You’re in the Rental Business to Make Money… Right?
In our last post we discussed the tenant, the third basic element of property management. Continuing, the fourth basic element is the money.
We began the last post by writing, “In any business the aim is to make money”, and then we addressed the importance of serving the customer, the tenant, well. But it may be good to pause and consider this matter of making money more directly. So, let’s ask: Is that why you are in the business of owning a rental property? To make money?
We’ve found that many owners who manage their own properties feel conflicted about this. Yes, they tell you they want to make money, but then they make business decisions that tend in the other direction.
Most commonly, they get too emotionally involved with their tenants. They feel guilty about raising the rent on these nice people, and the result is that over the years their rentals make far less money than they should. These soft-hearted owners often don’t even insist that their tenants pay rent on time and let them get weeks or months behind. So landlording becomes as much a charity as a business for these owners.
And while it may seem charitable to be “nice” to tenants in this way, it really does them no favor in the long run. It is more caring to enforce the law of life that to succeed in this world you must pay a fair price and meet your financial obligations. Plus, when owners don’t collect a reasonable income from their properties they are not able to maintain them properly and their condition deteriorates over time, to the detriment of the “nice” people who live there.
By the way, that’s one benefit of hiring a third-party property manager: the manager has no emotional impediments to collecting money for the owner. Quite the opposite. They are incentivized to increase the owner’s bottom line since they normally make a percentage of what the owner makes.
Which brings up another point we should address while dealing with the issue of money in connection with the rental property business, which is, to repeat a hackneyed but true phrase: you’ve got to spend money to make money.
We’ve seen too many owners who seem to resent that they need to spend money maintaining their rentals. It’s as if they think that since they had to spend a lot of money purchasing a house that’s all they should have to spend. Now it’s the property’s job to make them money back. Sadly, this attitude is bound to result in ever-increasing frustration.
The reality is, of course, that just as the home you purchased to live in requires ongoing financial investment to stay in optimum condition, so does the rental house you purchased. The advantage of the rental is that it also pays you in the process. And as a realistic business owner you realize that you must put some of that profit back into the property if you want it to remain profitable in the long run.
Maintaining a property can cost hundreds or thousands of dollars a year, hundreds if it just needs the grass cut and an occasional minor repair, thousands if this is the year you have to replace the heat and air system.
Many owners find that the best money they spend on their property is what they pay for professional property management. You knew we’d be going there, right? But it’s true.
The experience of many owners is that they make more money when they employ a manager to price their rental asset correctly so that it gets rented quickly while earning the maximum return for the owner, to find the best-qualified tenants, to collect the rent diligently (and unemotionally!), to watch their expenditures carefully and get the best price for the needed maintenance, and then to carefully report to the owner all the comings and goings of this money flow.
Yes, it’s good to make money in the rental business. That contributes wonderfully to your peace of mind. But so is making that money without running afoul of the many laws and regulations that impinge on the rental business. More on that in the next post.