As an investor, it’s important to maximize the net operating income for your investment property, and we’re talking about that today. There are two main ways to do this; by increasing your income and reducing your expenses.
Reduce Your Vacancy Rate
In order to increase your income, the first thing you must do is reduce your vacancy rate. There are two types of vacancies. You might have a vacant unit which is an actual vacancy or you might have an economical vacancy where you have someone living in the unit but they are not paying rent. If you have a vacant unit, you should do a market survey and find some comparables to help determine why that unit is vacant and why you cannot get a tenant in there. Ask yourself if your rent is above market or if the condition of the property is poor and maybe you need to do some repairs.
Know Your Market
Every time you have a lease coming up whether it is a new lease or a renewing lease, you should do a comparison of the market to find out what the rent rate is for similar units. Here in Colorado Springs, we have seen the rental market increase year over year for the past three years. In some areas of town, the rental market has increased by 10 percent. So, you may be leaving money on the table if you are not doing a good analysis of what similar properties are renting for.
Rent Collection Must Be Consistent
Your lease should plainly detail when rent is due and any late fees that will be applied when the rent is late. It should also list steps that are taken if rent is not paid. We recommend if you have a disciplined rent policy, then you stick to it. We like to say, ‘someone is always training someone’, which means if you are following your policy, then you are training your tenants to pay their rent on time. If you are not following that policy, then it is actually your tenants who are training you to not accept rent on time.
Handle Repairs at Lowest Level
The next part of maximizing your net operating income is to reduce your expenses. The first way to do this is by handling repairs at their lowest level. If a tenant calls in with a request order or there is a problem with the property, always see if you can troubleshoot the problem first. Maybe you can go by and take a look at the issue so you have a better idea of what might be required. Find out if a maintenance guy can handle the repair or if you will need to hire someone outside, which will come at a higher hourly rate.
Qualify Prospective Tenants
We recommend you screen and qualify your prospective tenants thoroughly. A good background screening with a credit check and a minimum income of three times the monthly rate is always encouraged. Make sure you know who you are putting into the property.
Retain Your Good Tenants
Obviously if you have a tenant who pays their rent on time and keeps the property nice and clean, you want to keep that renter as long as you can. If they move out, every transition has a cost. Wear and tear such as new paint and carpets will add expenses. You also have to expect vacancy when a tenant moves out which will be a loss of income. You always want to find those good tenants by screening them well and then try to keep them.
Bill Utilities Back
Many times when we take over the management of a property, we find that the owners have been paying all the utilities and the tenants are not. We found that when you are billing the utilities back it saves the owners money because the owners are not actually using the utilities. It also makes the tenants more accountable. You see the utility bills decrease in cost because the tenants are now aware of their actions and realize they are responsible for the amount of utility cost they use.
Increasing Net Operating Income: An Example
As an example of this concept, we took over an 18-unit apartment complex. When we took it over, it had a 55 percent vacancy which included 11 percent for actual vacant units and a 44 percent for economic vacancy where there were tenants that were there and not paying rent. This led to almost $16,000 in delinquent rent when we took over the property. And the rent income for that unit was just over $10,000.
One of the first things we did to turn this property around was follow some procedures to help the cause. We went and physically introduced ourselves to each tenant and let them see us actually making improvements to the complex. This let them see that we were actually taking care of the property which in turn, would hopefully make them take care of their property.
The next thing we did was actually enforce the lease that was in place. We enforced the quiet hours on the property and the cleanliness and parking on the property. We strictly enforced the rent payment process and made tenants aware again of the procedures. Tenants then either followed suit and began to take care of things as they saw us doing, or they left because they didn’t like the new procedures happening.
With all the delinquent rent that was sitting out there, we then offered each tenant a payment plan to assist in catching up on the rent that was owed. Many of the tenants did in fact get caught up on the rent and were able to stay on the property. Unfortunately for those who didn’t, we did have to turn to evictions and collections.
One year later that property is at 0 percent vacancy and we were able to collect 80 percent of the delinquent rent that was past due. The monthly rent income from the property itself has now gone up over 18 percent to almost $13,000.
Increase your net operating income because it increases your return on investment and of course it also increases your cash flow.
If you have any questions about increasing your net operating income or anything pertaining to Colorado Springs property management, please contact us at Cornerstone Real Estate Team.