Real Estate Profits are only earned from RENTS minus COSTS
Without understanding and controlling costs, today’s property management applications are missing the biggest nugget of information that property managers and DIY real estate investors require to make and keep investments financially sound. A revamping of antiquated offline rental property management applications converted to newer online property management applications won’t help if investors do not control costs.
In my many, many years as a DIY landlord, managing property myself and using professional property management firms, the two most important success factors to making profits are: acquiring great tenants and excellent cost controls.
Past property management software applications basically only automated bookkeeping and were convenient for preparing tax returns. The applications never integrated with newspaper ads when trying to acquire new tenants, nor did they help in qualifying tenants. Modern property management applications have made tenant acquisition and bookkeeping slightly more convenient; however, they haven’t uncovered the holy grail.
Integrating Cost Management into Property Management Software is THE Game-Changer
An investor who buys property to rent does so with a long term view– not for a flip or quick resale. Although landlords need to keep looking for ways to cut their costs like any other business, renting property profitably is unlike any other business. As with manufacturing, there is a large upfront cost, but property is immobile and its product can’t be shipped to other geographies for sale. Renting property is also different from service businesses. Landlords can’t “downsize” property as service business can do to labor to remain profitable. As an asset class, owning property is illiquid unlike stocks or bonds which can be bought or sold in an instant.
Profitable real estate investing is very challenging and consists of finding locations to rent with profits coming solely from diligent property management over time- even during times when rents seem ridiculously high. Therefore, the investor’s sole purpose in selecting and using property management software should be to get help to reduce costs over a multi-year period. Getting bookkeeping and tax preparation help is only the ‘block and tackling” of property management software. Property management applications need to help make the real estate investments more profitable each year regardless of changes in property market value, interest rates, property taxes, increases in rent, or anything else.
Recommended Cost Management Items for Property Management Software
I really don’t need any more comparative rent matching applications, nor do I need more or better bookkeeping software. I can easily keep using my existing outdated software. Because rental units are in heavy demand, there are many online places where I can easily compare rents and even list my vacant units. I can find sample leases on the internet to use and there are online tenant qualification tools, tax filing tools, yada, yada, yada. Many of these items are free, too.
Success in rental real estate investing all comes down to Revenues minus Costs equals Profit no matter what comparative rental services say you can rent the property for, where I list my properties, etc. To help me become more successful, the following are the items I need from property management software.
The top items I would want for cost management:
|1||Generate a unit configuration spreadsheet that matches what I rent.||I want to know the rental investment configuration for keeping track of expenses.
Is it a house, condo, townhome, land, with furniture, appliances, etc?
|2||Automated budget preparation based on rental unit configuration.||Many software applications can prepare comparative rentals for my areas, why not keep a database for comparative costs and apply them to the unit spreadsheet?|
|3||Automatically Integrate expense invoices into my unit database and spreadsheet.||Register repair services and ask them to use my software to generate their bills for me. Of course, I would need my software to transmit an invoice copy to them in some standard formats. But for many owners and service companies, this change in the billing process will probably be welcomed by both parties. In this way, I would have control over everything I spend on for expense analysis, tax preparation, etc.|
|4||Manage larger maintenance or renovations projects.||Maintenant Costs not only need control, they also need to be implemented in a timely fashion, especially at unit turnover. Integration with one of the available project management tools available would be very helpful.|
|5||Provide cost summary and analytical tools. AI repair service recommendations would be very much appreciated in this area.||I want to see how much I spent on repairs and also compare costs of the service companies I hire. AI software could help by doing comparative analysis of my service costs, versus other vendors costs for the same services.|
|6||Prepare historical unit profit and loss summaries including the rate of return etc. and forecast profits per unit based on total investments, return rate on invested cash, total profits, etc.||I need to compare my unit and total investments to make real estate purchase, sale, exchange or other decisions|
Additional “nice, and very nice, to have” items
|7||Categorize repairs for tax purposes||Sorting and separating out capital expense options from current expenses is a big help, even if you use a tax advisor.|
|8||AI recommendations for potential purchases that integrate with my current portfolio.||When surveying a property to purchase, there are those which will fit in easily with an investor’s existing portfolio, and others which will need a large integration effort or require a whole set of new skills and knowledge. For example, consumer vacation rentals versus commercial retail space rentals are two market extremes of different types of investment real estate which have completely different markets and customers.
|9||Tax preparations.||Produce the US Internal Revenue Schedule E or other forms required for filing taxes.|
|10||Provide tools which can search the internet to help with financing/refinancing unit purchases etc.||Price and financing options can make a big difference in a potential property purchase or long term profitability. Any software that could analyze my portfolio, suggest financing options, and search the internet for them would be a fantastic service.|
|11||Integration with TurboTax or other standard tax preparation software||Preparation of the correct forms for uploading into standard annual tax software packages along with the rest of a taxpayer’s Income tax file.
|12||Provide Depreciation forecasts for a unit based on the US IRS depreciation schedules||Keeping track of what is taxable profit and what is sheltered through depreciation helps make best use of property cash flow.|
It isn’t how much RENT you get. It’s how much it costs you to get that RENT!
[Editor’s note: We’re in the process of writing the final conclusions for the small landlord property management software category review for members of the Geek Estate Mastermind.]
[Image via beginner-bookkeeping.com]