Creating a financial plan gives you a better idea of exactly how much it costs to acquire and operate your investment property. Four Leaf Equity begins by separating your expenses into fixed costs and variable costs.
Fixed costs describe things like rent, payroll, property taxes, insurance, and any loan payments you have. Variable costs may include hiring, inventory, marketing, advertising, maintenance, supplies, and utilities. Totaling the fixed and variable expenses gives us an idea of how much you spend each month.
It’s also necessary to assess the cost incurred when starting and keeping your business running, like registration fees, permits, rent deposits, utility and IT set-up fees, and any down payments on buildings or equipment.
Then we look at income potential. How much rental income is coming in, and are those rents in alignment with the marketplace. How often will rents increase? The condition of the property and the location will impact rates. A newer property may get premium rent right away, but an older building may need renovation.
When looking into older properties, some or all of the units could need rehabbing to get rent premiums. If you are rehabbing units, Four Leaf Equity can project the renovation dollars to bump rents anywhere from 10 percent to 30 percent. If you decide to rebrand a building, you may generate returns through improvements to landscaping, signage, and amenities. We’ll look at the costs for replacing carpeting with vinyl, tile, or wood flooring for better durability and maintenance, stackable washers and dryers, or energy-efficient windows. Upgraded lighting, plumbing, and electrical services throughout the building may be the best alternative. We look at rehab ROI and advise on upgrades to get the most significant rent bumps.
Another consideration is whether you will be generating organic rent or acquiring new properties, and the anticipated expense growth. Organic growth could be more cost-effective than acquisition but takes longer to achieve a return. However, you are in control of all the fee schedules, management decisions, policies, and processes, as well as the pace of expansion and tenant retention from the start. The direction you take allows us to estimate expense growth within specific time frames.
A financial projection takes all this information and evaluates costs along with return on investment (ROI) currently and over a period of three to five years. We calculate net and cumulative cash flow and compare the present value with future value. This provides a percentage of profitability on which to determine whether a net gain, loss, or break-even will result from the investment.
Based on the answers, we dive deeper into inflation, current interest rates, and business investment alternatives. Eventually, we are left with a list of strengths and weaknesses and may uncover other hidden costs. Only a thorough look at your financial statements, other assets, market trends, and interest rates will give a full overview of your financial projection. Then we can budget, plan, and make educated decisions going forward. Not every investment opportunity will be right for you, but risks can be managed with a proper financial projection and a detailed strategy to meet your goals. We analyze every aspect of your unique situation to provide accurate advice to estimate the highest rate of return in best and worst-case scenarios.
Caulfield, J., 2014. Rehab ROI: Which Upgrades Cause the Biggest Rent Bumps?
The Funding Circle, How to Do a Cash Flow Analysis (The Right Way)
DJ has been a serial entrepreneur for over 20 years, founding multiple companies in the software and media industries. He began real estate investing in 2016 and loved it so much that in 2017 he decided to focus on it full time.