In Part One of this series we discussed how to analyze our rental property operating statement and improve the numbers by maximizing revenue. In Part Two, we're going to focus on how to control direct expenses so that we can keep more of the revenue that we generate.
"It takes money to make money" is certainly true in the rental property business. Our product is a well-located, clean and structurally-sound property that has cost us money to buy, maintain and manage. The property continues to cost us money each month, so we need to find a balance between spending the right amount to keep our property competitive and holding down expenses so that we realize a good return on investment.
Direct expenses relate to marketing, leasing and maintaining our property. Direct expenses have been colored red in our example operating statement. Let's have a look at them, one by one.
05 Advertising and Promotion. The purpose of advertising is to maximize our occupancy rate. If you have no vacancies, there is no reason to advertise. But if a vacancy is forecast or currently exists, we want to spend the minimum amount necessary to fill our vacancy as soon as possible.
1. Invest in sturdy, professionally printed yard signs that include basic facts about the property (bedrooms/baths) and a contact phone number and/or web site. NOTE: Always check local sign ordnances for restrictions on the size and number of signs allowed. If the property is located within a condo or planned community, check the CC&Rs - they almost always contain sign restrictions.
2. Use free services, such as Craig's List, before spending money on print or on-line advertising. Also look for free bulletin boards in coffee shops, grocery stores and other places where flyers may be posted at no cost.
3. Use open houses to show the property rather than scheduling a multitude of individual appointments. Not only will this save you from spending more time than necessary traveling to and from the property, but most sign ordnances allow us to place additional signs in the neighborhood before and during open houses.
07 Cleaning and Maintenance and 14 Repairs. While cleaning is typically done by the owner between tenants only, maintenance and repairs are performed during turnover and when the property is occupied. Here are some tips for saving on general maintenance and repair costs.
1. Extend the life of exterior wood and metal surfaces with regular painting and use of water sealant and rust-prevention products. Have the roof inspected every two to three years so that small problems can be repaired before they lead to major damage to the structure. Have the structure inspected for termite damage at the same time.
2. Conduct regular preventive maintenance on heating, air conditioning and other systems.
3. Stock frequently-used parts and buy in bulk. Having common parts on hand will cut down on repair completion times and costs - especially the time your maintenance guy charges to continuously run to the hardware store for the same parts over and over.
4. Replace/recycle appliances when they have reached the end of their "economic life." Continuing to repair an old appliance is often more expensive than simply replacing it.
5. Take detailed pictures of your property when new tenants move in. Some will abuse the property and break things beyond the scope of "wear and tear." If you have pictures of the property showing the item properly functioning or in-tact, use that information to charge the tenant for the repair.
6. Circulate a "Tenant Questionnaire" twice per year asking tenants what needs to be repaired. Tenants often wait until a little problem becomes a big expense before notifying you of the situation - being pro-active can save money.
08 Commissions. Owners may use real estate agents to find tenants in return for a flat fee or a commission based on the amount of rent. In some markets this is not necessary, in others it could be worth the commission if the agent is able to reduce the vacancy time significantly.
11 Management Fees. Unless we can manage the property ourselves, hiring a licensed, professional property manager will ensure that vacancies are filled, rents are collected, and the property is cared for properly. Here are some tips for keeping management fees down.
1. The scope of work and associated fees are always negotiable. Determine what you can do and what you need the property manager to do.
2. Resist paying property managers a flat fee. Basing compensation on actual rents collected motivates the property manager to fill vacancies quickly.
3. If the property manager offers a bundle of services, such as management, maintenance and yard care, shop those services with other providers to determine if the bundle is a deal. If it is, take advantage of it.
15 Supplies. Supplies include all consumable items used to maintain the property, such as light bulbs, furnace filters, cleaning supplies, etc. If you can predict your annual usage, buy in bulk at the beginning of the year. Keeping supplies in a locked, secure storage area can reduce "shrinkage" and your supplies costs.
17 Utilities. While most tenants pay 100% of their own utility bills, multi-family properties often have common area utilities costs for gas, electric, water, sewage, trash and other bills that are paid by the owner.
1. Install properly-set timers or light sensors on security lights.
2. Maintain a sufficient number of trash receptacles so that special pick-ups aren't needed when overflow occurs.
3. Maintain systems powered by gas or electricity to operate at peak efficiency.
4. Inspect regularly for water leaks.
5. Use ENERGY STAR rated systems and appliances.
These are just a few of the many ways we can control our direct rental operating expenses. In Part 3 of this series, we'll discuss how to analyze and control the indirect expenses that appear on our operating statement. In the final installment, we'll look at how we use our operating statement in buy, sell and hold decisions.
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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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