Is Cash Flow King?

scrooge-mcduck

Last week I was talking with a fellow-landlord, Kevin Sandlin, and we began discussing his rental property. His tenants are moving out and he is considering whether it was good time to sell his rental property or just hold on to it. His preference is to sell now but he is concerned about trying to sell it this late in the year – typically the slowest real estate sales months. So now he is considering to continue renting his home. Such a dilemma! Now that the market has heated up for both real estate sales and rentals, I hear about this dilemma more often than ever. In fact, even I may be changing my tune since my August post, To Rent or Not to Rent.

You may recall from that post that my tenants told me they will be moving out and they felt as though they had done me a favor by queuing up another tenant for me. This is indeed nice because the only thing I hate more than a water leak at midnight is a vacant unit in December! HOWEVER…..I am still a bit foggy-eyed from a 2009 real estate hangover and holding real estate is something I had sworn off forever. Yet now we have a real estate market is forcing me to reconsider.

I have had time to reflect on my rental home and I estimate I have an opportunity to increase rent by nearly 20% with a new tenant – a significant bump in my cash flow situation. Is cash flow king? I think yes, it is, and it is calming my urge to sell. Perhaps this once-sworn-off property will live to see another Favero lease. Perhaps.

To be sure, I am getting out the magnifying glass and taking a closer look. Over the years I have developed a relatively robust spreadsheet that conjures memories from my Real Estate Finance classes in college; this spreadsheet helps me evaluate any potential real estate investment. Stripping it down for simplicity, I evaluate cash flows as below:

  • Potential Income (rents)
  • less Vacancies
  • plus Other Rents (parking, fees, etc)
  • equals Effective Gross Income (EGI)
  • less Management Fees (in my case, I call it the “I hate being a landlord” fee)
  • less Operating Expenses (property taxes, dues, insurance, repairs, utilities, etc.)
  • less Replacement Reserves (I use 10% of rent for this value because I cringe at the thought of replacing a roof)
  • equals Net Operating Income
  • less Debt Service (mortgage)
  • equals Before Tax Cash Flow
  • less income taxes (somewhat complicated but basically estimated by taking EGI less Operating Expenses less Interest Expense from Debt less Depreciation equals Taxable Income multiplied by Tax Rate equals Tax)
  • equals After Tax Cash Flow

There are a number of other considerations beyond cash flows, but for now, this where I am focusing.

Am I missing any major expenses or considerations? Do you face these same questions? I know it is a good problem to be facing, but I struggle with it nevertheless.

From Kazakhstan to American…$55k per month! :: #RidiculousRent

Plaza_Hotel_April_2008

Have you ever been to Kazakhstan? I haven’t. I am trying to imagine what $55,000 USD could possibly get you in the former Soviet state. I honestly have no idea! Perhaps this is a sign there are simply not enough Kazakhstan-focused episodes on HGTV’s House Hunters International.

Anyway, since the Soviet breakup in 1991, I am guessing that Kazakhstan has been doing quite well…..well, at least it appears their royalty is doing well.  As reported by Katherine Clarke in this NY Daily News article, the president’s nephew, Daniyar Nazarbayev is trying to lease his 4,200 sf apartment at the Plaza Hotel for $55,000 per month. The story gets richer (excuse the pun), so you might enjoy reading the NY Daily’s piece here: http://bit.ly/PlazaPad.

Here’s to moving on up!

Convenience Incentives as a remedy to your Fee Allergy

Credit: William K.L. Dickson

Credit: William K.L. Dickson

Like most grandfathers, mine had a handful of quirky quips that were perpetually repeated. My grandfather’s favorite seemed to be, “I’m allergic to fees.”

Allergic to fees.

Last week I was discussing RenterUp with a property manager, Rick, and we started discussing a point I mentioned in a previous blog (Stop Chasing Checks) about changing the way we think about charging for conveniences. That blog post references another property manager who was bragging about his 90% acceptance of online rental payments by charging a $5 Handling Fee. As mentioned before, I really appreciated the change of perspective: Handling Fee instead of a Convenience Fee. Rick had an even better perspective: Convenience Incentives.

Rick and I discussed a few quick ideas of Convenience Incentives, including:

  • Early Pay Incentive Option 1: Pay by the 20th of the month for a $10 discount
  • Early Pay Incentive Option 2: Advance pay 3 months of rent for 3% discount (maybe consider matching the months to the percentage, such as pay 12 months advance for a 12% discount)
  • Electronic Pay Incentive: Pay electronically for $5 discount

Imagine how favorably a judge might look upon an incentive-focused property manager in the event of an eviction or other legal issue.

Everyone responds better to incentives than they do to fees. So, my grandfather was obviously onto something….perhaps we should consider convenience incentives as a remedy for your fee allergy!

What other Convenience Incentives might work for rental homes?

Babies, Weddings, and a $40k/month rental :: Jennifer Aniston’s RidiculousRent

Credit: Zillow.com

Credit: Zillow.com

 

It appears Jennifer Aniston and her special friend, Justin Theroux, have a lot going on at the moment. Allegedly the couple is pregnant, engaged, and in the middle of a remodel. Can you imagine the stress of it all? A remodel with a baby and wedding to plan?

To ease the burden, I recommend they rent something nice. Something really nice. Oh look, they have rented something……something very expensive! Aniston and Theroux apparently paid $40k per month for this amazing LA home – Are you as curious as I am about the pool area after the baby arrives? What will it look like after it’s surround by baby-proof fencing?

Enjoy the pictures of this amazing rental home here, on FrontDoor.com or on Zillow.com.