As an early adopter of new technology, I was so excited when MapQuest became mainstream in the early 2000s. After having worked as a process server for about 10 years at the time, I knew my way around my home city of Phoenix fairly well.
But with this new technology I felt that I could work faster and smarter than anyone else out there. I began relying on the directions provided by this service, setting aside my hard-earned knowledge of a growing metropolis. Like anyone who has relied wholly on a mapping software, I soon found myself becoming an expert “U-turner,” as I was often off-course.
Off-course may be the perfect term to sum up 2020. But like any challenging circumstance, it does give us the time to pause and reflect on what we learned and how that will serve as a guide moving forward. As a serious investor, I spend a good part of my end-of-year review with my wife (who runs our investments) analyzing our current situation and then creating a plan for the next year. Below are two of the key areas that I analyze annually and recommend focusing on as you look to a new year and new opportunities.
Acquire, Sell or Hold Steady
If there were ever a year where we may have felt like throwing our hands in the air and selling everything, 2020 fits the bill: COVID-19, the loss of income and resulting inability for some of our renters to pay, and eventually an eviction moratorium mandate from the federal government.
Hard times call for hard decisions. Your analysis in this area must involve thoroughly reviewing each of your properties and devising a game plan specific to each one. As an example, after one of our review and planning sessions five years ago, we made the decision to acquire some short-term rentals. Being in Phoenix, we focused on winter visitors looking to escape the cold for three months. We mapped out how and where we wanted to buy, considered if any of our current properties could work in this model, determined the platform we would use to advertise, and evaluated the ROI for this model versus traditional renting. We executed our plan and eventually bought six homes and condos that worked well for winter visitors, but also have been filled year-round with other short-term renters. They have been great investments so far, generating four times more income than a traditional rental. But the big question is, will they be the same in 2021?
Pivot Usage Type
Continuing our story, due to COVID-19 our winter visitors are not booking like they have in the past.
This has led us to a healthy discussion on how we can pivot the primary usage of our properties to ensure they are still income generators. That discussion created a lot of questions:
- Is it time to convert these short-term rentals into more of a traditional model?
- What would we do with 6 washers and dryers, 18 beds, 8 couches, dining room tables and more?
- What happens next year if the rentals come back?
- Will that require $30,000 for furnishing those units again?
- Where is the market today in regard to new homes in a hot market like ours?
Answering those questions led us to decide to keep these properties as furnished short-term rentals, but to switch our focus to people who are between selling their existing home and buying a new one.
This decision then generated a whole slew of new questions, such as how would we find renters, what would we charge for rent, and how are these renters different from winter visitors? All valid questions that we are figuring out. My next step is to visit the realtors in the new home communities to let them know what I have available. Although this is a new strategy that pivots from where we were previously, I am confident it will work based on our analysis.
These are just two of the many topics we review in-depth each year. Every rental is unique and poses different challenges and opportunities.
In addition to the two key areas we discussed, we also consider the following:
- Location: Is it time to sell or acquire based on what is happening in a certain market?
- Tenants: Are we happy with our current tenants or should we be looking for someone new?
- Government regulations: Are there changes that help or hurt our investments?
- Improvements: What does each property need to ensure it is desirable?
- Taxes: How do changes in state, county and city taxes affect our bottom line?
- Vacancy: What vacancy rate do we aim for to ensure short- and long-term profitability?
- Policies: Do we add, alter, or eliminate current policies to entice renters to stay or rent?
Performing this type of analysis will easily help you identify whether you are currently in the best position with your properties or if you need to change a few things. These property-specific questions are great, but you also need to consider how you manage your property. Is it time to hire a property-management company, or can you continue doing it yourself? Are there available technology platforms that help you onboard tenants, manage, and collect rent?
No doubt there is room for adjustment or improvement in how we manage our properties. Although 2020 has taken most of us into uncharted territory, investing the time to map out your 2021 goals will make you a better investor and manager. After all, U-turns or adjustments are okay as long as they help us successfully reach our destination.