The Secrets to Assembling a Profitable Rental Real Estate Portfolio

A resident of Methuen, Massachusetts, Benjy Orbach is a former sales manager who specialized in warehouse optimization. A real estate professional, Benjy Orbach has a record of matching buyers with their dream properties. He also specializes in helping real estate investors keep rental portfolios profitable.

Maintaining a profitable real estate portfolio boils down to two things, first is getting a great location and second is keeping a lid on costs. A property in a good location has great employment numbers, has low crime rates, and is in a well-performing school district.

You can check an area’s job availability rates from the US Bureau of Labor Statistics or from the local library. You can find data on crime rates at the local library or police station. Similarly, watch out for upcoming developments which may indicate the area is growing and a property’s proximity to public amenities that will appeal to tenants.

Next, consider the costs of owning the property. First, investigate the area’s average rent. Will this be enough to cover your mortgage payments? If not, look for a property that’s selling below market rate. Listing platforms like RealtyTrac.com usually have sections with properties up for foreclosure. Buying below market locks in a profit at the start and lowers your monthly mortgage payments.

Next, factor costs such as average vacancy rates, property taxes, and insurance. Municipality assessment offices have data on property taxes. Other costs include maintenance and repair costs as well as management fees. A profitable property will earn you a lot of rental income, incur little monthly expenses, or do a bit of both. 

Why Companies Calculate Their Expense

A sales and operations leader in Methuen, Massachusetts, Benjy Orbach worked as an operations manager for one of the largest import retailers in the country. Overseeing a territory that consisted of 10 stores and two customer service centers, Benjy Orbach had oversight over warehouse operations and budget preparations. He performed critical financial arithmetic such as calculating the business’ expense-to-sales ratio.

The expense-to-sales ratio, also called the operating ratio, is a calculation that reveals a company’s operational financial health. In simple terms, it is calculated by dividing a company’s expenses by sales and then multiplying the result by 100 to get a percentage. Therefore, if a company’s expenses in 2020 were $100,000 and its sales $200,000, it had an operating ratio of 50 percent.

In practice, however, deriving a company’s operating ratio is much more complicated. For example, only operating expenses are used in the calculation. These are the costs directly attributable to producing and selling a product or service. They include rent, utilities, office supplies, advertising, and salaries. Non-operating expenses like tax and interests on debts are not considered.

For sales, only net sales figures are included. This is the total revenue received in a year minus the cost of returns, discounts, and allowances. Both the net sales and operating expenses figures are derived from the company’s income statement.

Managers, executives, and investors use the operating ratio for comparative purposes. They can compare one year’s operating ratio to another year’s, one department’s or product’s ratio to another’s, or one company’s to another in a similar industry. Generally, a lower operating ratio is a good indicator that the company or department is efficient in how it spends cash to generate cash. A high operating ratio, on the other hand, shows that a company is inefficient in how it uses up cash to generate revenue.