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This article was adapted from Bill Ham’s book, Creative Cash: The Complete Guide to Master Lease Options and Seller Financing for Real Estate Investments, with permission from the author.
Making money is usually a reason people get into the real estate business. However, being profitable is not as easy as finding a good deal and watching the money come in.
If you want your real estate business to be profitable, you should always look for ways to improve your cash flow – and one of the best ways to do it is by doing better business.
The idea is to find areas where you can create value by reducing costs. But where do you start In my experience, there are a number of ways you can cut costs and I will share them with you here. With these tips and some analysis on your part, you can expect to improve your cash flow – maybe significantly.
1. Repair and maintenance costs
Try to cut those costs down by looking for better and cheaper contractors. Start by soliciting quotes from local contractors. For the best price, develop a relationship with these local service providers.
I like to look for contractors who will give me a discount in exchange for my loyalty. I guarantee them all work on the property (economies of scale) if they offer me good service at a lower price.
A local team of loyal contractors will help you take offers. When you show a salesperson that you have a team to do the job, your offer will appear more believable and more of them will be accepted.
My rule of thumb for employees in apartment buildings is to have two employees per 100 units. This is shared between office and maintenance staff.
Using this example of an apartment complex with 100 units, it should be occupied by what I call one in and one out. For every 100 units you need one employee in the office and one employee on the property. The first 100 will most likely require a property manager and maintenance manager.
A complex of 200 units should have a property manager and a deputy manager. You will also likely need a maintenance manager and assistant. Most management companies tend to overcrowd their properties. I’ve added thousands of dollars to complex cash flow by properly staffing them.
Some management companies also charge staff costs. For example, if an employee makes $ 20 an hour, they can bill the owner $ 25 an hour. You need to know this information so that you can save costs here.
3. Rotate costs
This is the effort to get a unit ready for renting again after a tenant has moved out. These costs are determined by your contractors. You want to be aware of the total amount spent on gymnastics expenses each year. This information will be included in the financial data.
If you see high turn costs (not to be confused with regular repairs), it means one of two things. Either management overpays its contractors or the tenant base is unstable overall.
If managers are paying too much to spin a unit, there may be an opportunity to streamline spending. It’s good! If the round cost is high and you are not paying too much for each round, you are rotating units too often. This means that the tenants move in and out of the area / property regularly. The rental income is usually the highest expense for a property.
The longer a tenant lives in a unit, the more money you will make. In most housing markets, the average rental period is two years. This means that you convert around 50 percent of your apartments on average each year.
If you find tenants moving out less than every two years (on average), you may have an economically troubled property with tenants moving too often for you to ever make real money. Avoid doing business with an unstable tenant base. It will be a management nightmare and you will not have the cash flow that you expect.
4. Contract Services
Contract services are services that are provided to the property on a regular or scheduled basis. This is slightly different from the repairs by general contractors mentioned above.
Contract services include garbage collection, landscaping, pest control and so on. You will likely be working with a company rather than a single contractor for these.
These services are likely to be under a contract that may or may not survive the sale of the property. See when to renew these contracts and start negotiating new prices early.
5. Office expenses
This is one area that can save you a ton of money and put your money back on the books. When an office rents its equipment, compare the cost of buying the equipment to the cost of leasing it.
I found an office that was paying over $ 100 a month to rent the copier / fax machine. I bought similar equipment at the local computer store and found that I can buy similar equipment for about $ 1,000. In less than a year we saved money and owned the equipment.
Marketing costs can also fall under this category. Make sure the property takes advantage of all free promotions before spending any money on marketing. Make full use of the internet and social media before running paid advertising.
Research what types of advertisements were effective. Not all marketing reaches all tenant bases. If you have an older C-class apartment complex, you may get more traffic from free online bookings than from high-ranking apartment leasing websites, which can be expensive.
6. Pool service
Once I took over a piece of property and found that the maintenance manager knew nothing about the chemicals that were getting into a pool. The old management never bothered to make sure he was properly trained. Each month he estimated the amount of chemicals that needed to be added.
There are pool shops in almost every city. If you bring them a sample of your pool water, they will test it and explain how you can chemically maintain your pool for free.
The regional manager took this maintenance manager to a pool shop and had him instructed on how to handle the chemicals properly. It turned out that our supervisor had put almost twice as much chemicals in the pool as was needed. In the end, we saved money in the summer months while creating a safer pool for our tenants.
7. Rent roll
With the T12 you can get an overview of the physical and economic occupancy. However, check the dates against the rental list. Look at the total physical occupancy. T indicates how many people live there and how many units are rented, but gives no indication of economic occupancy.
You may need to take a closer look to get this information. Start with the “Balance” column. Not all rental lists call it “balance,” but what you’re looking for is the amount of rent each renter owes. Look at the planned rent for that unit, then find out the balance owed.
What you do is see if the tenants are paying their rent. Every dollar you see in the “Tenant Balance” column is a dollar owed in the rent back. In my experience, tenants who are more than 30 to 45 days behind don’t catch up. They will either be skipped or you will drive them away.
Recently a student asked me to help him analyze a business. On the rental list, I found that the average rent for each unit was around $ 500 per month. I looked at the balance column and saw that almost all of the tenants had a balance between $ 1,000 and $ 2,000.
As the new owner, my student would have to give most of this rent back, otherwise he would have a pathologically high eviction rate. Although the property had high physical occupancy, it had terrible economic occupancy. This is a management nightmare for the period of time looking to turn this trait around. Remember: New vacancies have an immediate cost as you prepare these units for the next tenant.
Unaudited expenses can add up
If you got into the real estate business to be profitable, and I assume you did, make sure you are in line with your operational approach. This is an essential way to run your business smoothly and profitably.
Small and even large expenses that are not verified can cost you and turn good business into bad. You can improve your cash flow and increase your profitability by using the tips offered here and keeping an eye on your business.
Bill Ham is the chief operating officer for Broadwell Property Group in Atlanta, Georgia. Connect with him on LinkedIn.