THE BIG PICTURE
STRATEGIES: RENTALS
exists. Challenge yourself to spend some time investi- gating other areas. Once a market is identified, drill down to specific neighbor- hoods. View school rankings and job information to isolate areas that will create the best rental de- mand and consistent income. Vacancy and turnover are absolute profit killers, so make sure you are diligent in identifying your target markets. TIP NO. 2 DON’T UNDERESTIMATE OPERATING COSTS Rental properties are real, live operating businesses, and as
replacing the roof up front. Procrasti- nating with rehab can lead to serious negative outcomes. Tenants cannot be relied upon to notify you or your property manager of a small leak. That small leak can turn into extensive water damage and create a significant hit to your bottom line. Be proactive with your homes. It is usual- ly cheaper to do work up front than wait for larger problems to occur down the road. TIP NO. 4 FIND A RELIABLE FINANCING PARTNER Instead of looking for a lender, look for a financing partner. It’s no secret that leverage is an easy way to expand your rental portfolio. But don’t settle for a bank or a private lender who wants to give you one loan and then disappear. Conduit lenders, such as Colony American Finance, offer best-in-class solutions to assist in both the acqui- sition phase as well as the long-term hold period. They can extend credit beyond your immediate needs so that you know you’ll have financing avail- able for future acquisitions. Understanding your financing op- tions is essential in creating leveraged returns that you can scale as you contin- ue growing your rental portfolio. Some investors choose to manage their own portfolios. In some cases, this works and helps themwith their bottom line. True growth, however, often requires a keen fo- cus on scaling your business and expanding your rental holdings versus managing them. Consider budgeting to pay someone to manage your properties for you. This will enable you to acquire a larger num- ber of homes and will free up time that you can use to evaluate other invest- ment opportunities. Work with your manager to put to- gether a policy and procedures manual so that both parties are on the same page in regard to tenant screening, maintenance TIP NO. 5 FIND A GOOD PROPERTY MANAGER
calls and other essential management ac- tivities. Understand and get access to the management software that your property manager uses so that you can also moni- tor your portfolio’s performance. TIP NO. 6 KEEP METICULOUS RECORDS The long-term success of your rental portfolio requires considerable effort and organization. It’s important to analyze historical factors such as maintenance, vacancy and credit loss. These indicators can allow you to make future decisions on rents, repairs and operations. Keep clean historical records of all your rental properties so that you can easily access data and make informed de- cisions. Clean books will also make the filing of tax forms more seamless, ensur- ing that you realize the proper benefits and advantages of owning real estate. Having a sound database of information is also extremely important when it comes to financing options that may be available for your portfolio. A little extra effort in the record-keeping department can prove instrumental in increasing the profitability of your rental properties in the long run. Rental properties can be a great way to generate consistent, long-term returns. They do require work, however, and being proactive in maintaining best prac- tices can go a long way toward a building a successful portfolio. While it may be tempting to cut corners at times, it’s imperative to stick to a plan and see it through. This can often be the difference between a highly profitable investment and a deteriorat- ing money pit. Although these tips are meant to be help- ful, it’s also important to use your intuition and be nimble and in tune with the needs of your specific portfolio. With proper care and dedication, you too can grow your rental portfolio without breaking the bank. •
To Rent or To Resell? HERE ARE SIX WAYS TO GROW YOUR RENTAL BUSINESS WITHOUT BREAKING THE BANK.
such, carry operating costs. Budgeting for these costs is crucial in growing a success- ful rental portfolio. While gross yields and cap rates can be useful in analyzing an investment opportunity, it’s the net yield that will pad your wallet. Don’t forget line items such as turnover costs, maintenance, capital expenditures, vacancy, property management and credit loss. Even if the costs are nonrecurring, budget for them so you can create a steady profit that you can count on over time. TIP NO. 3 TACKLE CAPITAL EXPENDITURE NEEDS UP FRONT You’ve located the perfect house with a great potential profit profile. The listing agent tells you, “The roof is 25 years old, but only has some occasional minor leaks that can be repaired fairly inexpensively.” Don’t settle for this type of mind-set, and don’t downplay potential problem areas in a home. Plan for the cost of
by Dennis Spivey
A
s the U.S. real estate market contin- ues to recover from the financial crisis of the mid-2000s, there has been a noticeable flow of capital moving back into residential investment opportunities. From the fix-and-flip model to the long-term rental/hold strategy, we’ve seen a steady re- turn to real estate as a more tangible and sta- ble investment. The players range from large institutional entities, backed with public and private equity, to entrepreneurial individuals looking to expand their portfolios. More recently, a steady shift in return analytics has prompted investors to weigh the long-term benefits of renting properties versus reselling. Generally,
long-term rental properties can generate great, consistent returns, but one must proactively manage the process from acquisition to lease in order to avoid unforeseen costs and potential losses. Here are six tips that can be helpful in keeping your pocketbook healthy when planning a rental business. TIP NO. 1 IDENTIFY YOUR TARGET MARKETS “Measure twice, cut once.” We’ve all heard the expression used in various scenari- os. Rental investments are no different. Economic factors such as jobs, home
formation and median income can all affect your rental property. Taking time to better understand an area can tremendously affect the performance of your investments. Some investors only consider the markets in which they reside. But being open to new locations may lead to greater opportunities for those willing to conduct some extra research. There are many resources available to assist investors in examining a specific market. The Internet is flooded with different consulting resources—some free, some for a cost. Don’t get stuck with the notion that your local MSA is the only feasible rental market that
Dennis Spivey is Vice President at Colony American Finance.
42 | think realty magazine november :: december 2016
thinkrealty . com / mag | 43
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