Dave Friedman is Co-Founder and CEO of Knox Financial, the smart and frictionless way to turn a home into an investment property.
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When people invest in a publicly traded company, they keep track of a number of the business’s financial metrics. Unfortunately, when people invest in buying a rental property, they can get so caught up in the day-to-day of being a landlord that they fail to keep track of metrics for evaluating how well their investment is performing.
Whether you’re a seasoned landlord or considering purchasing your first investment property, keeping an eye on these metrics will help you take steps toward maximizing your property’s financial performance.
1. The Property’s Annual Appreciation
Having spoken with landlords across the U.S. over the last decade, I’ve found that when landlords look at how well a property has performed at the end of the year, they often just look at their net cash profits — rent collected less expenses.
Net cash profit is certainly an important metric, but equally, if not more, important is the equity appreciation of the investment property. Even if your property appreciates just 1%-2% per year on average, this means you’re building thousands of dollars of wealth each year.
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At the end of each year, I suggest looking up an estimate of your investment property’s value on Redfin or Zillow. See how much the value went up compared to the previous year. Add this to the net cash profit. This is how much wealth you created via the investment in that year. Then, divide this by the equity you hold in the property. This ratio is your total rate of return.
2. Rent Charged Versus Potential Rental Income Per Unit
When you own an investment property, your sole form of cash flow is rent collected. Too often, I see landlords undercharge for rent. While I’m firmly against trying to overcharge on rent, landlords are doing themselves a disservice if they do not charge fair market value.
To get a rough estimate of the median rents in your area, you can do a quick search on a site like Renthop of median rental values in your neighborhood. To put a finer point on the number, you could find other rentals in the area and compare their prices and finishes to yours. If you’re substantially under the median, raising rent when the lease is up is the right step.
3. The Number Of Months Of Vacancy Per Year
Vacancy is something that happens to all landlords at one point or another. By and large, it can be avoided. Unless you are doing a significant renovation on your property, the number of months your property is vacant each year should be one or fewer.
If you see that your property is vacant for more than two weeks per year on average, it’s time to put serious thought into the issue. This does not mean only focusing on reducing the time between tenants, but also making sure your rental property is one that tenants enjoy living in and want to keep leasing. When tenants don’t renew their lease, try to find someone to move in the day after they move out. If there is vacancy between leases, aim for four weeks or fewer every few years.
Months before a lease ends, you should be in touch with your tenant about lease renewals and the new rate you’ll be charging. If you’re not comfortable with these conversations, get a professional to help you. If you do have turnover, conduct a simple exit interview with the tenants — even if it’s just a quick multiple-choice question on why they’re moving out.
4. Late Payments
Late payments mean you’re spending time following up with renters on payments, and your time is valuable. Late payments also increase the chances that you’ll have delinquent payments if people fall behind on their rent.
Ideally, the number of late payments you receive should approach zero. Over the years, I’ve found that a simple way of minimizing late payments is signing people up for automatic rent withdrawal every month.
5. Delinquent Payments
Much like with late payments, this number should be close to zero.
If you find that delinquent payments are frequent, you could also look into rent protection insurance for your existing leases and consider doing more thorough background checks on incoming tenants.
6. Emergency Repair Costs
Every year, you should expect to do proactive maintenance on your property. However, the amount of money you spend on emergency repairs — such as hot water heaters or furnaces breaking down in the middle of the night — should approach zero. This means that you’re making repairs proactively instead of reactively, which is much more cost-effective in the long run.
Remember, a rental property is an investment, and keeping an eye on a few metrics about your investment’s performance will help you make decisions that will greatly increase your wealth in the long run.
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