Property managers often hear the cry from their investors that they’re not making enough money—as if it’s their fault. “Too many bills,” “Rents are too low,” “Tenants keep leaving.” Imagine telling your investment bank manager the same thing. “Hey, I put $10,000 in the stock market and it tanked. Please fix it.”
Who ever said making money was easy?
If you’re thinking about getting into the real estate game (or you’re already in it and wondering why things aren’t going as planned) here are some home truths to get clear about:
- You get the real estate you pay for, just like anything else;
- The market goes up, the market goes down;
- There are good tenants, there are bad tenants;
- Cash flow is not a right.
In fact, you’re not guaranteed any return. Ouch. When it comes to making money, buying, selling and managing real estate is never a sure thing. Here’s another painful truth. Any Realtor who assured you “X” percent return on your investment property was lying. “Perhaps, but if it weren’t for all these repairs,” you say… Let’s look at those repairs. When you bought that “as-is” bank-owned, condo in 2010 for $60K that had 15-year old appliances and needed a new air conditioning system and boiler (that you didn’t bother to replace) where exactly did you expect to be five years later? Let’s be fair here. Rental properties require upkeep, just like the house you live in.
You have two options
Option 1: Maximize monthly cash flow by not fixing things when they break, become a slumlord and have your property slowly fall apart – and then lose that cash again when it’s time to sell because you only attract lowball, fixer-upper offers. Option 2: Don’t. If your range, refrigerator, dishwasher and microwave are a decade old, ditto. Replace them, or expect the tenant to bug you with issues on a regular basis. If the AC system is more than a 12 years old, it will need replacing at some point. Expect to pay at least $3.5K to get that done on a condo, probably more on a single family home.
Sound expensive? It is.
The truth is, many rental properties are simply not cash flow propositions. If monthly income is important to you, then is something to discover before you buy. To do this, figure out your potential rental income and then subtract the following basics to find out if you even stand a chance of cash flowing. Let’s assume, for the sake of argument, a monthly rent of $1000 on a typical 2/2 condo (Orlando, Florida) with easy, round, but realistic numbers. + $1000 – Monthly rental income
- $300 – Condo Association dues
- $50 – home owner insurance
- $100 – management fees
- $200 – property taxes
You can see that from $1000, you can expect a maximum cash flow of $350 a month with these very basic expenses. That’s with zero fixes, because nothing ever breaks, right? That’s just $4,200 a year. Now let’s assume a month’s vacancy while you find a new tenant, you’re down to $3,200; and let’s assume it costs $1000 to make all the necessary repairs to get “rent ready” including, lock changes, maid service, carpet cleaning, touch up painting etc. So now we’re at $2,200. Minus your property manager’s fee for finding a new tenant, screening and drawing up the new lease at $500, and we’re at $1700 profit for the year. Finally, let’s now throw in that new fridge mid-tenancy, at say $700 (plus tax and delivery and haul away your old one), plus a half a dozen basic handyman repairs… Is there much left?
you’re lucky, you’ll break even and carry the property at no cost. And if you’re really lucky, perhaps there will be a surplice. But don’t bank on it. In many cases, you will be short. In a good market, this won’t matter. In fact, if you’ve done your homework, you’ll expect it. When home prices are rising, all of the profit is realized upon sale. Closing day is pay day. When condos were $50K in Orlando after the crash, this is exactly what savvy investors understood. If they could simply break even on holding the condo for five years and then sell for $100K, they stood to double their money. And thousands did.
It’s all about timing. And expectations.
A good Orlando property management team can certainly help mitigate expenses, but in the end whether you make money, or don’t, it’s probably not their fault. It’s about the math. Real estate is a risky business. Property management is even harder. If it weren’t, we’d all be rich.