Have you ever noticed that when you get a paycheque, the money disappears quickly?
Most people don’t really know where their money goes, and the same thing can happen with rental properties if you’re not careful.
A dollar saved is MORE than a dollar earned
Why? Because of taxes! When you earn a dollar, you pay taxes on it. When you save a dollar, you’re saving dollars that have already been taxed.
For example, depending on your tax bracket and your tax deductions, you may have to earn $1.50 in profit just to keep $1 in your pocket.
Depending on the investment, saving a dollar can often be easier than earning more income to ‘create’ that same dollar.
So how can we apply this to rental properties? Let’s look at a few examples…
1) Reduce tenant turnover
‘Turnover’ is a term used to describe when an existing tenant moves out, and you have to find a replacement.
It’s one of the most expensive parts of being a landlord because every time a tenant moves out, you have to ‘refresh’ the apartment, advertise for new tenants, and if you’re using a property manager, you have to pay a leasing fee.
Refreshing an apartment can include:
- Cleaning – all units require some level of cleaning
- Garbage disposal – some tenants leave behind items instead of doing it themselves
- Appliance repair/replacement – new tenants may not be happy with the old ones
- Painting – even the best tenants scuff up the walls
- Minor repairs (or major ones), and more
The key to reducing turnover is to keep tenants happy and living in your units for as long as possible. Find out what problems they’re having and do your best to solve them.
And if the tenants want something that will add value to your unit, consider buying it! It’s cheaper than the cost of turnover, plus you’ll keep them happy, your property will immediately go up in value.
2) Ask tenants to do work
If your tenants are handy, it can often be cheaper to hire them to do work on your rental properties than it would be to hire a handyman or contractor.
Consider paying them to do the work, subject to your approval of course.
However, never reduce their rent for the work done – always pay them separately by cheque (as you would any contractor) or cash (see the next item).
That way, your rent roll will still show the full rent amounts, which is key to obtaining the maximum price when you eventually sell the property.
3) Pay cash for work done
Handymen, contractors and even tenants will often give discounted rates for paying cash. Why? Because quite often they don’t claim the income on their personal tax returns.
How does this affect you as an investor? Take advantage of the cheaper price by paying cash the ‘correct’ way.
- Bring a receipt book with you
- Fill out their name, contact info, and include the amount paid, and
- Ask them to sign it.
Even though they are often not willing to give you an official printed receipt for a cash payment, most will sign your handwritten receipt!
If you keep their business card, any email/written quotes and correspondence, your handwritten (and signed) receipt, and a copy of your bank withdrawal slip, you have all the written documentation you need to prove your deduction on YOUR tax return
(Note: I am not an accountant, but this has worked for me. Check with yours before proceeding)
4) Target renovations to your market
Have you ever watched those ‘flipping’ TV shows and seen how easily costs can get out of control?
When you’re in the middle of a project, it’s too easy to simply replace everything to make it look brand new, or worse, to make it look like something YOU would want to own or rent.
The #1 question investors should ask themselves when renovating is,
“Who is my target market?”
They should then renovate according to what their target market expects.
For example, if you owned a rental property in a cost-concious area of town, would you install marble countertops and a fireplace?
Cost-concious buyers would LOVE it, but you would likely never recover the cost of the improvements, either through re-sale of the property or through rent increases.
Always ensure your renovations match the expectations of your target market.
5) Defer maintenance (until the right time)
Tenants are great because they pay for your property, and then walk away from it, leaving you with a free and clear asset. However, some tenants can be a pain because they may expect every small thing to be repaired by you.
Remember this point – You do not have to do everything your tenant wants!
That doesn’t mean you should ignore them completely, but ‘selective hearing’ can often come in handy. 🙂
For example, sometimes it makes sense to delay repairs for a short time because you have something bigger planned, or maybe you are short on cash flow that month. You bought rental properties to make your life easier, not your tenants!
But no matter what you do, communicate your plan with the tenant so they know what is happening. Let them know there will be a delay, or about your bigger plans. They will appreciate being informed, even though they may not be happy about having to wait.
6) Closely manage your property manager
In my experience, the biggest problem area in controlling costs is with property managers.
Why? They often do repairs and maintenance for the owner, or they manage tradespeople for a fee. Obviously, this is a conflict of interest – the more repairs and maintenance they do, the more they get paid.
It’s your job to keep up to date on what they are doing, or better yet, give them a maximum dollar limit before they must come to you for approval. Otherwise, make it very clear you won’t pay for the expense.
You can also make it clear which repairs do not need approval. For example:
- Major emergency water leaks are okay
- Major electrical hazards are okay
- Screen repairs are not okay
This not only gives you control over which repairs are done, but also when they are done. It also allows you to shop around for the best pricing with various tradespeople (so you can save even more money).
Important – To accomplish this, it’s important that you setup your rent payments to be paid ‘gross’ at the beginning of the month, not ‘net’ at the end of the month.
Otherwise, your property manager will simply deduct the repair costs from your rents and give you a statement showing you what was done. There is no chance for you to approve or even dispute the repairs if they decide to go ahead with the work.
Sometimes you’ll hear excuses from the property manager that the repairs were urgently needed, or the tenants were complaining, or that they forgot about the spending limit. No matter what, stick to your policy and ensure they do not freely spend your money without permission!
7) Avoid evictions
Always do whatever you can do to avoid evictions… even consider paying tenants to leave!
Why? Because evictions are EXPENSIVE. You’ll have to deal with…
- Lost rent – you can’t re-rent the unit until the tenant is gone, the unit is cleaned up, etc.
- Tribunal costs – you must pay fees to evict someone
- Legal costs – to have representation at the tribunal
- Time off work – if you decide to represent yourself at the tribunal
- Sheriff costs
- Damages – evicted tenants usually aren’t happy and may retaliate
- and more
And don’t forget your personal time to deal with all of the above (even if you hire legal representation). Trust me on this one…
The only time you should ever consider a full scale eviction is if the tenant is totally unresponsive to your ‘bribes’ for them to leave, or you can’t contact them at all. Then start the process immediately – don’t wait.
8) Reduce property expenses
Each month, pick one expense for your rental properties and try to decrease it (you can also do this for income – try to increase it).
For example, let’s say in January, you decide that for all your rental properties (as well as your personal residence and your business), you will review the electricity bills in detail, and look for ways to save money.
Perhaps you’ll install energy saving light bulbs, have the forced-air furnace cleaned and serviced, or have the ductwork cleaned.
And so on for the rest of the year…
Why pick one expense each month? Well, most people would be overwhelmed if they created a long ‘To Do’ list for their rentals.
In addition, many tasks take longer to finish that originally estimated, and with too many things unfinished, it can also contribute to that ‘overwhelmed’ feeling.
As a result, it’s often easier to focus on one thing each month.
The Bottom Line
Every time you save a dollar, you get to keep profit that you’ve already earned.
Every time you spend a dollar, you’re giving away profit that you’ve already earned.
While it may not seem like saving $15/month on electricity per apartment is worth it, the truth is that all of these savings add up quickly.
Multiply $15 times 10 apartments, and that’s $150 per month or $1800 per year. And you can do this multiple times for different income sources and expenses.
Remember, multi-unit income properties (and all properties to some degree) are valued based on INCOME, which means the higher the income they produce, the more valuable your building becomes.
That $15 monthly savings multiplied many times could easily add up to be tens of thousands of dollars in equity, not to mention increased monthly cash flow.
As an investor, you should understand that cost savings and correct property maintenance/renovation is a fine balancing act, and you should never spend money on your property just because a tenant or property manager wants you to.
In the long run, you’ll keep more profit in your pocket and have happy tenants living in safer properties.