By Anthony Eferhirhie Abugu
Real estate is one of the strongest forces in building and sustaining wealth. Until you master how to create and maintain wealth in real estate you will continue to lose money in real estate.
Just as in every business, there are risks and the best way to mitigate and manage risks is first to be aware of them and secondly have the required knowledge (technical ‘how’s) to reduce and manage these risks.
Risk in real estate is quite enormous mostly in the rental space but this risk can be managed and reduced to its minimum by enhancing our knowledge of real estate rentals. As a passive income, real estate rentals can keep the cash flow coming to you monthly, bi-annually, and annual basis.
Real estate rental has a tremendous compound effect in multiplying your real estate investment while at the same time enhancing cash flow for you and for as long as you want. Cash flow is life. Any enterprise that lacks or struggling with cash flow is dead or about to die.
The true life of every enterprise is cash flow. If cash is not coming in then that enterprise is in a moribund state suffering from entrepreneurial rigmosis. While cash at hand is King cash flow is God.
From Myths, we understood that the gods make the king and not the other way around. Any society or community where kings make gods is out of touch with true power and authority. It is he who the gods make king they give their powers and authority to.
While very few people are skeptical of going into real estate rental, the few who have already been there are moaning in pain and licking their wounds of losing money from tenants who live in these properties and refuse to pay the rentals.
Sometimes, eviction becomes another battle. On the other side, we see others who are into real estate fix-n-flip, development, and sales of low and high-income housing units. These are the presumably big boys (friends of the gods) of real estate but with the seasonal hand of time, the gods have proven to us that they have no friends but loyal and obedient subjects.
Even a disobedient servant of the gods will surely become an enemy of the gods. However, they are still some genius and legends out there cashing out with efficient cash flow channels from their real estate rentals. How are they getting it right?
Maybe they are giving the gods better sacrifice than others yet the gods cannot and will not accept obeisance and sacrifices that are not in conformity to their being. Until you conform to the requirements that enhance cash flow in real estate rental your real estate will be in serious trouble. Understandably, every real estate generates cash as in cash flow from rentals and capital gains from the property appreciation as an asset.
When your real estate (property) is no longer consistent with cash flow it depreciates thus becoming a liability. You must also understand as a matter of necessity that not all property is an asset (Cash flowing-in; adding money to your account) and the opposite is a liability (no cash flow; taking money away from your account).
Also, the argument that real estate rental is weaker and more strenuous than real estate development and sales has no merit. The merit will be defined by the real estate investor who is investing in real estate with a Real estate Investment Plan (RIP). While some real estate investors are keen on rental others are keen to develop and sell. Both are real estate investors, and their cash flow and financial strength are determined by their real estate investment plans. Hence, this argument is not sustainable.
This article only tends to establish some fundamentals for making the most of rental in real estate and enhancing cash flow as well. So the real question is why are you not making money or not generating enough cash flow from your rental as some are currently doing?
Here are 3 major mistakes real estate investors who are keen on rentals make which is either blocking or slowing cash flow in their real estate rentals:
1. No Legal Process
As a word of advice, if you have or plan to have one rental property, incorporating it as a business enterprise may not be necessary. However, if you already own multiple properties or you decide to develop a portfolio of properties then forming a corporation (limited liability) can be far more advantageous because it limits your liability and spreads your administration costs across these multiple properties.
First, let’s go back to our god’s mythology again; the gods will only accept sacrifices that are in total conformity to the ritual of that time. This can be narrowed down to whether you have a legal entity or a lawyer running the transactional phase of the rental. This can happen in the form of a retainer or settlements based on each transaction.
Whichever way, do not start your rental even as an individual or as a corporation without a lawyer or legal entity at your corner and your back. One of the mistakes lots of property owners make is the greed mistake. Do not consider a big thing the fees to pay a lawyer as in most cases the prospective tenant is the one paying this fee and not you.
From experience, while property owners charge this same legal fee, either they do not have a lawyer or will cut this fee to half and send the other half to their lawyer. What these set of property owners fail to understand is that the mere presence of a legal entity in a rental transaction puts the prospective tenant on a high alert and same time gives the rental process a legal face that frees and protects the property owner from any encumbrances, vulnerability, and risks.
It’s easier and quicker for your lawyer to enforce financial compliance on your behalf as a property owner than for you to do this yourself. The Key here is: Do not start any real estate rental without the service of a smart lawyer or legal entity. Secure the legal service of a lawyer first before starting your property rental if not you will step on landmines even on your farm.
Yeah! Legal landmines in real estate rental can be traumatizing and I bet you don’t want to be con by a clever tenant. Lastly, do not be among the overconfident smart folks out there who have the backing of a legal entity but are quick to abuse the legal apparatus.
Misusing your legal apparatus as a property owner will cost you a lot both in the short and long term and even bore holes in your powers as a homeowner. Misuse and abuse of legal apparatus is quite common in real estate rental and you will continue to lose money, trust, and reputation if you are very good at maneuvering and abusing your legal apparatus.
This can stem from short-changing your lawyer of his legal fees, inordinate timing of the legal process in the transaction phase, collaboration between the homeowner and lawyer to suppress the rights of tenants and not taking legal counsel from your lawyers.
2. A Game of Fairness
Until you understand what it means to be a tenant you will always think that your real estate rental business is always and will only be about you. No! While your interest is foremost and forward the interest of your tenant(s) must also be foremost. This is a two-way ride.
You cannot continue to maltreat, scam mummify, and oppress your tenants all in the name of ‘Landlord’ or ‘Landlady’ and make cash flow from that rental. It’s not possible. Let’s look at this in three ways: First, your tenants have rights, and their rights are protected by the law. Don’t take this for granted and just as I had earlier said, it cannot be all about you the homeowner.
Yes, there are times when it might be all about you but not always about you. Without your tenants, you have no real estate rental business. Treat them with dignity and respect. They will not be your tenants for life. Respect their rights and treat them as human beings – like real adults, you owe some real obligations.
Secondly, the law that empowers you to rent your property out also requires you to make your property livable. Your tenants cannot be the ones doing major repairs for you. The law requires that your real estate rental property be safe, secure, and serene (S3) for your tenants.
When you have these three ‘S’s in place, you must generate cash flow from your real estate rental investments. Forget the location. Is the rental property Safe, Secure, and Serene? As a homeowner or real estate investor in the rental business, you must make sure that your property meets these 3 S’s.
Thirdly, the law that empowers you to own a real estate property for rental also requires you to be responsible. There are too many irresponsible Landlords and Landladies in the real estate rental business mostly in Lagos.
As a homeowner, you should be responsible enough to listen to the complaints and feedback from your tenants and also, be responsible enough to a very high and noble degree to make decisions or rental management and maintenance policies that foster amicable living and wealth building or generation for your tenants and not always coming up with complicated antiprogress laws or policies. No! This is wrong in its entirety.
You cannot just sit down and eat your tenant’s Service Charge (SC) payments and leave them to their fate while at the same time expecting the same people to be financially compliant in terms of their rental. Thuggery and hooliganism can kick-start your rental business but can never drive it forward and sustain its growth or cash flow. Of course, no cash flow and no growth.
While doing all you can to make value and generate cash flow from your real estate rental, be fair or at least show empathy to your tenants.
3. Inconsistency in Facility Management and Maintenance
It takes management to gain maintenance and maintenance to gain value. What you do not maintain deteriorates in value and with time it dies.
As far as I am concerned, in real estate, the driving force behind value which gives an asset a strong value base is facility management and maintenance. This is so powerful. Ignore this and you are just playing, and of course, playing while at the same time losing money and reputation.
Time is either the death or life of value and until you give your real estate rental property the necessary time to manage and maintain, with time it will deteriorate from an asset to a liability. Management and maintenance is the life of any real estate asset. Cash flow in real estate heavily depends on these duo to survive and sustain. Take them for granted and your cash flow will first start to plummet down the drain where nobody wants to live in your rental properties anymore.
If you must sustain cash flow in your real estate rental then you must set up a management and maintenance system that has a process with a team of trusted trained personnel to run this for you. As already established earlier if you have more than one property or want to buy or develop more real estate properties for rental you must put a corporate face to it by incorporating it (LLC) because the legal face and facility management and maintenance are business oriented keys that must be in place.
While I will not want to define what a successful real estate rental is as many factors make a real estate rental successful but most important is facility management and maintenance. To be successful at real estate rental, your facility management and maintenance must be in full active gear and also top-notch.
Also, one of the pointers of a successful real estate rental is the amount and consistency of cash flow that real estate property generates per month, quarterly, and annually. If it’s not generating a sizeable amount at some level of consistency then it’s not a successful real estate rental except you have a vague definition of what a successful real estate rental is. Luxury and comfort will be mere child’s play if facility management and maintenance are not at play.
However, I will not also downplay the rising cost of inflation which impacts maintenance highly but with strategic planning and a phase-by-phase maintenance culture, maintaining your real estate property will not be as difficult as you might think or made to believe.
What sets real estate properties aside from others is the management and maintenance systems and processes put in place to always keep these properties Safe, Secure, and Serene. You must empower your facility management and maintenance team to act with full discretion on your behalf. A word of advice, while you might allow your legal personnel or other trained personnel to manage your real estate rental properties for you, make sure you handle the facility management and maintenance yourself or as a matter of grave concern, you supervise the team running the management and maintenance yourself.
Conclusively, cash flow in real estate rental is real, possible, and only sustainable by avoiding these 3 mistakes real estate investors and homeowners make in rental. Let’s not forget that the gods are only happy with those who obey them. Cash flow in real estate rental is guaranteed from short-term to long-term if you have a smart lawyer (legal entity) as part of your rental process, play a fair game with your tenants, and uphold the principles of facility management and maintenance to a very high degree. Cheers!
Anthony Eferhirhie Abugu, Real Estate Professional Consultant (RPC)