Whether you're an experienced landlord or new to real estate investment, you're looking for maximum ROI on your property. These tips coming straight from experienced investors can help.
One of the biggest drains on a landlord’s rental income is
expenses. Owning rental properties is never as easy as buying a property, finding a tenant and waiting for the big fat checks to roll in -- and savvy landlords know this.
“Once a property is purchased, its ROI mostly comes down to minimizing losses,” says Brian Davis, a real estate investor with 15 rental properties and co-founder of the real estate blog
SparkRental.
“I like to think of rental income as a pipeline that you want to keep flowing smoothly and with minimal leakage.”
Whether you’re planning on
getting into the landlord business or you’re an experienced landlord, you probably want to know how to net more income. We talked to an array real estate experts to gather their top suggestions for how to maximize your rental income.
1. Thoroughly Screen Tenants
One of the biggest hassles we heard landlords mention was the cost (in money, time and stress) of evicting troublesome tenants.
An eviction can take three to six months and can cost upward of $5,000, so do some preventative work by putting new tenants through a thorough screening process.
Run a credit check to give you a sense of their financial responsibility, along with a criminal and eviction investigation. Also, do a little reconnaissance.
“Drive by their current residence,” says Denise Supplee, a real estate agent, investor and former property manager, as well as co-founder of
SparkRental. “Is it messy? Are there trash cans thrown all over -- or worse, is the trash just piling up? Is there an old broken-down car with expired tags just sitting? Big warning flags!”
2. Tenant-Proof Your Property
“Landlords can’t deduct money from a security deposit for ‘normal wear and tear,’ so they need to do what they can do prevent it,” says Davis.
This includes forbidding mounted TVs in your lease, securing hardware like towel bars into studs, opting for low-maintenance flooring like hardwood over carpeting and installing door stops. Anything that prevents reasonable daily use from leaving a mark on your property is a wise move.
Simpler landscaping and durable exterior materials like brick and vinyl can also cut back on your maintenance costs, advises Chad Carson, a real estate investor and blogger at
CoachCarson.com.
3. Get the Right Insurance
This should go without saying, but always spring for landlord liability insurance.
“Just the cost of one frivolous lawsuit could empty your bank account,” Carson says. “A good insurance policy will hire attorneys to defend you in the unlikely case of a lawsuit.”
The Penny Hoarder editor Justin Cupler rented out his old house for a year after moving out, and he adds: “Call your insurance company and change to a structure-only policy. Most homeowners policies cover the entire house and its contents. If you’re renting it to strangers, no need to insure their items. This can save you about $25 to $50 per month.”
4. Buy a Home Warranty
“If your house is older, things are bound to break,” Cupler says. “(A home warranty) typically costs only $20 to $50 per month and covers you in the event of an unexpected breakdown that can drain your reserves.”
5. DIY Whenever Possible
“
Having a rental property is less about maximizing income and more about minimizing expenses,” says Andy Panko, owner of two one-bedroom condos in a complex in Woodbridge, New Jersey. “I always try to personally do as much as I can with regards to my properties. I'm very handy and can handle most typical repairs and updating. I also do all of my own advertising (free via Craigslist), showing of my units, and do all of the background checks and credit screening (via TransUnion's
SmartMove service, which I charge to the tenant).”
6. Use Rental Agencies With Caution
Some landlords find rental agencies and property managers are worth the expense, as they save them time and stress in the long run.
“I was too easy on my tenants — not charging late fees or starting evictions when they got behind. This allowed them to walk all over me and cost me even more money,” says Mark Ferguson of
Invest Four More. “When I had seven properties, I handed them over to a management company, and they were much tougher. Even though I paid them a percentage of the rents, we collected more rents and had better tenants. It saved me headaches, time and money.”
If you go this route, just make sure you’re getting the most bang for your buck. Cupler suggests comparing fees first by “getting a few agencies vying for your business and finding the one with the best benefits for the cost.”
If you’d prefer to forgo the fee, there are helpful tools.
“Hiring a property manager may take some of the headache out of dealing with tenants, but their fees can take up to 10% of your returns. In today’s real estate market, that could reduce your cash flow to the point of barely turning a profit,” says Callie Hamilton, a real estate investor whose husband founded
Rentlit to help fellow landlords handle things like online automated payments, maintenance services, background checks and lease creation on their own.
7. Check Your Properties Regularly
Even if you’ve hired someone to handle your day-to-day management, make sure to inspect your properties on a regular basis to ensure your tenants are properly keeping up on your investment.
“Walk through the properties as often as you can,” says Deb Tomaro, broker associate with RE/MAX Acclaimed Properties. “Changing the furnace filter every 60 days is a great excuse. That gives you a chance to look for any issues before they turn into a huge and expensive repair. For example, I can't tell you how many cabinets under the kitchen sink get rotted out because the tenants stuff the cabinet full of things and never know that there's a small leak. The leak goes on for a year, the sink base is destroyed. Every time I go into a rental unit, I ask if I can check under the sinks for any leaks, and I run my hands along all the plumbing to make sure I don't feel a leak.”
Even a simple drive-by to make sure things are being maintained on the outside can tell you a lot, she says.
8. Keep Your Tenants Happy
In addition to eviction, turnover costs rank high on landlords’ lists of things to avoid.
“The biggest expenses in the rental business occur when a tenant moves out,” Carson says. “A tenant who stays five or six years doesn't complain about smudges on the wall, but for a new tenant, you'll have to paint and do other repairs.”
Keep your tenants happy by responding to maintenance requests promptly and politely. If you find you have to
raise rents to meet monthly expenses, give tenants an incentive to stick with you, like a small upgrade when they renew their lease, Carson suggests.
9. Get the Most Rent Per Square Foot
“Bigger is not always better in the rental world,” Carson warns. “Find properties with the highest rent per square foot. Many times a 1,000-square-foot apartment will rent for the same as a 1,300-square-foot apartment. But the painting and other ongoing maintenance will cost more for the larger unit.”
Or follow the example of Keisha Blair, co-founder of
Aspire-Canada, and
focus on renting out multifamily properties, which “can reduce the risk of having long periods of vacancies significantly, reducing your risk of loss of income,” she says. “In multifamily homes like triplexes, this significantly increases the income potential while minimizing significant losses if one tenant decides to leave. Even though these properties tend to be more expensive, they tend to outperform single-family investments quite significantly in the long run.”
10. Don’t Include Utilities
Never include variable utilities like heat or electricity in the price of rent. Jennifer Stahlman of
PayLease explains why:
- “Padding the price of rent to include utilities means you have to overly inflate the rent in an already competitive market.”
- “When utilities are included, there is no incentive for the resident to conserve, leading to higher utility bills.”
- “If you don’t add enough to cover all utilities, you have to pay the difference.”
- “Utility providers frequently increase their rates, leading to inconsistent invoice amounts.”
11. Build Things In
Consider investing in built-in furniture like shelves or a breakfast nook.
“Generally, if it can't be moved, it can't be broken,” says landlord and real estate investor
Eugene Gamble. “Although initially more expensive, the costs are mitigated by the reduced number of repairs needed as tenants can't move pieces according to their particular desires. You also save on the time in finding replacements or doing repairs.”
Carson also recommends including lots of built-in storage solutions, for a very ingenious reason: “more stuff = harder to move!”
12. Charge Extra for Add-Ons
Consider renting any garage(s) located on your property separately, Gamble advises. “Not all tenants have a car, so you can rent that extra space out if it is suitably located and laid out.“
If you rent to tenants with pets, ask them to pay a one-time or monthly pet fee rather than paying a pet deposit, says Kaycee Wegener of
Rentec Direct. “If you ask for a pet deposit, that money can only be used to clean up any damage caused by the pet, and the remaining balance must go back to the tenant… However, if you charge a one-time or monthly pet fee, you can use the income at your discretion.”
13. Form an LLC
“A successful business begins (and remains so) by positioning itself to reduce risk. Notice, not ‘eliminate’ risk, because that's impossible,” says attorney and real estate investor
Craig Morgan. His strategy for doing so:
Have a single LLC (the most common entity choice for investors) for real estate holdings. Keep your rentals in one LLC; this LLC does not partner on other projects or conduct other services (e.g. contractor work). All the LLC does is hold property.
If you have a short-term portfolio (read: fix-and-flips), then put those in another LLC. If you're a home repair person or property manager, then that service is performed in a different entity. The crux here is that you limit the exposure (i.e. the liability) of each LLC. In theory, a plaintiff can only go after what is in the LLC/the value in the LLC. So, if you get sued as a contractor, the plaintiff can't get ahold of your rentals because it's a separate and distinct business.
14. Crunch the Numbers
“Since a rental property is an investment, it should be analyzed as such,” Panko says. As a result, “it is more important to maximize return than to maximize income. Even if you have enough cash to buy a rental property outright, you can typically earn a better return on your money by taking a loan to pay for most of it.” He provides this example using of his own units:
The total monthly cost of taxes, maintenance fee and insurance is about $525, and monthly rent is $1,250. That's monthly net income of about $725, or $8,700 per year.
The property costs about $110,000. If I had put out the full $110,000 to buy it outright, I'd only be making about 8.3% per year on my investment, i.e. $8,700 of net income divided by an initial investment of $110,000. Instead, I only put $27,500 of my own money in (25% down payment) and borrowed the rest with a 30-year loan. The loan is about $400 per month. So adding that to the taxes, maintenance and insurance means my total monthly expenses are $925.
With monthly rent of $1,250, this means my monthly net income is only $325 a month, or $3,900 per year. However, that equates to a 14.2% return per year, i.e. $3,900 of net income divided by an initial investment of $27,500. So by taking out a loan instead of buying it outright, my income is reduced but my investment return is increased.
That said, you still need to know what you’re getting into: “It should be noted that borrowing money increases the risk of owning a rental property,” Panko adds. “For example, even if the unit is unoccupied for months and, therefore, not producing any income, the loan still needs to be paid every month.”
As with any complex business decision, if you feel your head start spinning, it’s always best to consult with a professional.
15. Use Your Tax Breaks
Too many landlords miss out on savings because “they don't know what is an allowable expense” when it comes to
tax breaks, says Gamble. “
Landlords can claim all sorts of breaks for the upkeep of their property and in the repayment of mortgages. Learn what you can do, or hire an experienced property accountant.”
Your Turn: Do you have a rental property? What other tips would you add to this list?
