End of Love

End of Love

You’ve just bought an investment property and prepared it for rental. You’ve decided you will manage this property on your own, after all why pay someone else to do it when you can pocket all the money yourself?

It can’t be that hard even though you have other things vying for your time and attention. You can attend to this on your off hours. Advertising for tenants, screening tenants, collecting rents, making repairs and whatever else it takes you think you will have time to do it all.

Life will be easy street from now on right? The truth is, when we try to manage our rental properties ourselves we often come up against competing objectives.We want to increase the value of our property, we want a tenant to pay our mortgage, we want to be loved by the tenant and we want him or her to pay on time every time and we want him/her to take care of the property better than if it was their own. That is one tall order and you may get some of it some of the time but not all of it all of the time.

The competing objectives begin when you want to be liked by your tenant after all who doesn’t want to be “landlord of the year”? Your tenant on the other hand wants to pay the least possible, have you shoulder all the maintenance and repairs and even have the window washing included. You on the other hand want to charge as much as possible, expect the tenant to take care of the place as if it were his/her own and cut the grass.

Voila – the end of love.

Once you have signed the rental agreement with your tenant, your relationship with them will formally begin. When you are managing tenants, you will realize that not all renters are made equal.

Some tenants are a real pleasure to work with and the only time you need to see them is when you are collecting rent. They go the extra mile to maintain your property get along beautifully with the neighbours. On the other hand, some tenants can be living terrors who will require that firm hand under the velvet glove.

Property management can make or break you. This is what will really put you to the test. Unless you actually live within easy reach of your revenue properties, you’re going to be relying upon someone else to manage things. Even if you live close by professional services can market your property easier than you can especially if they have a formal web site and they would know the best price to ask for your rental. They can also be the “buffer” between you and the tenant so that sticky situations where you have to get firm with tenants can be smoothed over.

Property Management means: writing ads, handling inquiries, showing the property by appointment, collecting rent… it all spells personal involvement and free time encroachment. So, unless you know what you are doing, hire someone qualified who will also give you solid reliable service.

When hiring a professional to market or manage your place get references from their existing customers. Once you see that they enjoy a high occupancy rate you can then rest assured you are in good hands and if your place is priced well you should be able to keep it fully rented.

Pricing Strategies

Pricing Strategies

3 Pricing Strategies

Your pricing strategy will determine your annual return on your furnished rental. Mark it up too high and you may have to wait for a qualified renter. Basically, the higher the rent, the shorter the stay.

Three main strategies come to mind when discussing pricing of furnished housing.

1.  Quick Price: this price point refers to a slight mark-down from what the market will pay. The advantage is that the place will rent quickly and you as an owner or property agent will have several prospects who may want to rent it so you can be choosy. Often this strategy will provide the most consistent annual yield with little or no un-rented time and more often a long term lease.

2.  Market Price: this price point is what the market will commonly pay for a comparable property. The advantage is the property is not under or over priced and should rent within the first month after being showcased to the market.

3. Select Price: this price point is at the highest-end of the scale. There are many reasons why a homeowner may choose this strategy. If an owner has recently done a lot of upgrading, has high quality furnishings and amenities or the property is especially beautiful even waterfront the owner will feel the place is worth the higher price. The disadvantage here is that there will be fewer takers and the property is likely to sit for 60 days or more which is typical of luxury rentals. Any takers it does attract may want only a short-term rental – like summer holidays shrinking the annual return. Use this strategy only if you will not be adversely affected financially while the property sits waiting for a renter or if you plan on using the place yourself during the down time. High end properties do not attract as many prospects so you will not have the power of being too choosy.

The best strategy of course is “correct pricing” which the market will see as fair and full of value. While at first it may not be apparent what the correct price is – the market will soon tell you. If you have begun marketing your suite and there are only a few calls and lost of questions, your price may be high. If you have had 2-3 viewings and no one has decided to take it that is usually a red flag that your property is priced too high for what is offered.

A property that is offering good value and priced right rents after the first or second showing.

Investing in Real Estate: Break Even Point

Investing in Real Estate: Break Even Point

Determining Your BER

Breaking Even as opposed to “Breaking Bad” (a totally different topic) or determining your break even ratio (BER) is important when you are considering turning your Real Estate property into a rental.

A break even position occurs where a property eats up as much as it brings in ( debt service & expenses) and a negative cash flow occurs when rental properties don’t generate enough income to cover all expenses. This results in the owner having to “cash feed” the property to make up the difference. This is a problem real estate investors want to avoid under any circumstance however the market is the market and there is a cap on how much the public will pay. By knowing this, a strategic rental plan can offset losses in just about any market.

I guess the first thing your accountant or Real Estate agent will explain to you is how to find out “the break even point” for an income property.  This tells you what you need to be bringing in to make the property viable. Another measure is the BER, a ratio that shows what percentage of gross revenue is required to sustain the property. As you already know, to be profitable, an income property’s annual gross income must be greater than the cost of it’s annual debt service plus annual operating expenses.

For example a BER of 85 tells us that 85% of revenue is used to cover costs. The lower the BER – the better – as less money is needed to feed the “beast”. This indicator also tells us that the rental value could decrease by 15% before the property is simply breaking even.

BER = (Debt Service + Operating Expenses) / Gross Operating Income (rent)

 

 

Beside just operating expenses and debt servicing the BER is also affected by the property’s annual vacancy rate.   A good property manager can reduce vacancies by keeping rents at market value. This is key in aiming for profitability. Each month your rental sits vacant or underutilized represents an income drop and that means money from elsewhere will be needed to cover costs.

It it more prudent to rent a property at the market value rate for a longer term than leave it languish because the rent is too high. At that point the revenue is “0” and that is never good.

A client of mine has calculated an annual operating budget at $27,300. The market will pay up to $3500/month all in so annual gross revenue = $42,000. Using the above formula the BER for this property is 65. A pretty good number – 65% of gross rent is used to cover basic costs leaving a 35% return to the owner.  The market rental value would have to fall 35% for the property to break even. *The owner does carry a very low mortgage on the property which contributes to making this number possible. On average, homeowners of upper end properties see a BER of 75-85% Very Upscale properties worth over a million $ probably see a lower return only because the carrying costs are usually higher that what the rental market will bear.

ANNUAL VACANCY RATE: and how that affects the bottom line.

Let’s look at how vacancy rates affect the bottom line. In the above scenario (assuming a one year lease) if the $3500/month property rents within 30 days of being listed, the owner will realize $42,000/year in gross rents with a BER of 65%. If it sits on the market for 60 days the annual return drops to $35,000 with a BER of 78% and if it sits for 90 days on the market the gross annual income goes to $31,500 causing the BER to rise to 86%. If the owner still hasn’t rented the property within the first 4 months of listing he will likely be in a negative cash flow position.  The better strategy would be to have priced it correctly in the first place or failing that, correct the price long before reaching a negative cash flow.

 

 

60 Days or more is far too long for a property to sit on the market and there are only a couple of reason for that.

  • the market has contracted and with it demand
  • the property lacks the qualities the market is looking for
  • it is priced too high

On average a property correctly priced with all the desirable features in a growing market should rent within 30 days (or less) of marketing it to the public giving the owner the best BER possible.

The longer the property languishes on the market the less annual income it will produce leaving the owner carrying the costs in full for all the vacant months.

It is far more desirable to price correctly from the start or at the very least to begin correcting the rental rate to avoid further losses.

 

10 Upgrades that will Increase Your Rental Rate

10 Upgrades that will Increase Your Rental Rate

10 Upgrades that Will Increase Your Rental Value

So you have a rental property that you want to offer furnished and you want to be able to ask for top dollar and attract professional clientele?  Follow this guide to raise your property from simply “standard” to “deluxe” and better.

A few upgrades can work wonders especially for the working executive who is in town on a contract assignment. Unlike the leisure visitor who is in Victoria for the attractions, the working executive is more interested in “cocooning” and making the accommodations a real home with convenience and comfort.

  1. FAST WiFi: one of the most important utility required by executives and professionals. Make sure your WiFi connection is the fastest and strongest you can get. Tenants who have to video-conference with colleagues over the internet as a condition of their work contract will require high speed Wifi. Many tenants will also stream media from the TV or computer so a strong connection is crucial.
  2. Electronics package: Make your rental guests happy with a smart TV for streaming media. This will save on paying for premium TV channels as everyone likes to watch movies.
  3. An additional or all-in-one home theater sound bar featuring WiFi enabled blu-ray is a huge bonus.

4.A Custom Closet does a lot to make the property unique and practical. A built-in closet with extra shelves, drawers and organizers is absolutely fantastic and saves on having bulky bureau and dressers in the bedroom.

5. Good lighting and lots of it. Each room should have bright and direct lighting for tasks such as reading, working, sewing or anything where acute visibility is required as well a ambient lighting for overall illumination.

6. Storage – or at least a place to put suitcases out of the way. Your executive renter is here longer than the average holiday guest and an extra place to put personal items will enhance the value of your property.

7.Wine cooler: not necessary but a great addition for beverage storage if you have the space. Providing a wine rack either mounted, stand alone or even countertop is a nice touch.

8.Full size laundry appliances are a fantastic upgrade as laundry can be done faster and more efficient with fuller loads.

9. Bookcases: even one good book case can hold reading materials and help keep the place de-cluttered.

10. Beach towels, beach blanket, picnic essentials – very important if your property has a shared BBQ patio, pool or sauna but equally important so that your tenants don’t have to take your good towels to the pool deck or local beach.

These are some suggestions that will make your place really stand out for for which you can charge top dollar.

A Picture is Worth 1000 Words

A Picture is Worth 1000 Words

A Picture is Worth 1000 Words

There are a few staging rules you should apply before taking pictures of your property.

  • Always set the table – place settings with napkins, candles and wine glasses tell the viewer they can entertain with style and that your place is complete and refined
  • GET RID OF THE CLUTTER: Make sure the kitchen counters and any shelving or bookcases are thoroughly de-cluttered. Uncluttered space looks larger in pictures and much more inviting.
  • Your personal belongings, family photos etc should be put away for the shoot. Straighten up! Crooked window shades and curtains, lamp shades, picture frames, throw rugs, sofa pillows — all can show up glaringly in a photograph. Remove excess furniture so the room isn’t crowded.
  • Add as many pillows as is reasonable to beds, turning down the quilts/comforters a la Euro style.
  • TV’s should actually be turned on as they show better in a photo than just a black screen – ditto for fireplaces
  • Add some flowers to the dining and or living rooms – this adds a nice focal point or a nice bowl of fruit will really set it off
  • photo – then zoom in to a focal feature of the room (armchair by fireplace, view from the window).
  • Of course a clean home does shine through so hire a professional team to put some sparkle ‘n shine into it – if paint touch ups are needed get them done too
  • Find the most flattering angle of the room – walk around until you see a configuration that includes most of the features or highlights the main feature – take several angles. Often a corner of the room is best to shoot from.
  • Sunny days are probably best for outdoor photos – blue skies make your location appealing but overcast days are best for indoor photos where you can avoid the “light blast” coming in from windows. Close the blinds and use your flash for an even balance of light.
  • If you have a furnished patio/balcony two tall drinks, coffee cups and towel or other props shows how the space can be utilized
  • Many people suggest turning on all the lights – set your flash to auto so it fires when necessary
  • Use a step stool to rise a bit higher in the room and take a long shot
  • Pros use a tripod – no more shaky photos from a hand held

For absolute best results hire a professional Real Estate photographer where you can be assured of perfect focus and exposure.

Make Your Property Move-in Ready

How do we move the property from “your home” to a “tenant’s dream home”? There are some key things in place that you may want to look at.

  • The first order of business is to get rid of all your personal stuff. You might think that your books, magazines and movies would be a great asset to those who might make your place a home – but I can assure you that is not the case. Unless your place is just for a short-term holiday, prospective tenants will want to make it their home.This includes family photos, personal mementos and of course your diary (joke).
  • Anything of sentimental or real value to you and is not easily replaceable should also be packed away. Typically this includes fine china and silver, crystal vases and glass ware, heirlooms and anything else that you cherish. Your renters will need only basic dish and glass ware and won’t miss these other valuable items.
  • Keep your artwork simple and sparse and your decorative knickknacks are not needed. I also find that sculptures (unless they are large and heavy) really have no place in a rental home, after all art is subjective and your pieces may not be for everyone while at the same time you don’t want your renter to feel that they are living in a museum. I am always amazed at how homeowners who advertise their space for rent will put a value on all the “artwork” as if that adds anything to the comfort of the stay.
  • What your renter will want is a comfortable bed, fully equipped kitchen, a place to read, study or work, most of the utilities covered and secure parking. Anything extra is just that extra and may not add much to the final rental price.
  • In addition keeping your place scrupulously clean, painted and in good repair will add value. Making sure that everything works from the lights to the BBQ to the fireplaces EVERYTHING should be working as it was meant to be. Fix it if it does not work or work as it should.

In the end the better care your property has the better your renter will also take care of it. If you care so will they.