Imagine this: It’s rent week, and you have 3000 units and over 4000 renters to manage. Late payments and revenue fluctuations are recurrent issues. Over a third of tenants have dodged rent so far. 300 residents won’t be renewing their lease. At the same time, a bunch of water heaters are out, and contractors are quoting an eye watering, five-digit figure to fix them. Oh, and your best administrator just handed in their notice. These issues have one consequence in common. More costs for your business. And just like that, your profits nosedives.😰
Sadly, this is the daily reality for many landlords and property managers. 7% of landlords missed mortgage payments during the pandemic due to tardy rent from tenants. Landlords in Miami and New York, where cash reserves were lower, experienced such losses disproportionately. Some landlords also couldn’t pay property taxes and maintain properties due to delinquencies and tenant evictions. The good news? While the economy may keep swinging, you can block some of the impact with some sharp money management blows, namely a financial cushion. In this article, we’ll explore why and how to build one.
Financial instability: The stressful reality rocking rental property management
Cost of living crisis, check. Rising operating costs, check. Increasing compliance and sustainability obligations, check. These issues add up to a hefty bill for which your rental property management company is on the hook. It’s a huge deal since the demand for rent has fallen, with decreases hitting 0.78% in December 2023. Then there’s the fact that margins in property management can be slim, with fees between 4% and 12%. 🤦
Optimizing your money management may seem like yet another task to execute on your team’s already-packed to-do list. But the payoff is worth it. Once you build a solid financial runway, your business can take off. You’ll have more security, profits, and freedom to take advantage of scaling opportunities. 👍
What does a typical financial cushion look like? 🤔
When it comes to finance management for a rental property management company, what’s a smart decision will depend on its unique circumstances. However, there are some milestones you’ll want to achieve on your money management journey. These include:
- Funds to cover at least 12 months of expenses, like staff salaries, mortgage payment taxes, and community association fees
- Affordable credit lines for emergencies
- Optimized rent payment solutions and processes
- Streamlined expenses and adequate spending controls
6 Financial management tips for landlords 💰
Whether you’re starting from scratch or have some runway saved up, reaching the next stop in your money management journey will take some planning and sacrifice. Let’s dive into some money management moves to execute and position your rental property management company for success.
Understand your company’s current financial position
“If you fail to plan, you are planning to fail,” as Benjamin Franklin quite rightly put it.
So, first up on your financial management task list is getting up close and personal with your business’ numbers. Take a look at the figures from the last three to five years and note any trends and inconsistencies. In particular,
- Evaluate the company’s capital needs. Include past, present, and future obligations. For example, mortgage, ops, insurance, and property renovation costs
- Assess the company’s profitability by property, area, and segment to highlight top performers and laggards 📊
- Examine the company’s liquidity (a.k.a. working capital) and solvency ratios. Use these figures to understand how well your company can meet its obligations, stay in operation, and remain viable long-term. If number crunching isn’t your forte, call in reinforcements from an accountant for cash flow management and forecasting help. Some records and metrics that will be useful here include:
- Historical and current financial statements, e.g., cash flow statements, balance sheets, income statements, and Accounts Payable ageing reports
- Performance figures, e.g., revenue, net income, gross profit margin, net profit margin, leverage, working capital, current ratio, and return on assets
- Cash flow metrics, e.g., Operating Cash Flow (OCF), Days Sales Outstanding (DSO), Average Days Delinquent, Current Accounts Receivable (CAR), Current Accounts Payable (CAP), Cash Conversion Cycle (CCC)
- Capital structure, e.g., Debt to Equity ratio, Weighted Average Cost of Capital (WACC) and Debt Service Coverage Ratio (DSCR)
- Comparative analysis. Compare the company’s capital structure with industry peers and competitors to assess its relative leverage, liquidity, and financial risk. Look for deviations from industry norms and investigate underlying reasons
Set achievable, cash flow-boosting goals 🎯
Now you’ve got an idea of company finances, it’s time to set some money management goals. They should empower your business to eliminate monetary burdens and create more financial freedom. For instance, you could focus on:
- Optimizing cash flow management, e.g. increasing cash reserves by negotiating payment terms with suppliers
- Reducing debt
- Increasing revenue, e.g., through maximizing rent occupancy
- Improving rent collection efficiency, e.g. offering split rent payments and having tenants pay rent online (more on this later)
- Streamlining expenses
- Creating an emergency fund for unexpected expenses
Top tips💡: Be specific in your money management plans. Set S.M.A.R.T. goals. Also, pick three to focus on initially. Then once you’ve nailed the goal, move on to the next.
Automate finance-related processes to support money management 🤖
If your team spends umpteen hours on admin, it’s costing your business big time. Labor can consume up to 70% of business expenses. That’s money that could be going into your financial cushion. So, it pays to reduce the administrative burden in your business through automation. In practice, calling in the bots to uplevel your finance management could look like:
Implementing digital tools for bookkeeping and expense tracking. Including spend controls like company cards and automated categorization and approvals
- Setting up automated invoice generation and distribution for recurring expenses like utility bills and vendor payments
- Automating savings into different accounts for specific functions, e.g. the emergency fund or investment account
- Generating financial reports automatically by using tools with in-built reporting features and accounting software integrations
- Automating budgeting and forecasting processes to track financial performance and plan for future expenses
- Letting software track late payments and chase late payers. Speaking of which…
Upgrade your rent payment options
Perhaps you’ve already digitized rent collection processes so that tenants can pay rent online. Or maybe you allow a select few to pay in instalments through a rent payments portal. But for your money management moves to succeed long-term, your company’s payment options must match your tenants’ wants and needs.
Let’s put this tip into perspective. Americans are glued to their phones more than ever. The average person spends 4 hours and 25 minutes each on their phone and checks it up to 144 times daily. 🤳At the same time, BNPL is on the rise as life becomes more expensive. Around 60% of “financially fragile” consumers used BNPL at least five times in the past year. Knowing this, offering payment options embodying these trends makes sense. You’ll not only enhance tenant satisfaction but reduce those pesky late payments A great example of such a solution is a rent payments app like Flex. While it’s not a BNPL service, it embodies some of its selling points. Flex simplifies the rent collection by enabling renters to split payments through a mobile app.
Not only does Flex manage defaulters for you, but it also provides an unbeatable deal. Your company will get paid on the 1st of each month, no ifs, no buts. Flex also has nominal fees for renters and no extra cost for your company. Plus, you’ll get analytics features on renters and payments to make cash flow management and forecasting quicker and more precise. 🙌
Create a multifaceted rental property management budget
For aeons, financial experts have talked about the importance of keeping expenses low, diversifying income streams, saving, and investing. While their delivery was sometimes out there (think jam-packed conferences with singing and dancing audiences😅), they were on to something. You’ll need to tackle your company’s money management goals from different angles to improve your company’s financial position. Here are some ways to pad up your company’s financial cushion:
- Work out business costs. Then, build expenses into rent costs. Just remember to observe laws and regulations around rent hikes and junk fees
- Create a comprehensive and realistic budget that includes all current and future expenses. E.g. Buying equipment and their upkeep. Add a buffer to account for any price hikes that may occur
- Allocate a set amount of cash monthly for recurrent bills like salaries and taxes. Use separate accounts for each bill
- Divert a percentage of profits into a high-yield savings account monthly. Aim for 12 months’ worth of expenses. Then, build to two years’ worth or more
- Get a comprehensive insurance plan. It should cover common issues and potential hazards experienced by your unit type or area, such as wildfires. Resist the urge to scrimp on insurance, as it can be a huge safety net when issues arise.
Pro tip💡: Remember to be transparent with renters about fees and rent costs in the lease agreement and any comms. This approach will keep renters happy, your business compliant, and income streams steadier.
Watch your finance management progress like a hawk 👀
Want to maximize your returns? Then, knowing what’s working and what’s not in your money management strategy is critical. Integrate company data from sources like Accounting, ERP, HR, payments, and property management. These will provide you with a more accurate view of the company’s financial position.
Use reliable forecasting software to gain an accurate view of your company’s financial health. Then, track key performance indicators (KPIs) and metrics. Examine them (at least weekly) and adjust your approach, considering current developments. Some KPIs and metrics to track include:
- Occupancy rate
- Operating expenses ratio
- Rent collection rate
- Maintenance costs
- Cash reserve ratio
- Tenant turnover rate
- Debt Service Coverage Ratio
- Return on Investment
- Customer satisfaction and retention
- Economic indicators (e.g. job market growth, housing demand, and population changes)
Managing money for a rental property management company can be challenging. So, don’t go on this finance management journey alone. Seek professional financial advice from a qualified financial advisor specializing in real estate or your business’ size. They’ll give you insight into key areas like tax and investment optimization. Your financial advisor can also tailor strategies based on your company’s circumstances to boost its effectiveness.
Navigating money management successfully as a landlord
If there’s one thing we can take away from crises like the 2008 recession, pandemic, and rising living costs, it’s that “cash is king”. Those with enough liquid capital to withstand the economic blows and invest in their business win. So, building a financial cushion is critical for peace of mind, managing risk, and taking advantage of unexpected opportunities.
Your efforts will compound. So, even if you can’t make a huge investment, start your money management journey today. Implement cash flow management optimizations, stash away a few dollars, and leverage sophisticated rent payment technology. Also, stay informed of market developments and seek professional advice for sustainable financial success in property management. Before you know it, your finance management will be top-tier tier, and you’ll have a hefty financial cushion to prove it. 👑
