For creative financing people, OPM is the cornerstone of estate building and pyramiding of wealth. It's a magic concept; using other people's money to amplify our investment returns through leverage. Why can't we use the same concept in management? We can! First of all, we've got to divide our management job into various components which we'll call profit centers. Once we take a closer look at these, the opportunities for increased cash flows and profits will become more discernable.
What might logical management subdivisions be? Certainly Rent Collections, Deposit Policies, Penalties and Fees would qualify as income generators. What about Occupancy and Turnover, Maintenance, Appliance Policies and Insurance? These can go either way. They can be a source of expense or they can be leveraged to increase cash flow depending upon how they're handled. What about fences, pools and carpets? Pets? These too are potential sources of profit. The key to wringing profits out of what are normally expense items is to pass these costs along to the tenant -every chance you get. When rents tighten up in your area, you should consider implementing some of the policies which will reduce expenses or generate higher incomes. Consider these:
Start with rent collections: the easiest way to insure prompt collections is to rent to people who routinely pay their bills when due. You can verify this through the use of credit checks and references. And you can attract these people by offering
a discount on their rents in much the same way that Safe Drive insurance companies attract the better drivers and commensurately higher profits. We go one step further and offer tenants access to our Credit Card Account so that they can authorize us to simply call in to our bank in the same way as any other merchant in order to collect their rents.
From a landlord's perspective, it's a lot simpler to lift the receiver and to dial a local number, get a credit authorization, deposit the credit telephone order slip into his bank account for INSTANTANEOUS CLEARANCE AND CREDITING TO THE RENTAL ACCOUNT than it would be to collect rents the conventional way. And from the tenant's point of view, in a cash shortage situation, he avoids late charges, stress, evictions, and having to deliver his rents in return for a small credit card charge.
Of course, this doesn't replace the need to keep tabs on all collections to be certain that penalties are charged when the credit card fails to be credited because your tenant has exceeded his limit. Credit cards can be used for deposits too. I've found that people are much less sensitive to making higher payments when they can be charged. There are a couple of variations in this approach. Let's say that you've found a good tenant applicant who's having a problem coming up with his deposit plus his advance rents. Say he needs $1000 to move in, but he only has $750 plus a credit card. You could offer him your “credit card plan” for 10% more rents, enabling him to pay his deposit and rents by credit card. If you could (a) qualify a desirable tenant by this means, (b) make your collections easier, (c) increase your cash flows, (d) reduce the clearing time for your receipts, (e) and get the tenant to pay for the entire thing while reducing your risk of vacancy due to temporary cash shortgages which cause the tenant to be delinquent and to be evicted for non-payment of rent; doesn't that seem like a better way to do business?
This leads us directly into deposit policies. Probably 90% of all litigation between landlord and tenant stem from disputes over deposits. For 5 years I've been ducking this issue by ELIMINATING ALL DEPOSITS. Instead, the prospective tenant BUYS an Option TO RENEW HIS RENTAL CONTRACT after it's normal term with a 10% MA MUM increase in rents. This gives the tenant 2 years with rents which won't vary more than 10%, and it gives me access to the money immediately, since it isn't being held in trust for the tenant or as a 'security deposit against potential damages. These will be charged as they occur after the tenant has vacated. Instead, funds collected on the renewal option are PAID! They're not being deposited! They belong to me from day-1 for my own use. Over the term of the rental contract, I build in incentives to keep the tenant motivated to perform his obligations as called for in the Rental Contract. I go into this in considerable detail in my EASY STREET – HANDS OFF MANAGEMENT seminar. But suffice it to say, from the standpoint of collections, I effectively double the first month's rent collection and get the use of these funds over the entire life of the rental contract interest-free. Plus, I totally avoid disputes over deposits and regulation of what would have ordinarily been deposits by the regulatory agencies. This saves time and expense and generates cash flow.
Repairs and maintenance are the nemesis of the investor! During the first few years I did it all myself. I finally realized that my “investment” was beginning to look like a job that I'd bought for myself – a very low paying job at that. Let's face facts, if you're going to have to work to make your investments produce profits, you have to subtract the value of your labor from the profit before you compute your yield. If you don't know how much to pay yourself, find out what someone else would pay to get your services or how much you'd charge for them. Then deduct that from your year end cash flow. The balance is your investment return. Here again, the trick is to get the tenant to do as much as possible of any work required on the premises.
My rental program starts with a tenant inspection. He is actually inspecting the prior occupant. Between tenants I do only absolutely minimal clean up. This way I not only save time, I save expense. By getting an in-coming inspection, I've put the expense and trouble of this job onto the person who I'm going to have to please. I only need to fix what he sees needs fixing. And his objective inspection is the basis for my charging the preceding occupant for costs of fixing up the property if any dispute arises. Once the premises meet the standards of the new tenant, he becomes responsible for keeping them up to snuff. Built into his discount for paying the rent promptly is a “deductible” fee which he must pay for all repairs. For instance, if he gets a $50 discount each month for paying on time, then he also must pay for the first $50 of repairs needed each month.
I've discovered that one of the keys to low turnover and vacancy rates is to get the tenant involved in the property as soon as possible. His inspection, and perhaps letting him earn rental credits by doing painting, clean up, etc. engenders in the tenant a proprietory interest in the property from the very start. Coupled with the Option to renew mentioned earlier, and stabilized rents, he tends to stay longer prior to moving out. And he has an investment in the property in terms of his labor which he is reluctant to jeopardize by being evicted for not paying rent. Furthermore, when he has to pay the first $50 toward any repairs, it's amazing how much better he treats the property.
As a standard policy included in my rental program, I specifically exclude any appliances! This gives me the chance to (a) sell used appliances to tenants, (b) rent appliances, (c) buy appliances from tenants who won't need them in their next home when they move out at the expiration of the rental contract, (d) avoid having money tied up in CAPITAL improvements rather than in EXPENSES, (e) avoid tenant complaints and repairs normally associated with appliances, (f) save time which might otherwise have to be spent in buying and negotiating terms on appliances. When I really want a tenant, and the lack of appliances is a stumbling block, I can usually negotiate a slightly higher rent (5%) in return for putting in used appliances. I get him to find something he wants, within a stated budget amount, then I install it. Here again I avoid the time spent looking for a suitable stove or refrigerator which the tenant must like, and if it fails, I can always maintain that he picked it out, so he can't blame me if he isn't satisfied. And usually, the amount I've agreed to pay is less than he wants to spend, so he spends his own money to make up the difference, and I own the appliance. He understands my costs, and he takes better care of the appliance. Either way, my costs are reduced in terms of time and money.
Another often overlooked savings comes when your tenant pays for his own costs of insurance. I encourage his taking out a renter's insurance policy. This protects him from claims of others injured on the property, protects his property from accidental loss, theft or damage, and it also protects me from his claims to a certain extent. I give him address of MY AGENT so that any claims can be handled between us by the same company.
