If you hate the idea of owning rental property, then turn away … quick! Many people don't like the idea of being a “landlord” and having to deal with tenants. But when done right, it can be much less hassle than you think, and highly profitable.
When I first started out in 1990 I was doing rentals with the idea of generating a monthly cashflow. Within my first 18 months in the business I was generating over $15,000 a month net positive cashflow after expenses. I also had few very problems with my properties and tenants. My attorney (who was a real estate investor himself) asked me, “How are those rentals going for you?”. I said, “ok”. He said, “They can be a real headache, can't they?”. I said “sometimes”. Then he got a really mischievous smirk on his face and said, “Yeah, but money is one hell of an aspirin, isn't it?”. I was laughing so hard at that point and said, “Oh Yeah!”.
In my opinion, people who say that you shouldn't become a landlord and own rentals just aren't doing it right. You get cashflow, equity appreciation, can refinance it every so often (and pull out tax-free cash), and you get tremendous tax write-offs. It's the difference between just making money, and building wealth (and for all the house “flippers” bragging about making tens of thousands on a deal. I routinely walked out of closing when I bought my properties with checks for tens of thousands, had instant equity, and a monthly cash-flow. It was like flipping, but I got to keep the house and income.).
My strategy from the very beginning, was to minimize risk. How do you do that with rental properties? You make sure you have sufficient cashflow to make the property make sense. I'm not talking about the crazy “buy a house for $150,000 and have a $75 a month positive cashflow, that's just insane. Why go in debt for $150,000 for a $75 cashflow? It would make more sense to get a part-time job and make the $75 a month without all the debt. One repair (hot water heater, roof, etc), could wipe out an entire years income. I never bought a property unless it had at least a $250 a month cashflow (and we are talking about inexpensive properties under $125,000.). Then on many properties, I would raise the income. NO, I didn't jack up the rents on everyone, I used a little talked about creative strategy. Weekly rentals.
Most people are conditioned to think monthly when it comes to rentals. We have monthly payments, monthly rents, monthly utility payments, etc. But who says you can't rent out your apartments and houses on a weekly basis? Sure, get yearly leases, monthly leases, but have your tenants pay weekly – or at least give them the option. With the tough economy, many people opt to pay on a weekly basis. Sure, it's a little more paperwork and collecting hassle, but hold on a minute, let's look at it.
How many weeks are there in a month? Quick! Most people will rattle off the top of their head “4”. Well, there are actually about 4.5 weeks per month. So, let's say you have a house or apartment renting for $1,000. If your tenants have trouble with coming up with that all at once, they could opt to pay you $250 per week. Well, we just said, there are actually 4.5 weeks per month, so when they pay weekly, you are actually getting a total of $1,125 per month. That's a 12.5% increase per month. An extra 150% of the monthly income per year Or an extra one and a half rent payments.
But wait, it gets better. Whenever any place does shorter term payments, what do they always do? That's right, they raise the payments slightly. It's expected. You get a discount for monthly, but if you want the convenience of weekly, then the payments are slightly higher. So rather than $250 per week, they pay – oh, let's keep it easy on them – let's say we only raise it to $265 per week. So now our $1,000 per month house just went up to $1,192.50 per month. A 19.25% increase. That's two and one-third extra months payments per year. Our $12,000 per year rental now brings in $14,310.
Got a multi-unit property? Apply this there. I had one particular 30 unit property that was on a weekly payment program, generating over $5,000 per month positive cashflow. Rents hadn't been raised for over 5 years when I purchased it, so we sent out a letter to the tenants of an increase. A whopping $15 per week increase. No one complained. $15 per week, times 4.5, times 30 units … that's an extra $2,025 per month income. $24,300 more per year.
Quite an increase, isn't it? Amazing how a small simple strategy like this can make such a huge difference in the income of a property. There are other completely different creative strategies I use on various types of my rentals that increase their income over 30% per month compared to what the market rents in the area are. But that's for another post.
If you have rentals that aren't producing the way you would like them to, sit down and calculate what a difference putting them on a weekly program will make. Get a little creative with it. You'll be surprised at how much it will increase your bottom line …
… and the bottom line, is what this business is all about.