Budgeting For Rental Home Improvements Through Cash Flow
Rental properties need maintenance. Apartments can quickly get run down. This will attract less tenants and affect your ability to collect top dollar market rent. The problem is that repairs, maintenance and upgrades can get expensive fast. How can you fix up an apartment complex while maintaining even cash flow? This article will show you how.
Create a Budget
Nothing kills cash flow like unbridled spending. Just because there is money in the checking account does not mean that it can be spent on repairs and upgrades. Much of that money is already allocated towards annual expenses such as real estate taxes and property insurance. If you spend it out now, you will regret it later.Instead, open up a separate bank account that is dedicated solely to your rental property expenses. Then, create a budget for each month that includes all of the necessary repairs and upgrades. This will help you stay on track and ensure that you are not overspending.
A property owner should sit down with their property manager and determine a realistic budget – both annually and monthly. Based on past expenses, calculate the fixed expenses first. This would include taxes, insurance, capital reserves and management fees. Determine a reasonable amount of monthly income that you, as the owner, would like to draw from the property each month. The remaining income can then be used to pay variable expenses such as owner paid utilities and repairs.
Stick to the Budget
Creating a budget is the easy part. Sticking to that budget, no so much. Careful planning is necessary to make sure that you as the owner receive your budgeted income payment each month. The repair budget will include unplanned repairs along with planned upgrades. During some months, the budget may be absorbed entirely by unplanned repairs. Perhaps the furnace breaks down or an air conditioning unit needs attention. During those months, any planned value upgrades may need to be postponed in order to stay within the budget.
During other months, there may be few repairs, rather than taking a capital draw on the extra money, why not invest it into value added upgrades. Perhaps you have a vacant unit in your apartment building that month. Why not install an upgrade such as more energy efficient windows or remodel the kitchen. Not only will you be able to get the most rent possible, but you have also increased the value of your investment – all while staying within your budget and receiving the same cash flow.
Focus on Adding Value
Owning apartment buildings means that some items are just not going to last long. Units need to be frequently repainted. The carpet can be trashed after just one tenant. This is just the cost of owning an income property. While these items need attention, it is not wise to spend a lot of money on the replacement. Instead, focus on adding value. Focus on improvements that will last.
For example, we took over an apartment building that needed a ton of work. We have been doing a huge amount of work on the property while paying the owner basically the same amount every month. If we have a lot of repair issues one month, then we do less. In other months, we do more. We focus more on long-term upgrades like replacing vanities instead of replacing iffy carpet or painting. We are able to systematically raise the rents as the apartment community gets nicer. The owner is extremely happy. In 3 years, we have doubled revenue while only increasing expenses by about 20%.
In our next article, we will discuss how to increase property value and rents through value added improvements. We will discuss which small remodeling projects will give an investor the best return on their money.