Rental real estate is a common investment for both novice and large scale investors. With smart and cautious decision making, it can be profitable and relatively safe. Passive income is a smart goal, and rental property can provide wealth especially as you build a larger portfolio. Obviously, the right property, and being able to obtain a rent that is at least big enough to cover the monthly mortgage and insurance payments is the first step. The market also dictates how much profit you can make, as rent can rise and fall over time. However, there are some overlooked concepts to help you get a bigger ROI on your investment, whether you own a dozen properties or just one.
Hire a Property Management Company
It may seem counterintuitive to spend money to increase profits. In fact, according to Utopia Management, experienced property management companies typically save their clients more money than their fees. Industry standard is about 8-10% and each company handles a different set of services. Some typical ways rental management saves you money are:
- Tenant screening: Professionals are skilled at obtaining better tenants
- Lower vacancy rates: a good management company has a base of customers and broad reach to find new tenants quickly.
- Maintenance & Repairs: they have developed relationships with contractors for all sorts of repairs, getting better rates due to volume, and using in house maintenance staff at a lower cost than you could obtain.
- Eviction assistance: Management companies have lower eviction rates than a solo landlord. Tenants know that all rules, deadlines, and legal proceedings will be followed through, where landlords often let it slide and can let their emotions get the best of them. A management company will handle an eviction for you, getting a non-paying tenant out faster than you would.
Working with a management company can also free up your time spent to be able to invest in more properties and develop a larger portfolio. This is the true way to build wealth.
Keep up with real estate and economic news and current events. Staying informed and in touch with the real estate industry translates to higher profits. If you aren’t a daily news reader, you can set up news feeds for real estate news and economic topics, even specifying topics for your area. Use Apple News, Feedly, Reddit, Google News, RSS, or a plethora of other news feeds. Follow non-biased economic news or media sites such as Newtrals. Some examples of news topics that will affect you are:
- general rent trends increasing or decreasing
- changes in laws such as eviction moratoriums during Covid-19
- property values decreasing which may prompt you to invest in more property while prices are down
- unemployment or economic health rising or falling
- interest rates dropping could indicate you can refinance your mortgage or buy more property
Similarly, you should also follow specific neighborhoods in your area on social media. Facebook, NextDoor, Instagram, and Linked In all offer ways to connect based on region or specific interest. Here you can gauge growth of an area, when new trendy restaurants start to pop up, or when new building construction is on the rise. These platforms are useful as well to reach out for resources such as reliable repairpeople, pest control, landscaping, and contractors. By being an active supportive voice in the community where your property is located, you can then use it to find potential tenants, saving money in advertising and decreasing your vacancy rates.
Raise Rent at Least Every Other Year
If you are happy with a paying tenant, you may be hesitant to raise the rent, and that is a sound decision. However, it is fairly typical for rent to go up a small amount every year. Do your research and confirm that rents are indeed going up in your area first. And then consider small increases of 2-3% each year, instead of a large increase at one time. If you wait too long, then it will be a difficult pill to swallow for a tenant to afford a 10% increase after 4 years. You will get little pushback over a $25 increase typically. Give the tenant at least 60 days notice, and be prepared to have a discussion with justification of the increase, which may include showing the average rent for the area.
Inspect and Maintain the Property Annually
You will find issues that will cost you more down the road, such as leaks. If you wait to fix everything after they leave, you are hit with a bigger investment at one time. But if you inspect annually and repair some small issues, you not only spread the investment out, you keep the tenant happy by keeping up with issues. You also may find incidents that the tenant neglects and can remind them to keep up with them, such as changing air filters or minor damage. Sometimes you will find the property is in extremely bad condition and you may not want to renew the lease, and you will be able to give the tenant plenty of time and encouragement to rectify the problems.
Be Vigilant with Expense Tracking
In order to minimize your tax bill, you will need to record expenses diligently. Save all receipts, and track mileage. If you prepare your own taxes, be sure you aren’t overlooking any legitimate tax write-offs.
Following these factors can help put you in a position to grow your portfolio and increase your passive income. Having money to invest and creative financing are also necessary, but keeping a rental property for 30 years while the tenant pays off your mortgage can be a brilliant investment. It’s not for everyone, but it’s a fact that plenty of investors have retired comfortably because of their handful of properties.