How to Create Margin in your Rental portfolio

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How to Create Margin in your Rental portfolio

Margin–that critical component

margin photo

Margin….What comes to mind for most real estate investors, landlords, and property managers is financial concepts, such as Profit Margin.  Or maybe Gross Margin.  Or, if you are a particularly deep financial geek–Contribution Margin.  And that’s all well and fine.  Yes, savvy investors fuel their Financial Freedom by keeping a focused eye on their financial margins because without them, let’s face it, losing money on rental properties flat out sucks.

What I’m offering to plant in your fertile mind today is a different kind of margin.  In some very very smart people’s minds, like Dave Ramsey for example, it is one of the best kinds of margin.  The kind of margin I’m mentioning here is margin for the unplanned.

Unplanned expenses.

Unplanned sources of emotional pain.

Ultimately, Unplanned changes in your overall plan for Financial Freedom.

Unplanned expenses:

water heater leak

In my experience in counseling hundreds of real estate investors and agents, the Number One reason investors go crazy or go broke is they didn’t properly anticipate expenses.  Even a novice investor will be able to scratch out on paper or in Excel the basic expenses of operating a rental property.  But the truly savvy investors will plan for the unexpected expenses.  A new furnace crapping out just 6 years after installation.  A water heater leaking in a closet where nobody notices for a few weeks and fuzzy stuff begins to grow.  Savvy investors and agents will stick aside some extra funds each month into a NO-TOUCH bank account to absorb these expenses when they come up.   A good rule of thumb is to put aside 50% of the net cash flows each month into this account.  Nothing changes in the financial performance of the property such as ROI, ROE, IRR, NOI, NPV, etc.  All you are doing is managing the financial aspect of the property in a more conservative manner in order to provide for more controlled outcomes in the future–building in margin.  Not-so-savvy investors will strip the cash flows generated by each property and take that cash to be used to go buy more property or support their lifestyle.  Which do you want to be?

Unplanned sources of emotional pain.

I’m partial to the phrase,”You can’t call yourself a landlord until you’ve had to evict someone.”  This business deals with human beings and these creatures, myself included, are messy and sometimes unpredictable.  We don’t always act rationally or predictably, which typically results in a trailing of ugly messes to be cleaned up.  It can be a tenant mistreating a property.  It can be landlord lying to you as a property manager.  It can be a vendor mucking up a repair.  Or even something as simple as an error your bank teller made on your last deposit.

Regardless of the source of emotional pain, you have to deal with it proactively before it tears you apart and takes the joy out of running rental properties and, worse, takes your focus of your Financial Freedom.

The best practice I’ve found is to emulate what athletes do–they stretch.  RELIGIOUSLY.  DAILY.  EVERY. SINGLE. TIME.

runner stretch

Athletes know that stretching allows their muscles to absorb that unexpected twist of the leg, that hit to the shoulder, that blow to the breadbasket.  Without stretching, athletes know these unexpected moments of pain can become game ending moments of pain.

So, in running a rental business, stretch yourself by adding some margin to your daily calendar with small pockets of time that are just for you.  No meetings, no phone calls, no email binges.  Stretch your mind by reading some things totally unrelated to your business.  Stretch your ability to react to these unplanned stressful situations by learning how to write better email responses to those you interact with in a confrontational manner.  Stretch your ability to absorb emotional hits by keeping your Financial Freedom goals visible where you can see them in print daily.  Retirement early, travel the world, college fund for the kids, quit your job you hate faster–whatever your goal, refresh your mind of its importance to you daily.  It will help keep the impacts from taking you out of the game.




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