Tuesday, June 2, 2009

Passive Income- The Investor's Dream Part 2

Maximize Revenue, Not Just Rent

Last month’s newsletter was all about how to get the highest possible monthly rent But there is more to maximizing income from rental units than the monthly rent. This month we’ll look at late fees and “no deposit” leases for additional revenue and how to minimize vacancies to keep the checks coming in every month.

Late Fees
Late fees can be a very important increase to your revenue every month. Here are some ways to make sure late fees are charged and collected:
-Spell-out late fees in your lease, including when:
-Rent Past Due “Rent received after 5pm on the 1st day of the month is past due.”
-Late Fees Charged- “Late fees will be charged if rent is not received by 5 p.m. on the 3rd day of the month.”
-Clearly identify late fees. For example: “Tenants will be charged a $50 late fee for rents received after…”

- Collect late fees first, then the rent
- When a tenant pays, credit late fees first
- If late fee is not paid, then the balance of the rent is still due. Since rent is still due, you can take legal action to start the eviction process

-If a partial rent payment is made, rent is still due and late fees will be charged
-Once the rent is past due, send an invoice for the late fees
-The good news about late fees: They can be an important source of income. Some landlords feel that their best tenants are the ones that pay late every month, but always pay with their late fees. The late fees can add up to another month’s rent each year.

“No Deposit” Leases
“No Deposit” leases can generate incremental income. How? Offer two choices: lower rent with a deposit or higher rent. The higher rent should give you enough incremental income so that in about six months you have more income than the amount you would have received for the deposit.

A lot of well qualified tenants can pay the extra rent each month but have a really hard time coming up with a deposit and will go for the more profitable option. Here are some examples:

-$675 monthly rent with a $340 deposit or $735 rent and no deposit
-$1,200 monthly rent with a $600 deposit or $1,295 rent and no deposit
-$325 bi-weekly rent with a $325 deposit or $360 bi-weekly rent and no deposit

In each example you would collect twice as much extra rent as you would have as a deposit within 1 year. And guess what? You don’t have to give back the monthly rent when the tenant moves out. There will be no debates on how much of the deposit should be refunded and if repairs are needed you have a lot more money to make them with.

Some of you will say, “What, NO DEPOSIT? What if the tenant trashes the place?!!?” Think about this:

- Tenants who trash a property usually do a lot more damage than a half month’s rent. How far does $400 - $600 go to re-carpet and re-paint even a small unit?
- Even good tenants often say “Here’s my notice. Use my deposit for the last month’s rent.” Of course they have a legal obligation to pay the last month’s rent, but what is the cost of dragging them to court to collect?

Minimizing Vacancies
Of all the topics on how to maximize revenue, this may be the most important. Why? Because if you try to get an extra $50 rent on a unit, but it creates an additional one (1) month vacancy, you just wiped out a year’s extra income on a $600/month rental. Do the math:
     Extra $50 Rent x 12 months = $600 per year      
                      1 Month Less Rent = $600

How do you keep your units full and then re-fill them quickly when someone moves out? Volumes have been written about how to minimize vacancies, here are a few key ideas:

Keep Your Tenants: Turnover will kill you.
Pre-rent the Unit: Start advertising immediately when you receive notice. Not ready to show? Get a list of people to call when it is ready.
Develop a Waiting List: Always advertise your units. When you don't have a unit, keep track of who they are and what they want. Call them when you have what you want.
Pay For Referrals: As soon as you know of an upcoming vacancy send out an e-mail blast to let friends, family, and especially current tenants to let them know about your unit. Offer them cash to find your next tenant!
Fast Rent Ready: Goal: New tenant move in the day after your old tenant leaves. The current tenant leaves the property rent-ready. That won’t always happen so you need an action plan for clean-up and fix-up. Even major fix ups, such as junk removal, new paint, and new carpet can be done in a week if planned properly.

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