Part II: Property Managers Info Series: SMALL BUSINESS TIPS FOR SUCCESS IN REAL ESTATE -

Want To Reach Financial Freedom Through Real Estate? These Small Business Tips Will Help You Do It.

PART TWO: Treat Your Properties Like Your Products

In PART ONE of the series, we talked about treating your real estate investing activities as a business. As we discussed, that makes you the owner/CEO of your real estate business. Continuing with the view that real estate investing is our business leads us to thinking of our properties as products of value we offer to our customers, the tenants. A product is an item of value offered for sale. Products can be services or items and they can be in physical or in virtual form. Every product is made at a cost and is sold at a price. The price that can be charged depends on the market, the product's quality, the marketing efforts and the segment of the market that's being targeted.

When you view your properties as the products of your business, it changes the way you, the business owner, thinks about them. That change in thinking affects the way you buy properties, maintain them and even the way you advertise them to potential buyers or renters when they’re on the market.

In this installment of the Property Manager's Info Series, we’ll go over the key numbers and metrics you need to keep in mind when buying properties as investments, tips for maintaining your properties like the pros and ideas for advertising your properties so there are no costly delays in selling the property or gaps in receiving rent.

1. Know Your Numbers

If you want your real estate investments to be the vehicle to take you to financial freedom, you should start by having a financial plan that clearly defines how much income you need to bring in each month to cover your monthly expenses. Once your revenue target is understood, you can evaluate each property based on how it contributes to your overall financial goal.

There are several metrics you can use to evaluate a property's actual and/or potential financial performance. We'll touch on a few of the most common metrics here. A more in depth look at real estate calculations will follow. These are not the only metrics you can use. What you choose to measure depends on the investment type you choose and the specific return on investment you expect. No matter which metrics you choose, it’s important that you understand what that particular metric is telling you and that you monitor your property’s performance to be sure it’s giving you the returns you expected. If you’re not getting the desired returns, you may need to adjust your strategy, make changes to the property or remove the property from your portfolio.

Cash Flow

One of the most straightforward ways to evaluate your property’s performance is to measure the cash flow it produces over a given period of time - like a month or a year. Cash flow isn’t the only way to measure a property’s performance and some investors who invest for asset appreciation are not concerned with a property’s near term cash flow potential. Even if you don’t plan to use the cash flow from your property now, it’s still important that you’re able to determine what the property’s cash flow amount is.

Cash flow is simply the amount of profit you keep each month after collecting all income, paying all operating expenses and setting aside cash reserves for future repairs. The amount of money that’s left is your cash and it can be used to pay down debt you have on the property, invested into another property or paid to you as personal income.

Here’s an example of how to calculate the monthly cash flow from a single-family rental property that you have in your portfolio.

Monthly rental income: $1,000

Monthly operating expenses:

• Mortgage: $402

• Property taxes: $60.03

• Insurance: $39

• Property management: $100 often (often 10% of rental income amount)

• Vacancy reserves: $70 (7% of rental income. Adjust depending on risk tolerance)

• Repair reserves: $100 (10% of rental income. Adjust depending on risk tolerance)

Total monthly expenses: $771

Cash flow: $229 ($1,000 total income - $771 total expenses)

Now that you know how much cash flow the property is generating, you, the business owner, can now determine whether the return this product is bringing you is sufficient or not. If the returns are not meeting your expectations, you can control the income side by raising rent or charging for amenities you currently give for free. You can also control your cash flow by decreasing your expenses. You might do this by refinancing your mortgage to a lower interest rate or by negotiating a lower insurance premium on your homeowners policy.

Cash On Cash Return

Cash-on-cash return is another straightforward financial metric that compares total pre-tax cash earned from an investment to the total amount of cash invested. Real estate investors use cash-on-cash return to measure the potential profitability of an investment based on the down payment amount or cash purchase price, plus any required improvements or upgrades.

The cash on cash return formula uses a metric that we discussed earlier, net cash flow. This time we’ll use the pre-tax net cash flow and divide it by the total investment amount to give you your cash on cash return. The formula looks like this:

Cash on Cash Return = Annual Pre-Tax Net Cash Flow / Invested Equity The following example may help clear up any questions about the calculations:

Let's say you decide to buy an 8-unit duplex community for $1 million. You are able to pull together the $200,000 you need to make the 20% down payment the lender requires and you plan to finance the remaining $800,000 of the purchase price. In addition to the down payment, your initial cash outlay also consists of another $30,000 in closing costs and fees.

After one year, the rental revenue from the property is $96,000. The mortgage payments for the year, including principal and interest payments, came to $48,000. You spent another $12,000 making repairs and operating the property over the year.

We can calculate the cash on cash return using the following steps:

1. Calculate the annual pre-tax net cash flow:

Annual Pre-tax net cash flow = total gross revenue - (Vacancy + Operating expenses + Annual mortgage payments)

$96,000 annual revenue - $48,000 mortgage expense - $12,000 other expenses = $36,000 annual net pre-tax cash flow

2. Calculate cash on cash return:

Cash on Cash Return = Annual net cash flow / Invested equity

$36,000 annual net cash flow / $230,000 invested equity = 15.6% cash on cash return

The property's cash on cash return of 15.6% means the property's annual profit for that year will be 15.6% of the cash initially invested. It is important to keep in mind that this cash on cash calculation is only an estimate of future returns and is not guaranteed money. As the business owner, your job will be to see to it that your properties perform as expected or hire someone to look out for your properties’ performance for you.

Other Metrics and Figures

There are several other metrics investors and business owners use to evaluate future investments and monitor the performance of their current investments. Cash flow and Cash on cash return are just two that are commonly used in the real estate industry. Later in the series, we’ll talk more about some of the other metrics that are used and we’ll go over more of the general accounting terms you should know to successfully operate your business.

2. Maintain The Property Like The Pros

Now that we’re thinking like business owners and treating our properties like the valuable products they are, it’s time that we start to maintain our properties like the pros do too. This means keeping your properties looking and functioning at their best by staying on top of routine maintenance and handling maintenance requests from tenants properly.

Caring for your property to keep it attractive and to reduce the number of costly, unplanned repairs seems like a no-brainer. Most investors intuitively know they should do this. But, like with many other things, if we don’t have a system and a plan in place for handling maintenance, it will become another thing that gets put on the back burner of our busy lives or slips through the cracks while we tend to other daily priorities.

Having a well defined property maintenance plan can help you avoid issues at your property that can be costly and even dangerous. Your maintenance plan can help prevent a small leak from turning into a completely rotten section of sub-floor or a leaf filled gutter from turning into a full scale roofing issue. It can also prevent a loose board from causing a tenant’s broken ankle, or a faulty wire from turning into something much worse. To avoid serious problems, it’s essential to keep up with maintenance requests and take preventative maintenance measures.

A solid property management plan not only protects against injuries and costly repairs, but it also can reduce the amount of work you have to do at the property. You already have enough work to do and putting together a whole maintenance plan just sounds like even more work. Taking a little time now to put your plan in place could save you a lot of time later. For example, when the A.C. goes out, you could spend time on the phone talking to your tenant about how they're suffering in the heat, spend more time looking for a service person who is available to come and won’t charge you an arm and a leg and then spend even more time waiting for the repair person to come and fix the problem with the A.C.

If you had a maintenance plan in place, you could call one of the preferred HVAC servicing companies from your list of vetted, licensed and insured vendors and know that the person will come and do the job right without giving you the run around because you’ve worked out all the details with them beforehand. Of course, you might have been able to save even more time with the A.C. repair if you noticed the problem with the unit during your quarterly maintenance check and took preventative maintenance steps to address the problem at that time.

Your Property Maintenance Plan

An effective property maintenance plan consists of two distinct parts. One part of the plan are preventative measures and the other part of the plan are the reactive measures. On the preventative measures side, you should create a preventative maintenance schedule with specific tasks to perform on a monthly, seasonal, and yearly basis. One easy way to stay organized with the maintenance plan is to have checklists with maintenance tasks that you perform each season. As we mentioned earlier, scheduled maintenance can prolong the life of your property and reduce the chance of expensive, urgent repairs. In a later article, we’ll dive into the details of how to create a maintenance plan and discuss some key items you’ll want to include in your plan.

Even with the best proactive maintenance plan, you won't be able to prevent all tenant repair requests. Things break and different issues come up from time to time, so it’s also a good idea to have a system or a plan in place to handle maintenance requests that come in unexpectedly. Your tenants need to know who to contact when an issue arises and they should have an idea of what to expect when a maintenance request has been submitted. You, or your maintenance person, should reply to the tenant in a timely manner and stay in communication with the tenant to let them know what is being done to resolve the issue they brought to your attention. There are high-tech and low-tech ways of communicating with your tenants. We’ll discuss them more in future articles.

Get Help If You Need It

The good news is, you don’t have to do all the maintenance yourself or even answer the repair request calls, if you don’t want to. These days there are virtual assistants who can receive calls for you and reach out to your preferred list of vendors on your behalf. There are also property management companies who would be happy for you to outsource all of this work to them. No matter if you hire a V.A. or partner with a full service property manager, it’s important that you choose the right person (people) to work with on your property. Be sure anyone you work with also understands you are running a business and be sure their way of operating meets your business’s standards. Be clear when giving others directions and work from written agreements as much as possible. You’ll be looking for someone who not only has the right skills for the job, but also someone that you can effectively work with. This is your business and you get to work with whomever you choose. Choose wisely.

3. Attract The Right Customers

Continuing with the business theme, if your property is your product then your tenants are your customers. Your property should appeal to your ideal tenants or customers and your marketing efforts should attract those customers/tenants as well. Here is a list of five things you can do to be sure you’re attracting the right customers to your business.

1. Have a great property

Be sure you are following all the property maintenance tips we discussed earlier and check back in coming months for more property maintenance information. You want to be sure you’re delivering a great product to your customers by offering a property that is well kept and that looks like a place where people really want to live.

2. Advertise Your Property

You’ve purchased a great property and are maintaining it at a top-notch level. Now let people know about it! There are several online resources to help landlords advertise vacant properties. Zillow.com and Cozy.co are just two that you can use. Facebook Marketplace is another resource many investors find useful when advertising properties. Putting a sign in the yard is old-school compared to the new online platforms, but it’s still a very effective way of finding tenants. Word of mouth and other tenant referrals are commonly overlooked ways of finding tenants to fill vacancies but these should be at the core of your advertising strategy.

3. Write Great Copy and Have Professional Photos

If you’re going to advertise your properties online, it’s important that you have a high quality, professional looking listing. Today’s listings aren’t complete without interesting yet informative descriptions of the property and professional looking photos to go with it. These days, virtual tours of the property are increasingly common and provide a potential tenant with a better idea of what the property is like than regular photos can.

4. Know Your Property And Highlight Its Features

Does your property have extra storage space or new energy efficient windows that reduce heating and cooling costs? Let potential tenants know. Not all the amenities of a property are apparent to everyone and sometimes certain features don’t show up in pictures. You’ll want to be sure to include any special features in your write up of the property and be sure to let all potential renters know about the features. The appliances you provide, additional services like landscaping and your property’s proximity to popular restaurants, parks, schools, etc. are all features you want to be sure every potential tenant knows about.

5. Screen Your Tenants Thoroughly

Now that you’ve gone through all the steps to have an amazing property that’s well maintained, and advertised widely, you want to be sure to choose the right tenant(s) to live in your property. You can’t discriminate against people and you must be sure to follow all the fair housing laws when screening and choosing tenants, but you

can also gather relevant information to help protect you from choosing a tenant who will be a nightmare down the road. You’re not allowed to deny a renter based on their gender, sexual orientation, race, religion, age or physical ability. You can, however, check up on your tenant’s background, credit score and income to be sure these metrics meet your criteria. You should also call references and try to speak to previous landlords to see what kind of tenant they are and if they’ve ever been evicted.

Following these five steps in the beginning can save you a lot of trouble down the road and keep your business running smoothly.

Conclusion

Your property is the main product of your real estate business. Know your numbers so you can buy it right and monitor its financial performance. Have a plan for how you’ll maintain it and how you’ll respond to urgent repair requests. And be sure to reach your ideal customers with effective advertising.

Go back to PART ONE for tips on how to treat your business like a business and learn how yo can achieve financial freedom through real estate by doing do. Skip ahead to PART THREE to learn about the lease and how it is the front line of defense in protecting you and your business.