Today, I'm going to talk
about secrets of successful property management revenue addition.
Many of you know I wrote the book The ABCs of Property Management
and the Principles in this book are relevant even more today.
So stay tuned.
If you're thinking about managing your own property
or you're managing a property manager on a property
that you all, I'm going to do three videos, one focused on revenue.
The second I'm going to focus on expenses.
And the third, I'm going to focus on debt.
All of which are the formula to generating the maximum cash flow.
So there's three questions that I always get around
Should I manage my own property or should I hire somebody out?
This is the number one question I get.
The second most asked question, of course, is what do I need to do
or what do I need to look for
if I'm doing it myself or I'm using somebody to manage my own property?
And the third, of course, is
what systems should be used for property management success.
Those are the three things I'm going to talk about in these next three videos.
So whether you're managing the property yourself or you're managing somebody else,
these are the three primary drivers that generate cash flow
income expense and debt.
So for this video, we're going to focus on revenue or income.
So you guys can see the behind
the scenes view of some of the things that we do in our management company.
As you guys know, we employ about 250 people
and we manage about 10,000 units.
These systems that I'm going to share with
you have been generated over a long period of time.
These are the exact things that we look at whenever
we're buying a property or we're actually managing one ourself for revenue.
I always focus on six primary things.
Number one, what is the market rent?
Number two, what is the actual rat?
Number three, what is the economic occupancy,
which we're going to talk about in a minute.
Four, what is the vacancy of the property and in the market?
Five What are the non rental producing units inside of that property?
And six what other income opportunities might there be?
So first, let's talk about market rent versus actual rent.
And it's really quite simple.
So first, let's talk about market rent and it's exactly what it sounds like.
Market rent is what does the market support today?
You want to be careful not to try to achieve more than the market,
and you also want to be careful not to actually rent the unit for last.
So the market rent is simply the market rent is simply derived
by going out and shopping the market and seeing what are the homes renting for,
what are the condos, renting for the apartment,
or even a retail center, a self-storage or an office.
It doesn't really matter.
What does the current market support in red of that particular type?
That's what the market rent is.
In almost all cases, you're going to find that
the actual rent of a property that you're looking at or considering the buy
or even your own property is going to be less than the market rent,
because generally market rents do trend up.
It's very common for us to find a property that has been owned by an ownership
for a long period of time where these actual rents
might be significantly below the market rent for example.
So if 100% of the people moved out and then 100% of the people move back in,
you would most likely rent them at the market rate as opposed to
what the actual rate is on their rent role in the property at this very moment.
This difference is what we call internally lost to lease,
and it's very simply if, for example, the market rent was 1500 dollars
and the actual rate was 1350 dollars of let's say 50 units,
and that was the average of all the actual rents of those 50 units.
Then this particular property, a 50 unit property
would be about $150 below market.
That should make you excited because inside of just the red rule,
you're going to see that there's about $150 increase in the Reds
by not doing anything by literally just raising them to the market.
When the resident moves out, you'll be able to get that order $50 more.
So if this was a 50 unit building, that would be approximately
about 90 K a year. That's a lot of money.
So that's simply 50 units times 150,
which is 70 $500 a month times 12 for not for to talk
about the difference between economic occupancy and physical occupancy.
And you're going to see these terms used a lot.
So the brokers are going to use the physical occupancy and the management.
And the way to buy
it is actually to focus on economic occupancy,
which we're going to talk about in a minute.
Imagine that
you step onto this 50 unit property and it has five vacancies on the day
that you're there.
Then in theory, you take five of the units and divided into 50.
You're technically 10% vacant at that time.
So your physical occupancy is 90%.
Your your physical occupancy is 90% and your vacancy is 10%.
When looking at the economic occupancy, you might have a very different picture
economic occupancy considered vacancy for a period of time.
So let's say the vacancy would be calculated based on move ins and move out
for a period of a month or two months, three months or even a full year.
So you would AMAT you can imagine that if I stepped on to this property
just two weeks later, that the actual unit vacant might be ten.
If that was the case, then it would be 20% vacant.
So you can see how economic occupancy can change from week
to week and month to month.
Economic occupancy literally is total
income divided into the market rent.
So economic occupancy is very, very different.
So let me walk you through that.
So you would always start with the market rent.
So the market rent of 1500 dollars times
50 units is $75,000 a month,
but the actual rents are actually 35.
So let's say there's five vacant.
So you take 45 units times 13 five, you come up with around 60 grand.
It's a little bit more than that, but you get the point.
So actually your economic occupancy is more like 80%.
So in this particular case, you might have five vacant units,
which is technically 90% physical occupancy because it doesn't calculate
the rent versus the economic occupancy, which is actually 60
grand divided into the 75 grand, which is the market rent.
And that actually gets you an 80% economic activity.
Why is this important?
Because a lot of people focus on the physical occupancy.
They say all this property is 90% what it actually
is, in fact, collecting much, much less.
And it actually is running close to 80% economic.
The good news is, is that you have the potential
to raise the income, of course, but right now it's operating at about 80%.
So it's very important
when you're looking at a property to focus on the economic occupancy
and not the physical occupancy, which so many people do.
And this is where a lot of mistakes happen.
The reason why this could be a problem is because if they focus
on the physical occupancy at 90%, when their economic is actually closer to 80,
then their cash flow on a monthly basis and an annual basis
is going to be significantly off and they're not going to hit
the investor returns that they had promised to the beginning
or that they thought were going to be the case
when they originally bought the property.
What are the things that can affect economic occupancy?
The first thing is obviously vacant, but you can imagine if you have a vacant
at the beginning of the month
and somebody moves in at the 20th or the 25th of the month,
you technically might have rented the unit,
but you've lost 20 to 25 days on that one unit.
So you can see that vacancy can be very expensive and should be looked
at almost like an expense as opposed to a loss of income,
because each and every day at 1500 dollars,
you're losing $50 a day in rent.
So getting those vacancies full can mean a lot.
But this is the difference between seeing the opportunity
or just buying it based on, let's say, a physical occupancy number.
So one of the things we always look for is what is the current ownership
or management company doing to run the property
and are there opportunities to increase the occupancy of this
particular property both in the market read or in the actual rent?
As you can see here, there's $150 of opportunity just in the rent role.
But in addition to that, their collections are even down even more.
And this could be as a result of vacancies moving in and out during the month.
It can also be delinquents or evictions.
There can be all kinds of things that can drive economic activity down,
including down units, employee units, models and even store IDs.
We found properties
that are storing things in units that actually could be rent producing.
So this is a roadmap for things that you can find.
This is a roadmap on where you can force the equity back
up to the market level, not anything else.
What you're trying to do is maximize the inefficiencies
of a current operator and they can come in all sorts of ways.
And these are the things that we love to find when we're looking at properties.
The other category should be the other income category,
and this is something that a lot of people really seem to overlook
when we're taking a look at any property.
Let's say that same fifth unit, one of the things that we often find
is that a lot of the one bedrooms, two bedrooms and three bedrooms are all priced
exactly the same, even though, as you guys know, when you go to a hotel,
an ocean view is more than, say, a mountain view.
In a lot of instances in property management,
ownership does not charge for different locations.
And we find this to be a significant way to increase the rents and the rent rule
without doing very much.
I'll give you a one great example.
We bought a property
that is a senior community and all the units were priced the same.
In other words, the upstairs were the same price
as the downstairs, and this property had a heck of a time
renting the upstairs units because most of the seniors, given the choice,
they just automatically rented the downstairs units
because they didn't want to walk up and down the stairs.
So all we simply did was raise the downstairs units.
A lot of times people will lower the upstairs.
But what we did was raise the downstairs, which increased the market rate
on that particular unit and of course it immediately filled the upstairs units.
So these are things that we find all over the place.
The entire roll itself should actually be looked at
and each unit should be priced according to its location.
Number two, I often find that people don't designate that different types
of pricing for the different sizes.
Let me give you one example.
Sometimes when we take over a property, we find that there are multiple sizes.
Let's say for a two bedroom unit, you might have an 800 square foot
or 900 square foot or even a 1200 square foot, two bedroom unit.
Many times we might find the same kind of pricing
for a two bedroom unit, for example, across the entire property,
when in fact a smaller two bedroom unit should be actually
priced a little bit less than a larger two bedroom unit.
And then what happens is
you have stability as people are renting across all the unit types,
attention to the unit types, but also to the actual square footage
and make sure that the units are priced according based on the size itself.
The third one seems pretty easy,
but parking can be and is a great way to charge other income.
And let me give you a number of examples.
In some cases, we've actually added carports and we charge 50
to $75 per carport space depending on the area.
Given the choice, people like covered parking and you don't always
have to give it to somebody for free, which is included in the rent.
You can actually break it away from the rent and charge
extra for that given there's enough open parking for that.
The second one is obvious is a garage.
These are premiums.
We're getting 100 to $200 per month for these, depending on the location.
Another one that I also want to talk about is the RV
or even company trucks that people use during their day today.
So RV park is a thing.
People spend a lot of money in RV storage and work truck storage.
If you have the space, you can actually generate
quite a bit more revenue
just on the existing property that you have if you have the room.
The fourth one are pets. So pets are a big thing.
If somebody has a pet, they're going to make a decision
not to rent or that based on what your rules are.
So what we've done at our company is we've embraced pads
and we have rules around that.
But most pad owners are pretty responsible that been our experience.
So we get adequate deposits, but we also charge a pet rat.
So the pet rat can be $25 or $50 per month per pet.
But you also have to have two pet agreements
and those kinds of things, and you want to get adequate fees
for damage or anything like that.
But all this stuff starts to add up over time, guys.
The fifth one is storage.
A lot of people have jump around and they need storage.
So if it's in another location, let's say, and you have the ability to do it,
even if you put it in later, you could actually maximize
the price for that because somebody is going to go find a storage unit
somewhere to store their stuff, especially if they're moving out of a house.
And if you have it at the property and it's secure for them,
you can actually compete with some of the local storage
facilities in the area and get the same amount.
The sixth thing are the upgrades in the individual unit.
So let me give you an example.
It's very common for us to take over a property and find
that some of the units are really upgraded and some are not.
So one example would be around the washers and dryers.
So using that same 50 unit analogy, if ten units had washers and dryers
and 40 didn't,
then the ten units with the washers and dryers should get more
read per month because they actually have a washer dryer included.
And we find that those washers and dryers can be anywhere from 50
to $100 per month just by having a washer dryer in the unit.
And this could be another thing that you can do to actually bible
washers and dryers and increase the rest through
putting washers and dryers in units if they have hookups already in that.
Other upgrades.
Other upgrades are paid flooring,
cabinet, CDs, countertops, those kinds of things.
It's basically like a remodel or something that hasn't been.
Typically, renters will pay more for something that's been upgraded
versus something that has it, and only you can decide what that's worth.
But for us, these are ten, 15, 20,
$30 upgrades for each of these little items.
And appliances in some cases can be even more.
If you have a new clients package, the residents will pay for that versus
something that's, say, 15 or 20 years older.
The last thing that we've done our yard.
So a lot of these pet owners, if you're taking pets,
you can actually fence the little areas outside of the yard.
People read these and they'll pay more because they can leave their back
doors open and let the pets come in and out
and they don't have to actually walk them on the on the leash all the time
if it's fenced.
And of course, they're away from everyone else in the property.
So these are just some of the things that you can do on the other income side.
And these are the things that we look at when we're looking at
where's our value add and where can we force more equity?
And so these don't have to happen in year one or two.
They just have to be looked at, observed, and then you have to plan in place
to do these over time as these units turn over and as you put new tenants in them.
So when we're looking at a property, a go or no go on
something that we're going to buy, these are the four things that we focus on.
But if we own it, these are also the four things that we focus on.
Number one, we're always looking at the current market conditions
in general, especially over the last ten years,
we've seen these market rats go up quite a bit.
So it's possible that the unit you're looking at
or even the unit that you owned
might be severely under market
now, doesn't mean that you have to raise the rents on everybody.
It just means that you need to know what is your rent as compared
to the market in that example that I gave you, it was $150.
But if the market rent was now 1600, it's now $250.
And that's a significant difference
and that should make you excited on a go or no go decision.
So the next thing we look at is what are the actual rents in the role
compared to market?
And what you do is simply pull out all the leases plus your vacancy
and you actually calculate what your rent role is and you're going
to find that some of the rents that you actually have from leases
long ago are going to be probably significantly less than market.
So that's okay.
All that does is generate your loss to lease and what you want
is to look at every single one bedroom, every single
two bedroom, every single three bedroom in your portfolio
and have that lost the lease number at hand at all times.
So, you know, what is the total potential of my portfolio
or of my property and where can I take this thing
and how much cash flow can I generate in the event
I need to turn those rent quickly and generate more cash?
The third thing is what is the occupancy per the market?
This is something I use heavily to manage my own properties.
So a lot of times people calculate 100% occupancy
and then they're sorely disappointed as people move in and move out.
As I explained earlier on the economic occupancy side,
because it's just not smart to calculate 100% occupancy
on a property because you're going to have move ins and move outs.
And most markets are not 100% occupied in most cases.
You are going to have some movement during the year for our portfolio.
All we do is try to tell the managers,
We're just asking you to manage the property to market.
So it's important that you understand what the market is.
In some really high tourist areas, you're going to find that the audiences
in those areas might be close to 100%, but you might find other markets
that might be a little more
rural, let's say, and have less employment or less reason to go there
where the occupancies in that area might be a little bit less.
So just manage to your market and don't try to hit above the market
if you can. Great.
But when you're underwriting, make sure that you're just managing to market.
The fourth thing is other income potential.
And this is simply just extra meat on the bone
from experience and wisdom, from managing lots of properties
and taking them over and adding these kinds of things over a period of time
and growing the net operating income or just the income in this case.
But all of these decide whether we do a goal or no goal
on the actual acquisition of a new asset or we're always taking a look at this
from a property manager standpoint, or we always apply these four principles
back to our current property management portfolio
by rolling all of these four things into everything that we are.