How to Drive Profitability in Property Management
Property management is a lucrative business if done right. In this business, a property manager collects rents from the tenants, maintains the property, and manages the budget. The goal is to generate a stable income stream every month. Most real estate pundits agree that the business is generally resistant to economic slowdowns because the property manager can cut expenses in a variety of ways to improve profitability by focusing on core operations.
To share the secrets of successful real estate management, Joe Fairless invited Jim Murray to talk about his secret to success. Jim Murray started his career fresh out of college and he is also a co-host of Cashflow Kings. Based in Providence, RI, Jim is an avid investor who likes to manage multifamily buildings.
During the interview, Jim Murray offered interesting ideas that would definitely give new and upcoming entrepreneurs a head start on how to improve profits while working as a property manager. Here is his story:
To get his foot in the door, Jim started house hacking after coming out of the college. He still sees house hacking as one of the best ways to get immediate positive cash flow.
Simply put, house hacking is a real estate investment strategy, which allows the owner of a multifamily house to rent out portions of a home to tenants. The owner can use the property as a primary residence by living in one room and renting out other rooms. The rental income offsets the cost of mortgage payments, living expenses, and property maintenance. If managed carefully, house hacking can result in immediate cash flow.
According to Jim, his first investment was a building he financed for $140,000, which consisted of four units. At the time, the monthly mortgage on the investment was only $140 per month. The first tenant rented out the three-bedroom apartment on the third floor paying $900 per month, which was enough to offset the mortgage payments. After only one year, the multifamily unit started generating income up to $3,800 per month.
Real Estate Wholesaling
Besides house hacking, Jim also experimented with real estate wholesaling. If you don’t have the money upfront but you know potential investors who love flipping distressed properties, house wholesaling can offer lucrative opportunities.
In this scenario, the wholesaler gets into a contract with the owner of the distressed property to sell the distressed property at an agreed price to another person. The wholesaler profits by selling the property to an investor at a higher price and keeping the remaining margin as a profit. There is no upfront payment required and everyone from the house owner to the wholesaler and the investor benefits from the value proposition.
While it’s true that house hacking and house wholesaling offer plenty of benefits, you must understand how to generate a profit. Investing in real estate can prove costly without preplanning.
How to Generate Profit
Jim Murray thinks that most investors don’t understand the dynamics of profitability. For example, it’s common among investors to claim that property managers need to squeeze every bit of profit from an investment property. However, nothing could be further from the truth.
In reality, simple things can give you more than you expect. Jim recounts his experience when renting out his second property, which has four units. At the time, the building was rented for $500. Instead of keeping things as they were, Jim did a little rehab and increased the rent to $800. The building was in an A-neighborhood, which allowed him to quickly fill higher-priced units and increase overall profits.
Similarly, property managers can easily enhance the value of their properties without spending extra capital on costly refurbishments. A simple technique to upgrade the building is painting every unit in the same color and keeping the existing floors. To keep costs down, Jim suggests refinishing the hardwood floors because it’s inexpensive. If there are no hardwood floors, it’s better to opt for inexpensive laminate or vinyl flooring because it looks very neat compared to crummy-looking carpeted floors.
Another bit of smart advice is to refinance the property to save on property expenses. By doing so, you can lower your interest rate and change the terms of the loan, which should increase profitability.
The Golden Nuggets
Jim insists that investors should learn to save money because the saving habit will help streamline investment opportunities in the real estate sector. You can save money for your first investment by keeping a portion of your income from 9-to-5 jobs or by doing side-hustles to earn an extra income. The saving can even help you start your own property management business such as doing house hacking.
Another golden piece of advice is to build a network around you. These days, building a network is not difficult as anyone can become a member of Bigger Pockets, local REIA, and other real estate consortiums. These real estate communities are the pillars to success as you can quickly team up with other like-minded people and find interested investors. For instance, if you don’t have upfront cash and you want to do real estate wholesaling, such communities can help you find an investor you’re looking for.
Despite these potentially lucrative opportunities, property management requires planning and research. When Jim ventured into the real estate business, he had his fair share of learning curves. His first deal ended up in a loss as the four-bedroom/two-bath house he and his partners bought for $22,000 turned out to be a brothel and a hideout for addicts. He also blew up a money-making wholesale deal by suggesting to the property owner that Jim was getting a great deal on the flip.
In the end, real estate management is not about improving profitability only. Instead, investors should play smart and wait for the right deal. If you want more information and advice on creating a management company and how to position it, click to hear the podcast.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.