes from and what makes more come in will go a long way toward making your path to success clear to you.
Appreciation
When we bought rental property, one of the big attractions was that the value of real estate usually goes up. Of course, there are exceptions, but by and large real estate does appreciate to one degree or another over time.
In our business two kinds of appreciation are sale value and rental value.
Sale Value
The axiom is that you make your money when you buy your property not when you sell it. That means if you buy stupid, let your emotions become involved or just get snookered, you will wait an egregiously long time for the market to catch up to what you paid for your property. Meanwhile, you will struggle to cover the mortgage payments with rent receipts.
That makes for a nice tax deduction, but that’s not what we went into the rental business for, is it? Buying just for tax savings went out of style in the early ’80s.
Even so, with a smart or not-so-smart investment, you can still increase the value of the property by doing some things to make it more attractive to a potential buyer.
• Keep it sharp looking
• Do preventive maintenance
• Make improvements that pay back at least 1.25 to 1
• Keep the rents up to market
Rental Value
Good tenants like to rent nice places. The same things that make a property sell for more also make it rent for more. So in order to get your property to rent for more you also need to keep it sharp looking and do preventive maintenance.
You also need to provide outstanding customer service to the good tenants who rent from you. That means taking care of repair requests quickly and making the improvements that create an image for your tenants that says “I can be proud to live here.”
Other factors are not so much under your control, though, such as the condition of the area in which your property sits. I recently received an email from a landlord who was stuck in a difficult situation.
She wrote:
“Nine years ago I bought an historic home through a first-time buyer program in a transitional neighborhood that the city was investing in, and promised to live there for ten years in exchange for tax subsidies. Four years ago, the neighborhood had deteriorated so much due to drugs and guns that I got permission from the state program to rent the home. For the past two years I’ve had a troublesome tenant whom I’m now evicting, but whom I must sue for damages, back rent and utility bills. I can’t rent to anyone until I get the keys from him (can’t find him) and/or complete the eviction process which takes two more months. Because the neighborhood is so unsafe now, I cannot find tenants with good histories willing to live there, even though the house itself is prime. Average rents in the area are $550-600.
My question is whether it’s time to get rid of this property. There is a 5 percent assumable mortgage of $70,000 on it, no liens. I have personally been paying the $570.00 mortgage now for three months, with no end in sight. I will owe about $ $2400 in subsidies back to the state if I sell before November 2001. Getting the home in shape for new tenants will cost about $1000, and there is an outstanding water bill of about $1,000 that I will have to pay, and then sue for in small claims court. The tenant did not return the keys (which would save me the cost of eviction). The city planning office tells me there are no plans to continue trying to revitalize the area. On the plus side the home is very well located next to a major hospital and university with many graduate schools, only blocks from major city thoroughfares, the interstate, big supermarkets and banks. My first tenants were grad students from the university who left because of neighborhood safety, and it took me 4 months to find the tenant I am now evicting. I am totally unsure of what to do. I have tried marketing the house to community programs, city offices, and microbusinesses (zoning is mixed) to the same tune: great house convenient to everything, too much neighborhood pathology.
I should mention that I have $18,000 equity in the house. Out of 16 new homeowners in the program on our two blocks, only two of us have not just walked away. As a single woman I MUST maintain my credit, so I can’t.”
Unfortunately many landlords find themselves in a similar situation. Even so, neighborhoods can be turned around by using the squeaky wheel method of civic improvement. City government responds to the people who make the most noise.
It will require time and effort on your part, but spending that time and effort can be profitable. Just as how sharp your property looks is a predictor of the amount of rent and quality of tenants you get, so is the condition of the surrounding neighborhood.
The first step is to get in touch with the crime prevention department of the police department. Get as many area property owners as possible to attend a meeting where the crime prevention specialist will talk about how to get your neighborhood under their control.
The worse the neighborhood is, the harder it will be, but you cannot depend on the government to get it cleaned up for you, you have to take charge yourself. Once the drug dealers and other assorted riff-raff start getting booted out, made aware they are not welcome, and good tenants begin to move in, the neighborhood will begin to take on a different character and a perception of it being the “in” place to live will start to rise up in the minds of people in the city. That’s when the rents go up and you start making money. It has worked over and over all around the country, and continues to work.
Things to do next year to take advantage of appreciation:
1. Create a preventive maintenance schedule
2. Stick to it.
3. Join and participate in the neighborhood associations where your rental properties are.
4. Talk to the crime prevention specialist of your police department.
5. If you meet resistance, be a squeaky wheel.
How High Should Rents Be?
If you are going to make money on your rental properties, rents have to exceed costs. Well, duh. The only reason I bring that up is that some landlords don’t seem to realize that. They must not, because their costs keep going up and they never raise rents. Their insurance costs go up, but they leave the rents the same. Their property taxes go through the roof, but the rents stay right where they were. Their maintenance costs double, but rents become a real bargain (for tenants).
Here are some techniques to increase your rental and other income. Thanks to Dorothy Gourley for these ideas.
Rent Pricing
Review your pricing schedules. Do you have premium locations that are underpriced? Are there special view apartments where rents can be adjusted upwards?
Oftentimes upstairs apartments with views can be more desirable than downstairs apartments, or high rise buildings can have a premium-side location. Check your competition’s rents and evaluate your own scheduling, increasing rent pricing is one of the fastest ways to increase income at the apartment community. When buying a building, have a qualified apartment consultant provide recommendations. They will earn their fee many times over.
Early Rent Payment Rewards
Promote a gift drawing for tenants who pay rent on or before the first of the month. Earn interest from early dollars deposited into an interest savings account for 10 days until the moneys from rent payments are transferred to Accounts Payable accounts on the 10th of the month.
Resident managers deposit all checks into the money accounts and the home office accountants transfer the funds to the accounts payable bank accounts. The gift from the drawing can be dinner for two at a nice restaurant, sports tickets, gift certificates or rent coupons. Special monthly recognition can be given in your newsletter regarding winners. All monthly winners are eligible for a year-end drawing.
Piggyback on Competition Rent Specials
Watch your competitions’ specials. Piggyback on great ideas. Let others’ advertising dollars work for you in securing traffic and cutting your advertising costs.
Accept Rent Referral Fees
If nearby competition property pays referrals for tenants and you are 100 percent pre-leased, send prospects who are looking for apartments in 30 days to those communities. Know your competition and how they differ from you. Perhaps you can refer prospects seeking pet apartments, three bedrooms or studios to them. (Referrals such as this may be illegal in some states. Check your state laws.)
Sell Security Alarms for Autos and Personal Use
Tenants have become extremely security conscious. Make arrangements with a local security alarm company to provide their product to your tenants at discounted prices. Offer the service to a prospect or current tenants as an added benefit of living in your properties. Advertise the program in your newsletters promoting how tenants have benefitted from the use of the security devices away from the apartment community in malls, at airports, and sports events.
Offer Wallpaper and Color-Accented Walls
In higher-end units many tenants like to add their own special decorating tastes. Offer a selection of wallpaper for decorating the apartment.
Have a wallpaper vendor charge a fee per wall for the tenant to decorate the apartment. Charge enough to cover the wallpaper vendor, wallpaper removal at the time the tenant vacates and a profit. Another popular decorating feature is color-accented walls. Offer this decorator service, as well.
These are just a few ways you can increase your income outside of blanket rent increases. And put together with rent increases, you can increase your income geometrically.
