As a property manager or owner, your goal is to make a proﬁt from your rentals. We’ve showed you how tenantturnover is costly, and why retention adds to their LTV. Now, let’s take a look at your cash ﬂow. Retention can increase your proﬁts because receiving steady rent payments while cutting down on vacancy expenses will reduce your maintenance costs.
Calculate cash ﬂow. You probably already have anidea of whether or not you’re making money from your rentals, but the proof is in the numbers. If the idea ofcalculating your cash ﬂow makes you groan, don’t worry –it’s not as complicated as you think. In fact, you already have all the numbers on your tax returns. Here is the formula Below, we’ll explain it in more detail below.
Let’s break it down even more:
1. Look at your Schedule E (Rent and royalty income) from your last federal income tax return.
2. Subtract your "Rental and royalty expenses" from your "Rents received."
3. From that number, subtract your total mortgage payments for the year (12 x monthly payment), including both principal and interest, not just the interest you deducted on your tax return.
4. Now subtract the total cost of improvements added that year, like parking lot repaving or new appliances. Include the depreciation of the assets. You can ﬁnd this number in Form 4562 (Depreciation and amortization).
5. You’ve now calculated your true cash ﬂow!
Now how does tenant retention play into all of this? In order to understand why retaining a tenant will generate more cash ﬂow than re-tenanting, you need to know how much you spend to operate and maintain your property. Well, we already know that with resident retention, you collect more rent and cut down on expenses associated with a vacancy. This means that by reducing tenant turnover, you’ll have a higher total when you subtract your expenses from the total rent collected (#2 above). That trickles down to an increased true cash ﬂow. When you know how retention inﬂuences your proﬁt, you can make educated decisions about spending money and time on improving customer satisfaction.
Stay tuned for More On the Economics of Rental Retention and How Keeping Residents Happy Drives Profit. In Future Newsletters, we’ll break down more on the economics behind tenant retention and look at how applying strategies to reduce turnover will have a positive impact on your profits, operating budget, and long-term success as a rental property manager.
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