Author: Brian McKernan, Senior Broker
Congratulations on the closing of your new property. Getting through due diligence, obtaining financing and closing on your property can be exhausting but what is your next move now that you’ve purchased your property? While it can be difficult to think of the end in the beginning when you’ve just purchased a new property, preparing your property for sale whether you plan to sell or not, can help you establish your short, medium and long term objectives in managing your investment property and developing your exit strategy. Preparing your investment real estate for sale can be a long term proposition that can’t be done in a matter of weeks or months if you intend to add value to your property to achieve the highest price possible.
You may be planning to own this investment property for a long time with no intention of selling but what if you receive an unsolicited offer to sell? You may not be mentally ready to sell but as the old saying goes, “everything is for sale at the right price”. What is your right price? Are you ready to sell when you are not ready to sell?
Effectively managing your rent roll, tending to deferred maintenance, and keeping accurate financial records not only add significant value to your property but prepare your property for sale.
Rent Roll:
‘Creating’ a strong rent roll can be one of the most important tasks that you are faced with. Filling vacancies, keeping up with market lease rates, and writing term leases with rent increases enable landlords to create a profitable, attractive rent roll when it comes time to sell.
Next to large capital item expenditures, vacant space can be one of the biggest expenses that a landlord will face. Each month a suite sits vacant equals income NOT coming in the door and erosion of an investor’s overall return and profit. A long term vacancy can create a sense of desperation on a landlord’s part to just fill the space for the income but an unqualified tenant can cause more headaches and cost more money in missed rent and eviction costs than most landlords care to deal with. The flip side is holding out for a higher end market rent and passing on tenants that could be great for your property in the long run if they could have just gotten in at the right rate and increased their rents over time with annual escalations. Qualify and evaluate new tenants thoroughly but know when to make a deal with the right tenant for your property.
Routine market rent studies will help you stay on top of not only your own rents but your competition as well. Rents are constantly changing and it’s important to understand how your rents compare to similar properties in the market to effectively compete for those precious in-place and prospective tenants seeking space in your market.
Are you writing short term leases? Hopefully not month to month leases but rather a solid 3 to 5 year term that will allow you to lock in lease rates today but also give you flexibility to re-assess lease rates at the end of the term. Banks and buyers prefer or require the security of a term lease for tenants. Month to month tenants could be gone in the next 30 days and provide no security and predictability to your rent roll. When it’s time to renew a lease don’t get lazy and allow a tenant to slide to month to month tenancy unless you have a good reason like wanting the flexibility to terminate the lease for a better tenant opportunity and higher lease rate.
For good, in-place tenants that have rents well below the market averages and you don’t want to lose, be creative with your rent increases. Prepare tenants for the increases and ease them into the increases to soften the blow. There are no rules set in stone that say you can’t slowly increase rents on a quarterly or bi-annual basis. Rent increases equal income growth which equals overall value growth to your asset. Also help to keep up with expense increases and inflation.
Deferred Maintenance:
Investing in your property with routine repairs and maintenance will not only save you money on costly replacement for neglected items but save you a ton of money on your sales price at the closing table. Routine maintenance and spending this money slowly over time and maintaining items will save big bucks later when full replacement comes before its time.
Due diligence inspections in the contract period will reveal the extent of deferred maintenance and the Buyer WILL come back for a discount on the sale price during your contract inspection objection. You may think, a 15 year old roof has plenty of life and is still functional (which it may be) but be prepared that a Buyer is going to have a different opinion and see the roof at the end of its useful life. Putting the proverbial Band-Aid on the wound only lasts so long, proper maintenance and eventual replacement will need to be done.
Financial Records:
Are you using a good accounting system like Quick Books that you can quickly pull reports and frequently check your financial standing? If you are manually keeping track of things in spreadsheets, stay up to date on at least a monthly basis. If you are doing it all in your head or by hand, find some help. Your rent roll must be accurate and detail all important information. The rent roll is first step in financial analysis & valuation and the most revealing due diligence document.
Keep good track and work to reduce expense which adds to your NOI and property value. Find out the market averages for comparable properties, are you efficient with your expenses or are they out of control? Reducing expenses increases your profits.
Conduct an annual financial analysis and valuation of your income & expenses to determine your NOI (Net Operating Income) and apply a market CAP rate and determine your property value. Are you increasing value? Has all your hard work paid off? Is your property worth what you think it is worth? Only the numbers will tell.
Summary:
Whether you’ve just purchased a property or owned the property for several years, preparing your property for sale whether you plan on selling or not can provide that driving force to get things in order and help set the short, medium and long term goals to maximize your returns and value should you ever decide to sell. Real estate investments are a slow moving, static investment vehicle like a large ship on the ocean…it can’t turn on a dime but can make a turn…it just takes time.
Create your own value, get ready to sell…even if you are not ready to sell.
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