Operating statements reflect the pulse of our rental properties. How much we've earned in revenue, how much we've paid in expenses, and how much is left over to cover the overhead, pay taxes, reinvest in our property, and perhaps even keep a little for ourselves as owners. In a series of four installments, we're going to look at the operating statement to see if we can improve the numbers and maximize the return from our rental property investment. We'll start by looking at elements of revenue, then in two parts we'll discuss expenses, and finally we'll consider how the bottom line of the operating statement can be used in our business plan and in hold, sell and buy decisions. I hope that you will bookmark or subscribe to this initial installment so that you'll be sure to read those that follow.
Before we get started, let me disclose that our discussion is not a tutorial on bookkeeping, accounting, or financial management. The example operating statement shown may not match the format you use or that your accountant recommends. It was developed specifically to match the lines on IRS Form 1040, Schedule E, which is the tax form most often used to report rental property income and expenses. In short, this format makes it easier for CPA's and other tax preparers to take operating data and prepare tax returns. Property owners should consult with a qualified accounting professional to determine the best formats to use for their operating statement and other financial reports. With that in mind, let's get started!
A rental property is an investment purchased for the specific purpose of producing either a steady flow of income or for appreciating in value, or both. The operating statement is simply an organized list of the income and expenses attributable to each property we own. Today, our analysis of operating revenue is based upon the strategy that our investment property will produce annual rents greater than annual expenses (we make allowances for months when taxes are due or vacancies occur). We're not yet concerned with making money from our investment when we sell it, we want profitable operating income now.
A rental property can provide several sources of revenue, but the primary source is rents. Here are four things we can do to maximize rental income:
1. Conduct market rent surveys. On a regular basis, investigate similar properties in the area and compare rent rates and features. Use this information to set competitive rent rates and to support decisions to add or remove property features.
2. Maintain the property. Maintaining the property in excellent condition will keep occupancy rates up and support best-in-market rent rates. Regular preventive maintenance and replacement of aging appliances will also reduce recurring and emergency repair expenses. Tenants will pay more and stay longer in a facility that is well maintained and regularly updated.
3. Manage Turnover. Prepare for turnover activities well in advance to get vacant properties re-occupied as soon as possible. When a tenant gives notice that they will not renew their lease or will otherwise vacate, conduct a pre-move-out inspection and make a list of turnover tasks to be accomplished. Schedule painters, carpet service, appliance replacement, cleaning, and other activities to begin on the day the tenant vacates.
4. Collect Fees. Unfortunately, tenants sometimes pay late or have rent checks returned by their bank for Non-Sufficient Funds (NSF). Diligently collecting fees for these occurrences in accordance with the terms of the lease will help to deter them.
Laundry services are another means of generating revenue from our property. Here are examples:
1. Install laundry machines. In multi-family properties, install and maintain coin-operated laundry machines that we own or rent in a clean, well-lit laundry room.
2. Lease the laundry room. We can also lease the laundry room hook-ups to a company that installs and maintains laundry machines. They pay either a flat lease rate or a percentage of the coins collected.
3. Rent machines to tenants. When we offer a single family home or condo for rent, we can offer laundry machines as an option and add it to the rent.
Depending on the type of property we have, we can find additional ways to generate "Other Income."
1. On multi-family properties, offer tenants the opportunity to rent additional storage space, such as spare storage lockers or rooms in a storage facility we build on-site.
2. If available, offer additional assigned parking spaces for a fee.
3. Use your imagination...
I hope this information will help you maximize your rental property income and improve the numbers on your operating statement. Next time we'll look at how to control direct expenses, followed by tips on how to control administrative expenses. In our final installment we'll put everything together to create tools we can use to make the most of our rental property investments.
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If you are an investor looking for additional information on real estate investment or are interested in buying or selling real estate in the Bay Area, drop me a line at john@jsrealproperty.com .
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© 2011 John A. Souerbry
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