Why Funding Turnover Expenses With Revenue From Other Residential Rental Units Is A Bad Idea
When you're running a residential real estate business, most investors understand the importance of keeping track of the profits and losses for each individual unit. However, what about savings? Whether or not a company has enough cash to cover maintenance, improvements, lost revenues, and marketing during periods of tenant turnover may influence how long it survives. However, in order to properly evaluate your savings strategy , you have to look at the big picture. One thing you don't want to do is fund turnover expenses for one unit with savings from other units. Here's why:
1. It creates inaccurate profit and loss statements. This is because your savings is comprised of revenue from units that aren't really related to the unit that had the turnover expense. Your ability to save is directly influenced by each individual tenant's ability to remain reliable rent payers and responsible, clean, and low maintenance occupants. It's much more accurate to track the profits, losses, AND savings for each individual unit, so you can see exactly how each one is performing.
2. It can lead to extended vacancies in other units. This is because potential tenants will see that the property doesn't have the funds necessary to maintain a good level of quality, and they'll be less likely to want to rent from you. Don't be the landlord asking for current market rates on outdated units. Have some extra cash saved up for each unit relative to the work that may need to be done so that, even in the event that one of your tenants remains with you for an extended tenure, you can take care of these things and keep your units both competitive and occupied.
3. It can limit your ability to make necessary repairs and improvements. In order for your property to attract and retain high-quality tenants, it's important to continuously make repairs and improvements. However, if you're dedicating all of your savings towards covering turnover expenses for the business overall, then there's less money for you to spend on other important things...like growing your business by buying more units... or taking that much needed family vacation! Keep your budgets for each unit separate so that, when the time comes to make a serious investment in an individual unit, you can do it without worrying about going over-budget.
4. It limits your ability to market the units. After a tenant moves from one of your units, it's important to have enough cash available for marketing expenses so that you can attract new tenants as quickly as possible and try to avoid extended vacancies between leases. If all of your savings are currently put towards other units because they were left it in bad shape or were in desperate need of an upgrade, then you'll be unable to make this happen. Lost revenue can be an easily avoidable profit killer if you account for your savings on a per unit basis. When it comes to residential real estate businesses, it's important to keep your finances organized and compartmentalized. This will help you make better decisions for the future of your company. By separating savings for individual units from one another, you're able to more accurately track profits, losses, and savings - which will come in handy when you need to make repairs or improvements to a unit, or when you need to market it to potential tenants. Keep your business running smoothly and try to avoid funding turnover expenses with revenue from other unrelated rental units - it'll be easier on your wallet and your business in the long run!