“If you fail to plan, you plan to fail.” We have all heard this catch phrase, but few of us are really taking planning seriously. Whether it applies to our nutrition, retirement, or our investment property, planning takes time and brain power. At our company we manage many large multifamily complexes and homeowner associations. Around November of every year you can hear the groans from the managers as they dive into the numbers and reports to get the necessary info to put together the next year’s budgets for the properties. Is the roof going to last another year? How much do we spend on landscaping? Can we negotiate a better rate with this vendor? All these questions come up as I peer into the offices of the managers sharpening their pencils and getting their numbers right.
What about you? If you are a real estate investor you need to have a plan. You need to run the numbers ever single year and put together a budget for your property. Here is how rental property managers can help you to put together a budget that is realistic and accurate.
Anticipate the Market
This is a very difficult thing to do. The rental housing market is volatile, especially where I live in California. We have seen some pretty amazing highs and lows over the past ten years. So where is the market going next year? A property management company like ours is going to have a good estimation of what the current trends are at this moment. Investors use the phrase “the trend is your friend.” People who have been in the industry for many years are going to have the best insight on the trends.
They will also have insight into local development. For instance right now in Chico there are 800 new bedrooms that will finish construction in the next six months. These are primarily built for student housing, but it will have a domino effect throughout the entire community. What is going to happen when 800 new bedrooms, plus all of the other new development, hits the market at the same time next year? What will it do to rents? What about vacancy rates? Our property management division is attending all the new development meetings, and getting alerts based on everything the city approves to be built. That will give us better insight in planning the future potential of rents next year.
Anticipate the Vacancy Rate
A long vacancy in-between tenants can absolutely destroy your annual rental income. I’ve had owners call me after their home sat vacant for four months waiting to be rented. We were able to rent it in about two weeks after we took some professional photos and aggressively marketed the property. But even after coming to the rescue, it was too late. Her rental income was destroyed for the year. Your rental will sit vacant at some point. Hopefully you have great tenants who stay for years, but that’s not usually the case. Plan for your vacancies. A good management company should be able to do a turnover in about 7 days. 7 vacant days a year puts you at a vacancy rate of 2%. If you can get that, that’s great. We typically plan for 5% to be safe.
Anticipated Major Repairs
You never know when your water heater will go out, or when your HVAC will break down, but you want to be putting away incremental reserves for when that day happens. Hignell Property Management's rental property managers will do an annual walk through inspection once a year and rate the appliances, flooring, paint, and other fixtures inside the rental unit. These are put on a scale from A (brand new) to F (needs immediate replacement). We use this to determine the reserve amount we will need to put aside in our budget to replace these items when they will come up for repair. There is no prefect system, and we don’t have a crystal ball, but regular inspections every year will give you insight into what might break and when.
These are different than major repairs because you are the one to initiate the improvements. Maybe you want to put in Luxury Vinyl Planking in the living area or you want to completely redo the landscaping. Maybe your trees need trimming or asphalt needs a new coat. Whatever the case may be you are going to want plan for these improvements. The most common mistakes investors make is not setting enough money aside for reserves. Plan for these repairs, even if you think they are 5 years out.
At our company we can even get bids for painting, tree trimming etc,. even six months away from when we will do the work. These bids help rental property managers put together our yearly budget.
Have I missed anything? Please leave your comments in the section below to continue the conversation. Also, if you would like to have us look at a rental strategy for your property please don’t hesitate to give us a call (530) 576-5376.