Your investment properties should be income generators, not a drain on your time, money, and – yes, we’ll say it – sanity.
If your property isn’t working for you, it’s past time to make some changes. The question is, should that change be selling off your properties for a quick payday, or turning to a professional property management (PM) company to improve the performance of your rental units and set you up for long-term success?
Sell or Seek Help?
The real estate market has skyrocketed in the past few years, but that level of growth will be hard to sustain. If you’re thinking about selling, no one can blame you for wanting to capitalize on the competitive seller’s market we find ourselves in today.
Conversely, there is wealth to be had by staying the course with your investment properties. Improving even just a few key performance metrics for your units can result in significant gains over time.
Ultimately, the choice is yours, but if you’re curious about how partnering with a property management company could help your investment become even more successful, here are some things to consider.
Maximizing Your Property’s Value
There are two ways to look at the value of your investment property:
- Its Net Operating Income, or NOI for short. This is gross income generated by the property minus any expenses. And
- Its current market value.
Important to note: market value for rental properties is determined differently than the way other residential real estate is valued.
Whereas single-family residential property values are based on comparable sales, the focus for those looking to invest in real estate is on the property’s net cash flow potential.
Therefore, calculating an investment property’s market value is done by taking its NOI divided by the capitalization rate (a.k.a. cap rate, which indicates the rate of return that is expected to be generated on a property).
Current Market Value of Investment Property = NOI / Cap Rate
NOI doesn’t include debt service nor loan payments in the expense calculation. It is all related to operational expenses because different owners use a variety of capital structures to finance their properties. If we tied the property value to a specific loan and interest rate, the market would not be able to make apples-to-apples comparisons.
Comparing Market Value With and Without a PM
To understand how a property manager could help you succeed with your investment, it can be helpful to look at an example.
Say you purchased your first rental property for $200,000 with a down payment of $40,000. You rent it for $1,200 and your expenses (the money you hold in reserves for repairs, property taxes, property insurance, loan payments, etc.) add up to $900 a month.
In this scenario, your $40,000 down payment is earning you $3,600 a year. That’s 9 percent of your initial investment coming back to you as cash per year. With this perspective, a $99 per month fee for property management feels expensive because it would be 33 percent of your monthly net cash flow.
What About NOI?
To use the above example through the lens of NOI, the results would be much different. Say your expenses (minus loan payments) for the property are $200 a month. Your NOI is $12,000.
If, for example, the current cap rate is 6 percent, that means the current market value for the above property (earning $12,000 a year) would be $200,000. This is right in line with your purchase price of $200,000.
And If You Hire a PM?
If you hire a property management company that charges $99 a month and is able to bring the rent up to $1400 a month, you just increased your NOI by 10% and your property value by $20,200.
If the PM is also able to reduce your expenses on the property by $100 a month (for example, by having pre-negotiated rates with companies to handle repairs), your NOI just increased from the $12,000 when it was self-managed to $14,400. Moreover, the property value is up to $240,000.
Being successful with your real estate investment does not always mean having to go it alone. Nor does it mean having to sell off your properties if things are going as well as you’d like them to.
An alternate solution is to hire a professional property management company to help you increase the value of your property significantly without incurring any other additional expenses.
At the same time, doing so enables you to have a property that generates something much more in line with the passive income real estate investors look for.
If you have questions about property management or would like to know more about the Columbus real estate market, please get in touch with our team at RL Property Management today.