The Business of Rentals
If you have a financial planner, you probably meet with them at least once a year to review your portfolio and make adjustments if necessary. If you don’t already think of your rental properties as part of your investment portfolio, you should.
Owning rental properties is wonderful, but it is an investment that takes an ongoing investment of time and money. It is an excellent idea to have an annual planning meeting with your property manager, and here are some things you should be discussing:
Does the rent need to be adjusted? There are some owners who like to raise the rent annually, while others never raise the rent to avoid turnover. Yet property maintenance costs increase annually, so the rent should be evaluated to see if a reasonable increase is justified.
What were the expenses for last year? Insurance, property taxes, recurring costs such as gardener, HOA fees, management fees, and possibly utility costs. Many of these costs are fixed and you can budget for the coming year, but how do you deal with the unexpected expenses that come up?
How much is necessary? Reserves are a great way to gradually build up a pool of money to cover expenses – both planned and unplanned. Your property manager can get estimates for a turnover, a new roof, new windows, or a new water heater.
Determine the time frame for the improvement and the property manager can hold back monthly a set amount of money to build the reserve. This is a great way to get major improvements done or deal with emergencies without panicking over how to pay for them.
We all know that big-ticket items will eventually need to be replaced, but often people keep kicking the can down the road, and when the roof fails or the hot water heater goes out, the cost to replace it always seems to come at the wrong time.
This is how properties start to go down in value; the deferred maintenance starts to accumulate and the property owner never seems to have the money to do the necessary repair.
Is there a chance there will be a vacancy in 2018? If so, this is a great time to talk about rent adjustments, maintenance, a mini-remodel etc. and start building the reserves that will be needed.
- Long-term Capital Improvements
What is the status of the roof, siding, furnace, AC, windows, plumbing, appliances, water heater, garage door, fences, deck, landscaping, etc?
- Other Personal Expenses
What else will be coming down the road that needs to be considered? Estate planning, tax planning, mortgage refinancing, job relocation or retirement, kids attending college, caring for aging parents, etc. What will their costs be?
By working with your property manager, you can budget for the coming year as well as prepare for future expenses in a deliberate way that will allow you to be proactive versus reactive in owning rental property. Setting aside money towards your reserves allows for predictable income each month. The annual meeting is an opportunity to clarify goals and establish a plan so that the property manager is able to support and assist you in achieving your short-term and long-term goals.