So how does an investor ease the burden?
The goal of any investment property is to make enough money to never have to spend your own money. Often times, you can achieve double digit returns in buy and hold properties even after paying for property management, leasing, and construction. The key to finding these allusive 10%+ returns is to locate the right operation in the right market. This means you can take advantage of monthly cash flow, appreciation, and purchase with instant equity. Often you can’t do this alone. Having a loyal team to keep everything on track is essential.
If you make the right decision in the beginning, paired with the right team will create a successful turnkey system that keeps cash flowing in.
Let’s Talk Acquisitions
There are many different things to take into consideration when deciding which properties to purchase. The top 2 reasons are instant equity and high positive cash flow. Some properties have both and some have one or the other. A balanced portfolio should include a good mix of both equity and cash flow. Thus you can diversify your holdings and maximize liquidity. Acquiring properties for a turnkey operation requires comprehensive market knowledge. Such an operation will provide multiple types of properties with different specs. Focusing on a specific type of deal will make it very difficult to keep any inventory. For example, if you’re a turnkey operation looking to buy 6 – 8 properties per month in a metro area, this is very manageable. However, if you’re looking for 6 – 8 properties (per month) all within a half mile radius, and they have to be 3 bed 2 bath houses with a garage… Now you will have to start paying more for a limited product. The returns offered will decrease. This is a mistake that most major hedge funds (in residential real estate) have made over the last 2 years. A great acquisitions department will be comfortable buying in “A+” neighborhoods as well as “C-” neighborhoods, 2 bedrooms as well as 4 bedrooms, single family and multi family. It takes truly localized market knowledge to spot multiple types of great deals in a particular metropolitan area.
Rehab is part of most real estate investments. However, not all improvement are created equal. As we talked about in Is Remodeling Worth It, there are some remodeling jobs that have a far greater return than others. Contractors can also vary as well. If you don’t have a go-to company, call around to make sure you’re getting the best price available.
Be sure that the leasing system is somewhat separated from the property management. It is a bad idea for the person approving the applications to be paid a bonus upon lease signings. Leasing agents should get a bonus to move people in apart from a separate property manager who decides which prospective tenants are approved and which are denied. This eliminates one of the most common conflicts of interest within rental properties. The goal is to find stable, long-term tenants, not just the first tenants who apply. For a turnkey system to work, the leasing standards have to be set high. With any rental portfolio, vacancy is definitely the enemy. To ensure a low vacancy rate, you need multiple leasing agents competing to rent each property to earn a commission. It’s also vital to have an open line of communication between the leasing agents and the investor. If a property sits longer than a month, there needs to be feedback from the leasing agents to the investor and the property management team.
One person often cannot do it alone. Instead hire a management team that understands cash flow. The big picture with management is to keep maintenance costs low and rent collections high. This may sound simple, but there are many psychological aspects to property management that most investors don’t think about.
Another very effective tactic is systematically handling routine maintenance before it’s requested, i.e., performing preventative instead of reactive maintenance such as changing a furnace filter now rather than dealing with a broken furnace in the middle of winter. This sends the message that you care about our clients and properties.