Tracking your rentals
This week we have been neck-deep in QuickBooks working on our numbers in our rental company. The reason for this is we are doing a deep dive on our rentals to see how they’re preforming and also updating our actual metrics from 2023 to better forecast what we need to do for 2024.
Now, if you are unfamiliar with the word “metrics” as it applies to rentals, all that means is a particular thing that you track or measure so that you can compare it over time to give insight into whatever the thing is you are tracking.
So, for instance: Vacancy rate is a great metric to track in a rental company. You can measure it both at the individual house and then overall company level and each one gives you a different picture as to what is going on.
Now I’m sure there are different formulas on how to track vacancy. But the way we do it is based off rent received per year. We take each house and ask how many rent payments did we not receive, divide that by 12 months and then multiply the result by 100 to give us a percentage.
For example: if you had a house that you missed one rent payment for the year then the formula would look like this: 1(missed month)/ 12 (total months) = 0.083 x 100 for a vacancy rate of 8.3%.
And just so you know, most people in the single-family rental space shoot for a vacancy rate of less than 10%.
The lower the vacancy rate, the better because that means you have steady income. If the rate gets higher, you need to ask yourself some questions. Is it the house (condition or location), the market (time of year can play a role here) or something to do with the property manager like not marketing well. Overpricing the house or picking subpar tenants could also be factors.
We have had houses that were not in the greatest of areas that went vacant more often than our other rentals and took longer to find a good tenant as well. By looking at the vacancy rate on the individual house level, we were able to see we were spending more time on that house per year than any of our others and making less money off it. After that realization we decided to sell it and focus on our better properties that were more stable.
Now looking at the company level is important because your overall vacancy rate affects another metric you need to be looking at called your expense factor — which is very important because it is one of the big variables that ultimately defines your cashflow.
A common mistake landlords make is to think that cashflow= rents – mortgage payments. They get that idea because cashflow is income minus expenses. And on a monthly basis, the mortgage payment is the biggest expense that you incur. But there are other expenses associated with having a rental property that you may or may not pay for on a regular basis which you need to consider as well.
These costs include things like repairs, property taxes, insurance, vacancies, and management fees depending on if you self-manage or hire it out. And you need to calculate those costs on an annual basis and make sure you set aside a portion of each month’s rent payment to pay for those things.
That portion that we set aside is what we call the expense factor. And the higher those costs are, the more you need to set aside. So a more accurate formula for cashflow on a rental is: Cashflow= Income – Expense Factor – Mortgage payment
On single family rentals in our area, I typically hear people who self-manage say they expect to set aside 35% of each rental payment as their expense factor. That is with them figuring a 10% vacancy rate and having normal costs everywhere else while budgeting to save for future costs like roof replacements.
But if after calculating your vacancy rate, you realize it is higher or lower than 10%, you will need to adjust your expense factor to compensate. Otherwise, you could be coming out of pocket to pay for those costs — and it is much better for the house to pay for them.
Our company goal was to have a vacancy rate of less than 4% last year. And we blew that one out of the water with a 0.59% rate. We had very little turnover and got them filled quickly. So this was a good year and our expense factor will be adjusted down some for 2024.
That also means we will have a projected uptick in cashflow because we won’t have to set aside money from each rent payment to pay the mortgage payment when the house is vacant. And to quote Forrest Gump “That’s good. One less thing.”
But there are other factors we have to consider before we just drop our expense factor. Our insurance, for instance, has gone up across the board. And so have the costs for repairs. But by tracking these numbers on our rentals we will be able to plan accordingly and make sure we don’t take a financial hit when something breaks and we have the funds available to get it fixed quickly for our tenants.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.