THE BIG PICTURE. The biggest issue real estate investors face is how to create the highest possible return from their rental property. This requires looking at the big picture, not just the current month, or so they think. Unfortunately, many investors have fooled themselves into thinking they are looking at the big picture, when they are really being shortsighted. What comes to mind when you think of getting the highest return on your rental property? Cash Flow? That is the answer most would give, and it is logically correct, if all else is equal. What truly is the most important item is not cash flow, however, but simply “Cash.”

You have probably read it in many books, but what is the most precious commodity all of us have? Time. Once this month passes, we have lost all ability to earn money in it. This applies if we are looking a job, leasing out our investment property, or really any other activity that involves earning income.

So when given the option of putting $1500 in their pockets this month, or forever losing the ability to earn any money this month, what do most investors do? They forgo the $1500. When I put the question this way, it seems very obvious that investors who forgo the money are doing the wrong thing. But most investors actually think they are doing the right thing when forgoing the $1500. Let’s talk about the why first, and then the math behind our point.
Why do investors lose this kind of money all the time? Most often, they are holding out for higher cash flow. Maybe they have to cover their mortgage, they must have a certain return or cash flow on their investment. While these are valid goals to have, they often cloud investors heads and costs them thousands of dollars a year.

CASH IS KING. Let’s make it easy. The most important thing in regards to investment property is getting your property rented right away, and getting cash in your hand. Here is an example. There was an investor with a unique property, off the beaten path, who was not getting a lot of foot traffic or views on his property. When he finally got an offer of $1500 a month for a one year lease, he balked at it, because he wanted $1550. He looked at the offer like he would be losing $50 a month by taking the offer. The reality is that he loses $1500 this month by not taking the offer, and it is extremely difficult to make up that money over the next 11 months. Even if he got a two year lease a month later at the $1550 he wants, it would take over two years to make up the loss of the initial $1500 this month (30 months to be exact).

The key is to look at the current 12 month period and calculate what will yield the most amount of revenue for the next 12 months. If I want to rent a property out for $1500, and the market says it will rent at $1400, what should I do? Let's assume I can get it rented for $1500 a month, but it will take me a month to do it (by the way, that is a huge risk if the market is saying $1400 - rents have been dropping for 12-18 months now). For this current 12 month period, I will earn $1500 times 11 months or $16,500. If I get it rented now for $1400 a month, I will earn $1400 times 12 months or $16,800. I will earn more money in the next 12 months with lower rent! Now, you might say yes, but I will sign a 12 month lease next month, so I should look at the 13 month period (by the way, the lower rent is still ahead after 13 months). The problem is, you have lost $1400 this month, and that is what you should be most concerned about.

Another key point, investors often miss, is that the rental rate is not set by your mortgage or by what you rented it out for last time. It is set by current market conditions. Those may actually change daily. If you are trying to cover your mortgage or holding out for what you rented it out for previously (whether it was a couple years ago when you last rented it or a lease just expired), that can cost you thousands of dollars a year. Sophisticated investors set their rental rate at the low end of the range because they know lower leases do not cost them the most money in rental properties, vacancies do.

Let's look at another example, but this time we are equipped with our 12 month view tool of analysis. A tenant has a lease that ends in 30 days. They would like to stay in the property they have been renting for $1400 a month, but they notice the rental rates are now in the $1250-$1300 range. They ask for a rent reduction on renewal to $1300. The owner balks at this and considers letting them move out in order to hold out for the same $1400 a month. Is this a wise decision? From what we have learned so far, just based on common sense alone, this is a bad idea. The owner will lose rent for that first month almost guaranteed. The second factor is, if the owner is holding out for an inflated rental amount because the market has changed, it is unlikely that the owner will simply lose just one more month of rent, but maybe two or three. At which point, the owner may finally concede to lowering the rent and has possibly lost around $3900 for the 12 month period. Always do what you can to keep your property occupied.

As you can see, cash in your hand is the most important thing, and that goes hand in hand with keeping your property rented at all times. Sophisticated investors always do whatever it takes to keep the property rented, and avoid the cost of a vacancy. You can use this same calculation when weighing whether to pay to advertise, lower rents or deposits, or clean your property. All of those things make properties rent quicker. If you look at them as costs only, and avoid them, they can cost you far more in vacancies.