Once you finally finish the lengthy acquisition process that is required for most real estate investments, the real (fun) work begins! It is now time to increase income, lower expenses, and improve the operations of your rental in order to maximize your return on investment. This is the process that can make a good investment great.
Cut Expenses To Improve Operations
Cutting expenses is one of the best ways to improve the operations of any property and often one of the most overlooked.
If you have a rental property that is bringing in $1,000/month in gross rental income, and you spend a total of $900/month on all expenses, then it cash flows $100/month. This is good, but it could be better.
Let’s say you are able to increase the gross monthly rent to $1100/month. Your cash flow is now $200/month, which is awesome, but your expenses are still $900/month. If the property goes vacant, you will suddenly find yourself eating $900/month until it is rented again.
On the other hand, if you focus on cutting the expenses by $100/month first, your cash flow still increases to $200/month, but your expenses are only $800/month. If the property goes vacant now, you will only find yourself eating $800/month until it is rented again. While that still sucks, it is less painful than the $900/month above.
The beautiful thing is that there is no reason you can’t do both. But focus on expenses first, and cut your bottom line as much as possible!
If you are paying utilities on the property you need to focus on mitigating them as much as possible, because they are a huge expense. You can do this by upgrading to high-efficiency LED light bulbs, furnaces, appliances, toilets, faucets, etc. You should also look into installing solar panels on properties for which you pay the utilities.
I install motion detectors for the lighting in the bathrooms to improve operations. Tenants seem to have no problem leaving the bathroom light on 24/7, and installing a motion detector can put a stop to this pointless waste of electricity very quickly.
Commercial real estate often requires exterior lighting and electricity. You can cut these expenses drastically by installing a timer on the exterior lighting to ensure your lighting isn’t on during the middle of the day.
Another quick way to mitigate expenses is to lower your trash bill. You can do this by calling different companies or utilizing mini-dumpsters instead of multiple smaller trash cans. You never know how you can save money here until you pick up the phone and call around.
Insurance is another great way to lower your expenses. Don’t get stuck with a certain company just because you’ve been with them for a while. Shop around in order to get the best rates on your home insurance!
If you own an apartment that is on a single meter, you should consider implementing a ratio utility billing system (RUBS) to lower your cost. RUBS can be billed in many different ways, but it is essentially a way for you to split the utility costs amongst the tenants. If, for example, your monthly utility costs are $1000 on a 10-unit apartment, you would drastically reduce your expenses if you could get your tenants to pay even $50/month. The more you can transfer these RUBS to the tenants, the better your cash flow will become.
This is one of my favorite strategies for improving the value of a property.
Anytime an appliance, light fixture, furnace, or other item breaks in the home, look to upgrade hack the replacement.
Upgrade hacking is a great way to increase the overall value of your property without having to pay a fortune on expenses. Imagine that one of the furnaces goes out and you need to replace it ASAP. You call around, get a ton of quotes, and figure out that it will cost you $1800 to buy a new furnace and install it in your rental.
To upgrade hack this, you would buy a higher-end furnace instead of the lower quality one most people buy. Let’s say it costs you $200 more to get a high-efficiency, high-quality furnace installed. If that furnace only saves you $10/month in gas on your utility bill, it is an annual savings of $120. The high-efficiency furnace will pay for itself in 20 months, and most furnaces last at least 15-20 years! Assuming this furnace lasts 20 years, you would have saved $2200 in expenses by upgrade hacking. The best part is that a high-quality furnace could easily last you 5-10 years longer than the more affordable ones, which saves you even more money!
By the way, on average a high-efficiency furnace will save you 25%-30% of the costs you would be paying on a lower quality unit, which is way more than the conservative numbers above!
You can use this same philosophy when a toilet breaks, the light bulb goes out, the window needs to be replaced, or any other renovation in the property.
Don’t think of this as spending $2000 on a furnace. Think of it as spending $200 more to replace something you need to replace anyway. That is the mentality to utilize for upgrade hacking, and you should think this way for any repair or replacement you do inside of a home!
David Greene talks about this in his book Long-Distance Real Estate Investing.
This is the “fun” part that everybody enjoys talking about with rental properties. The easiest and most discussed way to increase income on a property is to raise the rent. If you buy a property with tenants who aren’t paying the average market rent amount, you can increase that as soon as their lease renews, which is an instant increase in income!
You can also increase income by renovating a rental to increase the amount of rent it will collect. A home that is 40 years old and hasn’t been renovated is not likely to rent for full market value. But a few thousand dollars could easily update the property and allow you to charge more for rent.
Another great way to increase the income from your property is to add more value/convenience to your tenants. You could do this by installing a coin washer/dryer unit in the apartment, which allows you to collect a little extra income and saves your tenants money and time by not having to sit in a laundromat. You could do the same thing with a vending machine if your tenants would like one or by providing an option for them to use a storage shed for an extra $50/month.
That would bring in some extra income and save your tenants the hassle of having to use an off-site self-storage facility. Maybe you live somewhere where you can charge some money for a dedicated parking space. The sky's the limit with the value you can add to your tenants!
All of these options can increase the amount of rent you’re able to collect, while simultaneously improving the approval rating of your tenants around the property. Tenants love convenience, and the more convenience you can provide them, the longer they will stay in your rental. This also saves you money by reducing your vacancy rate.
Anything you can do to reduce vacancy, stress, processes, etc., is a result of improving your operations and systems.
One of the best ways to do this is by hiring a professional property manager. But if you’d rather manage it yourself, make sure you have systems in place to make it easier.
Some of the best ways to implement systems are to utilize templates and checklists, mitigate distractions, and outsource everything you can. Checklists are huge because you can’t afford to neglect steps in your process. You should have a checklist that covers all of the steps you must follow in order to turn over a unit between tenants. That will ensure you don’t miss a vital step and end up having to go back into the unit after your new tenant has moved in.
Outsourcing is a great way to improve operations because it frees up your time for more important tasks. That is why a good property manager can really help you improve your business! The more you are able to outsource the day-to-day operations, the more you are able to free your time up to focus on building the business.
When conducting a renovation, it is important not to go overboard. You want to be right on target with the standard work in that neighborhood. For example, if every home in your neighborhood has granite countertops, you don’t want to install Formica. On the flip side, if every home in your neighborhood has Formica countertops, installing granite will probably not bring enough additional value to your home to compensate for the expense of granite.
For a house hack, you want to renovate the property as efficiently as possible in order to improve operations. It should be noted that builders-grade craftsmanship is generally sufficient for tenants and also much more affordable.
If you plan to fix up a property and then “flip” it (sell) quickly, it will make more sense to spend a little more money on the renovation. Again, you need to find a balance and ensure you avoid going overboard with the renovation budget. Only rehab those items that will bring you a great return on your investment.
The kitchen and bathroom(s) are where you will get the most bang for your buck with these renovations. If you want to spend a little extra money to improve the quality of your renovation, spend it in the kitchen and bathrooms.
Be a Good Person – You Can Improve Operations while doing it!
You can earn a great return on your investment by simply being a good person. Perhaps you write a thank you note to your tenants at the end of the year, for being awesome tenants. Maybe you even give them a $25 gift card or an Amazon Echo. You could buy these, or other gifts, fairly cheap on Black Friday.
Making your tenants feel appreciated and welcome may be the tipping point for them to decide not to move out at the end of their lease. The longer your tenants reside in the property, the lower your vacancy rate and the more money you will make. If a tenant renews their annual lease for another year, that is 100% worth the $25 you spent to make them feel special. However, spending money isn’t a requirement to make your tenants feel welcome. Smile and wave whenever you see them. Also, remember their name and be able to ask about their job/family/pet, etc.
Another way to GREATLY improve the operations of your business is to treat your team very well. Always treat your property manager and realtor well, and a nice gift definitely goes a long way here. You could buy them a bottle of their favorite alcohol or a gift card to a nice restaurant. This will be sure to keep you in their good graces. You may not get better service from your property manager by buying gifts for them, but it certainly can’t hurt. Your realtor will definitely bring you deals they find if they enjoy working with you.
Learn about this in detail in our beginner REI course!
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