We hope you have enjoyed our previous articles on committing mistakes while investing in real estate. We want to conclude with two mistakes that can make a huge difference in your bottom line.
We learned very quickly how profitable it is to address utility consumption at your property. It is one of the pillars of profitability for our real estate company. You need to explore your options when dealing with utilities. Utilities will only continue to escalate, and your cash flow will be doomed if you can’t control your utilities.
Let’s tackle our final biggest mistakes:
One of our major value plays is to locate properties where the landlord pays all of the utilities. This is commonly referred to as all bills paid. With some properties, the landlord has metered off electric and water to each unit so that the tenant is responsible to pay. However, many of the older buildings utilize only one water meter and one electric meter for the entire property. Having the tenants pay serves a dual purpose. First, it will lower your operating expenses tremendously, thus allowing your net operating income to rise along with the value of your asset. Secondly, usage will decrease once tenants are being billed directly.
With our properties, we institute a Ratio Utility Billing System which calculates a resident’s water usage and garbage costs based on occupancy, square footage, number of occupants, or a combination of these factors. It’s a very beneficial system. Not only can it be installed quickly and property owners can recoup a large percentage of their utility expense, but there’s no capital expenditure involved. There are several companies that will handle all of the calculations and bill the tenants monthly so you don’t have to.
Before you incorporate this system into your own property, make sure that the rest of the local market is already doing it. If you’re the only complex utilizing the system, you’ll lose tenants because they can rent your competitor’s apartment for a cheaper price.
Capital Expenditure Account
A capital expenditure is any amount of money you spend on a property to do an improvement or upgrade. These expenditures can include replacing a roof, paving a driveway, purchasing a refrigerator, etc. The common practice is to allocate $250 per unit per year in an account to apply to these expenditures so you don’t get caught off-guard last minute. Banks love to see owners set aside money for these expenses, and you’ll be happy too when you have to replace a roof and don’t have to worry about where the money is going to come from.
Our goal is to rehab a property as quickly as possible so that we can raise rents and attract better quality tenants. If your cap ex account is unfunded, it will be difficult to tackle these improvements.
Do you set up a cap ex account, and if so, how much do you fund it with? Please don’t make the same mistake we made and have ZERO in your cap ex account.
How do you control utility consumption on your property? Please leave us a comment below. We are always looking for ways to save on consumption. Great for the bottom line and for the environment!
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