The Other Side Of Owning Rental Property
By JD Esajian on January 5, 2015
When one thinks about being a landlord, the most common thought is dealing with tenants and maintaining the property. While this is certainly a huge part of being a successful landlord, there is another side of the business. You need to be as in tune with your finances and record keeping as you are with the property. For many landlords, this is considered the tedious part of owning real estate: one that can cause the most problems. For as much hassle as this may be, it directly holds the key to maximizing cash flow and determining profits. If you aren’t spending enough time on the financial aspect of your rental unit, you may be setting yourself up for trouble down the road.
As with any business, you need to know where you money is being spent every month. Even if you have an accountant or a manager that runs the property, you should be on top of your expenses. These expenses will determine the cash flow of the property. Many of them are fixed every month, but there are some that are variable and can add up quickly without you even knowing. Quarterly water bills, seasonal maintenance, tax increases and snow removal can eat away at any profits and leave you wondering what went wrong. As the owner of the property, you need to have a method of knowing where every dime goes. This can be as easy as an excel spreadsheet, but whatever the method is, you need to have something in place where you can easily reference your expenses in a moment’s notice.
With every new lease that is signed, you should do a review of all documents associated with the property. This means taking the time to actually read your lease and see if it is current and still applicable to your situation. It is not uncommon for a landlord to use the same lease on every property for many years. This is great if the lease is solid, but there are often changes in the property over time that can render your lease irrelevant. In addition to your lease, you should review your insurance and make sure you have the coverage you need. It will be too late to change this in the event that something happens to or on your property. If you think that dealing with an annoying tenant is a problem, you will wish this was the only thing you need to worry about if someone gets hurt or there is unforeseen property damage. Your insurance and lease are the two documents that can help protect your investment if something goes wrong. It needs to be reviewed accordingly.
One of the ways that landlords find themselves in trouble is when they start mixing personal and real estate funds. If you got into some bad banking habits along the way you need to change them as soon as possible. Some investors go so far as to have separate bank accounts for every property they own but at a minimum you need to have a business account in addition to a personal one. As soon as the security deposit is received you need to put this in your business account. It can be easy to say that you will figure it out in nine months but that often comes quicker than you know. In addition to be unlawful it can leave you robbing Peter to pay Paul dealing with monthly expenses. You need to treat every property you own as a unique entity and this means never mixing personal and property funds.
It is easy to estimate expenses for the property based off of last years numbers. The reality is that things can and do change from year to year. If you are in an area that has snow there is no telling what can happen from one year to the next. The same is the case with town’s property taxes or other expenses on the property. Just because you went through last year without any major expenses doesn’t mean the same will happen this year. You need to have ample reserves in place and review your annual expenses at least twice a year. If there are changes in these areas it will have an impact on everything else in the property.
Every time you are called to the property, you should take note of it. It doesn’t matter if you went to unclog the toilet or there was a fight between tenants. If there are issues with the property or the tenants, you need to send emails so there is proof of your conversation. If it is the case of their word against yours, you want to have as much evidence on your side as possible. This is just another example of how things can get out of control. The more detailed you are with your expenses, record keeping and communication with your tenants, the easier it will be when tings get off track.
Dealing with everyday issues with your rental property comes with the territory. It is important not to overlook the other side of the business. This is the side that will help maximize your cash flow and protect you if something happens. As boring as they may be, they hold the key to a successful business.