INCREASE YOUR PROPERTY’S CASH FLOW–
That’s What Warren Buffet & Jackie Gleason Would Do

More cash flow. Yes, I like the sound of that, or as Jackie Gleason used to say in one of his signature sign-offs, “How sweet it is!” Well, the “Great One” might not have been talking about real estate, but he would agree that every apartment owner wants the sweetness of increased cash flow (money in their pocket) from their property. Santa Monica apartment owners have some unique challenges regarding this issue. Owning apartments in one of the most restrictive rent control cities in Los Angeles County often makes a property owners feel that “the fat lady has sung” when it come to the ability to increase cash flow on a regular basis. In Santa Monica, the timing and amount of rent adjustments are ordinance-driven. Ouch! If you tinker with the well-being of a tenant in order to have them vacate, that is a big no-no. If I had a quarter for every time I have heard, “The only benefit of owning Santa Monica apartments is for the appreciation,” I would have a lifetime supply of parking meter money (in the old days, I would have collected dimes for pay phones).

Apartment appreciation has been tremendous in Santa Monica, especially during the past ten years, but you should not give up on increasing your property’s cash flow. I recently read Warren Buffet’s “Letter to Berkshire Hathaway Shareholders” that accompanies the company’s Annual Report. As a reminder, Mr. Buffet is the second richest person on Earth, and he is regarded as one of the smartest investors around. Even though the compounded annual growth of Berkshire Hathaway stock (BRK-A) since 1965 is 28.5%, he wrote that it is his obligation to also increase earnings on a sustained basis. I bet there is not one BRK-A shareholder who is upset with Buffet’s performance, but he still feels that increasing earnings is also his obligation as a CEO. If you want to read his entire 22-page letter, go to this web page: http://www.berkshirehathaway.com/letters/2005.html and click on “2005 Chairman’s Letter.” You will not be disappointed.

Therefore, appreciation is nice, but as I have said in my articles, “Show me the money (cash flow), baby.” How come Cuba Gooding, Jr. won an Academy Award for saying that, but I did not?

This is Annual Report season, so you might have received the one from Coca-Cola. Coke is the “number one” recognized brand in the world, so you would think all they need to do is make sure no one steals the recipe. No way! The largest beverage company in the world still sees a growing market for their products (all 400 of them).

Here is an interesting fact from their Annual Report. Every day there are 50 billion beverages consumed around the world. Of that total, Coca Cola’s share is…..quick, close your eyes and guess a figure, then read on. No, it is not 25 billion beverages. No, it is not 15 billion beverages. Rather, it is only 1.3 billion beverages per day. So they see lots of room to grow revenue (which becomes cash flow).

Now, before you think I moonlight as a stockbroker at Merrill Lynch, let me explain that I feel that you should not be passive about your property’s cash flow. If Warren Buffet is not going to rest on just growth, and if Coca Cola is still seeking a larger share of the world beverage market, then you need to jump on the increased cash flow bandwagon. As the financial guru, Suze Orman, says, “You have to have a relationship with your money.”

Increasing a property’s cash flow can come from both the income side and the expense side. I talked to several property owners in Santa Monica, and have come up with eight good ideas that I want to share with you.

Idea #1:
When you get vacancies, maximize the upgrade of the units. Instead of the normal make-ready cleaning for the next tenant, consider spending an additional, say, $5,000 per unit. Look into energy efficient appliances that qualify for rebates. These appliances do save you money every month. The additional money spent for all upgrades, improvements, and amenities enables you to achieve rents that are higher than the market. Here is the math. Let’s say that with all the new improvements, you can achieve $200 more per month than you expected. It will take 25 months to recapture the $5,000; however, the real story is the increase in property value. By applying a 14 GRM (Gross Rent Multiplier), which is the average for Santa Monica, to the additional $2,400 per year in income, the property’s value has increased $33,600. ‘That is not a bad return on the $5,000 you spent. You have increased your cash flow $2,400 more per year than you expected, and increased your property’s value by $33,600. This is like having each “split” Ace covered by a 10 card in a hand of Blackjack. Sweet!

Idea #2:
You should regularly monitor that tenants are in full compliance of their Lease Agreement, including not sub-leasing their unit. A tenant who is not abiding by their rent-controlled Lease Agreement on the sub-leasing matter is subject to immediate eviction. A vacant unit gives you the ability to bring that unit to a market rent level or higher if you do the improvements discussed in Idea #1.

Idea #3:
Shop around for property management firms, and then compare their prices and services. You will save some money. Look at the list of services and determine if you need everything that is offered. Also, determine an appropriate spending authority that you are willing to grant them. Like anything else, if you get some competition going, you will get to the bottom line pricing very quickly. Here is an item that will sneak up on you and might cost you big time in the future. Many property management firms include in their Management Agreement the right to list the property and be paid a sales commission in the event you decide to sell it. They might be fully capable of doing the brokerage, but you should not mix the two services. If you decide to sell in the future, it is a better idea to make the listing decision (including which agent) at that time.

If you decided to sell, select an Agent who is a market and marketing specialist. That person can properly evaluate your properly. In summary, make one business decision at a time. Stay flexible!

Idea #4:
It is probably time to put a fixed rate loan on your property if you intend to hold it for a number of years. Fixed rates are in the 6.5% range (as of the date I wrote this) for 10 years. Keep in mind that there may be some restrictions or fees associated with refinancing or selling before the 10 years.

Idea #5:
On a regular basis, check the market for rents in competitive properties and similar type of units. You can do that yourself by looking at ads in the newspaper, calling other properties, or talking to real estate Agents who work in your market. Good Agents are constantly doing rent surveys. In order to develop a relationship with you, they will often share some of the information (you can call me at any time for current information and current rent surveys). When vacancy occurs in your property, do not be afraid to adjust to the current market. Often owners will charge less than the market in order to minimize rent loss. Yes, charging less than the market is a strategy, but as I noted in Idea #1, increased rent means increased value at the rate of $14 to each $1 of increased income, so, the math is on your side.

Idea #6:
Another idea to add rental value to vacant units is to offer services to tenants. Some of the ideas listed next are for high-end luxury buildings, but a few apply to any property: Concierge service, grocery delivery, laundry delivery, cable service, and high speed Internet. Use your imagination in this area. Be the only apartment on the block that offers______________ [fill in the blank].

Idea #7:
Keep up the property’s maintenance. Deferred maintenance deteriorates the property at an accelerated rate, which results in higher costs in the future. In addition, it affects the ability to keep good tenants and attract new ones. For example, leaky plumbing should be repaired and maybe upgraded immediately. The future damage to the building by water will cost much more. Some of the repairs will be the upgrades noted in Idea #1. It makes no sense to deal with the issue again. Some deferred maintenance is cosmetic. It could be the landscaping or a fence that needs attention. Who wants to live in a place that gives the appearance of being on its last leg? You’re right— no one.

Idea # 8:
Many property owners have told me that they use the Westside Rental Connection (located in Santa Monica) on a regular basis. This service assists property owners in finding top notch, credit worthy tenants for their vacancies free of charge.

Of course, there are many more good ideas for increasing your cash flow, but ones I have reviewed come up a lot, so I wanted to share them with you. If you have a special idea that has worked for you, let me know. I am gathering my list that I will share in future articles.