There are few things in our daily lives better than finding a good deal: The hunt and bargaining at a yard sale; Researching and finding that perfect car at a bargain price; Finding a perfect house and hoping no one else notices before your offer is accepted.
Rarely, however, do any of these things just happen. It all takes planning, knowledge, and execution. So why in the world would you spend tens of thousands or hundreds of thousands of dollars on rental properties and use a rule of thumb?
Treat Your Rental House Like a Business
In the rental business, the property you pick as your investment and the price you pay will forever impact the success of the investment. Once the deal is done, you have very little impact on the expenses. At some point they will bottom out, but you can’t save yourself to more profit. A mortgage won’t change much over the life of the rental, you can’t get rid of insurance, there will always be some number of repairs, and taxes always go up.
When analyzing an investment, ensure you are looking at all the possible expenses. Will you self-manage or will you hire a management company? If so, expect to pay 8% of the total rent to a property manager. What about vacancies? A 3-week gap in income will be 6% of your annual revenue. Oh, and there is also the cost to turn the place over after a lost tenant. When it comes down to it, expenses ARE the risk factor in a rental property.
Revenue is key to profit on your rental property. What’s crucial is maximizing that amount. This is done by getting more than just one rent estimate and listing your property at that value.
For example, Zillow will provide you with a Zrent estimate for any property. But how accurate is it? Did you know that the department of Housing and Urban Development (HUD) performs a regular survey of rents across the US? I find that the HUD FMR is often more accurate than Zillow, and as a result, I make more than $200 more a month using their estimate than Zillow’s. That would be a $2400-year mistake by looking at only one estimate.
As a landlord and business owner, your job is to reduce risk, which in turn will maximize your rental returns. Rental property risk is at its highest when revenue goes to zero, which is during turnover or when tenants stop paying and don’t leave.
Understanding the cause of these events actually helps us minimize them. Sometimes there is very little we can do to stop a tenant from moving on. As landlords, we can only control getting another tenant into the rental house as fast as possible. This is called turnover, and we can directly correlate the time to get a new tenant based on the local rental vacancy rates. Knowing what those rates are, whether they are going up or going down, will tell us in advance if we are entering a high-risk period. We can mitigate those risks by lowering rent or selling the property all together. Just like selling a stock at its peak!
Another risk is when a tenant stops paying their rent. This too is directly correlated to data such as unemployment rates for the county. If unemployment is high, the risk of non-payment will increase. A tenant is unlikely to move out immediately when they lose their job. So, understanding the economy where your rental property is located will help you make decisions before an event happens.
Utilizing a property management tool, like Rental Investor, helps complete the whole management picture. Research rental properties before you purchase them to understand the local economy and ensure the property will be a good investment. Manage the property yourself and save money. Why pay an 8% management fee when we offer all the tools you need to make management simple? Finally, track and understand the rental property performance so you can reduce your risk.