Rental Properties & The Return On Investment -Not To Mention Time
There can be a fine line between what improvements to a rental property can bring an actual increase in return on investment and that which maybe a waste of time and money. Often one will here me state that I provide a nice clean habitable rental property for the area; however, often do not over improve the property. Traditionally, I do not believe in pushing for a top rental price range in a particular neighborhood as I feel my tenant turnover greatly increases.
You see there is alot more than just getting the highest rent for your rental with it’s newly installed granite counter tops and brushed nickel lights, fixtures, and accessories. I’ve watched a neighbor in a particular area charging $850 (with at least $15k more in cosmetic improvements) while I’m charging $625. Basically every year he’s got a tenant moving out with a good 30 days down time, new painting, clean up, and some extra’s here & there. Meanwhile my average tenant stays for 3-4 years. Now some will argue with me that I’m missing the boat. Sure every year he gets $2,475 in extra rents (only 11 months with a one month turn), and he’s spending a good $1,200 in additional maintenance due to the turn. What’s missing is the return on that extra $15k in improvements versus the lifespan of those improvements, and the time-value of that turn.
If you’ve ever had rentals for a length of time, you know that often your properties wear n’ tear tends to be much greater than your own. It’s really a crap-shoot and what I call “random chaos” that increases as you increase your rental portfolio. You see the quick estimate above on the extra $2,475-$1200/$15k is a good 8% return; however, one need’s to earn that $2,475-$1,200/year to offset reinvesting on those depreciating assets ( and random chaos) not to mention take the time to handle the turnover -which at a minimum occupies mental energy if you outsource 100% of the work. Now, If that investor could get his average turnover to every two years -we’d be talking. As a generalization the basic return of 8% would double to 16%. Perhaps, he’d could achieve that goal with a lower rent -say $750? This is something we all learn with time, experimentation, and experience.
Meanwhile, my $625 rentals are on auto-pilot and often fill rapidly (say 3 days or 1 week) due to the locational deal and word of mouth. Sometimes when it goes to easy -it’s a sign the place is under-rented (to cheap). So I’m not perfect either; however, there is one component of this investment operation missing.
Notice how most state (including our real estate investment book writers) that they want (or the goal is) a passive investment? That’s sort of ironic when one is investing in single family and small multi-family investment properties -now isn’t it? Even if you use a property manager, it certainly isn’t passive. My goal is to make my rental property portfolio as passive as possible. This would include easy day-to-day management, wear n’ tear on the property, and the handling of tenant (resident) turnover. All of this becomes easier with a resident with whom we know and have developed a business relationship with. Much easier if said resident isn’t moving out every year!
So if your residents are moving every year, identify what is causing the move out. Discover what it takes to get stable qualified applicants to apply & stay in your rental investment. Perhaps -you are pushing the rents. I don’t know about you but I get worn out when residents move out every year -especially if you have alot of them.
Now-I will add the disclaimer that I know many real estate investors that are having success at pushing market rents with superior rental properties. I’m not saying it can’t be done; however, if it is -it’s being done by a disciplined professional. So it can be done -you just better really know (rather than think) you know what your doing. The goal of the article is to get you to think. Think about what we can do to improve the return on our investments & while achieving our lifestyle goals too.
