By Sean Sutton Private money, a term often used for non-bank, non-agency loans, is one…
For residential real estate investors, effectively managing cash flow starts with setting reasonable expectations for expenses and accurately forecasting future performance. However, managing expenses (and properties in general) is no small task. Savvy investors are often looking for ways to improve their processes and operate their portfolio more efficiently. For example, experienced investors often focus on tenant communications and nurturing tenant relationships because renters have a direct impact on maintaining cash flow and achieving cash goals. Here are a few ways real estate investors can better manage cash flow:
In order to maximize cash flow, being practical about the way they manage their properties is critical for any investor. One of the first major decisions investors are often faced with is whether they have the time and skill set to manage properties on their own. Investors should determine their scope and level of participation even before investing. Unfortunately, many investors have neglected to do so and find out the hard way. For the passive investor, it is difficult to manage properties outside their regular work hours and family commitments. It gets increasingly hard as they invest outside their local area of residence. There is no doubt that property management can be a full-time job. Landlords need to be responsive to tenants at all hours and keep track of a wide range of expenses and payments. They must also be available for showings around the clock or risk missing out on quality tenants and extend vacancies. Investors can hire professional property management companies to handle all aspects of the business, but they must also account for the reduction in cash flow, often by 8-10%, which many industry veterans factor into their investment decisions. Regardless of the choice between self-management or professional management, investors need to conduct the necessary research and weigh the different costs, benefits and timelines.
Once investors have determined what property management style is best suited for their assets, they should figure out what systems to implements to track their portfolio. Whether they are managing the properties themselves or using a third-party company, all investors should take advantage of emerging technologies in the real estate space. While most of these tools require monthly or property level fees, they simplify the manual tasks associated with property ownership and can lead to better speed to scale. For example, investment property tools can provide advanced insights for acquiring properties, expected renovation budgets, and can effectively alert landlords when payments are due. Major players in this space include Appfolio, which allows users to list vacancies to various rental sites, screen tenants, generate lease agreements, and collect rents all through its online system, and Yardi, which uses a cloud-based platform that provides real time analytics and provide an online platform for tenants to request work and pay rent, as well as other tools. These technological tools allow investors to track their properties anywhere on the globe and can automate many otherwise time-consuming tasks. They are intended to make life easier for landlords and streamline processes to keep both owners and tenants happy.
Focus on the Well
Rental income is the principal driver behind investment decisions in residential real estate; however, many property managers forget to protect the source of their revenue. Effectively screening potential tenants is a crucial practice that gives investors additional control over their income stream. There is no better friend to a property manager than a good tenant, which can be shockingly difficult to find in many instances. So, while new property management technology can streamline many of the processes, it cannot simply generate good tenants. Investors would be wise to take time and consider the type of renters that are best suitable for their property type, a process which can also save them money down the line. For example, college students as tenants are often better adopters of online rental platforms and communication systems, but are usually expected to cause higher costs in repairs and maintenance. Other things to consider include incentives for ideal clients – foregoing a couple weeks of rent payments to attract long-term tenants who will reduce turnover and lower upkeep costs.
However, no matter how ideal the tenants are, rental issues and eventual vacancies tend to be unavoidable. This is why it is important to maintain frequent communication and regularly measure tenant satisfaction. Happy tenants who feel their concerns are heard by management are more likely to stay in place longer. Again, technology can help improve the user experience and speed up response times, but it requires a conscious effort by the landlord to use and implement. Some owners even use vacancies as an opportunity to re-evaluate and make tenant improvements. These savvy investors upgrade dated features during the periods of vacancy with the idea that modest improvements will produce happier tenants (in addition to higher rents).
Prepare for Capital Expenditures
Many landlords don’t accurately predict how much wear and tear that rental properties will see over its lifetime. Keeping reserves for capital expenditures (they will be undoubtedly necessary at some point) is a prudent practice to ensure that investors can quickly address issues that arise with the property in order to keep tenants happy. While a busted refrigerator may not break the bank, having funds set aside to repair faulty roofing and HVAC systems can really save investors on a rainy day or month. Stockpiling for expected maintenance and capital expenditures will also allow investors to accurately forecast what they can expect in portfolio revenue. For example, if a landlord’s properties are predominantly built more than 50-years ago, they should consider holding extra reserves as these units tend to require additional maintenance over time.
All investors should recognize that specific revenues from real estate investment property are NOT guaranteed. To get close to targeted returns, investors must efficiently manage and forecast their cash flow. Investors who acquire properties without properly projecting and calculating expenses may find themselves disappointed and frustrated as to where their cash flow went. Hopefully, through these tips, they have learned to be realistic, leverage technology, focus on the well and prepare for capital expenditures.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.