The obvious goal of investment rental property is maximizing profits by minimizing costs. It doesn’t take much experience in the business to realize the typical fixed costs are mortgage, taxes, insurance, maintenance, and a reserve fund for repairs and emergencies. A prudent investor does what he or she can to minimize these costs but there is a limit. When you are turning positive cash flow of eight to ten percent after these fixed costs, you have a decent rental investment. Then it becomes time to look at hidden costs and opportunities to further boost profits.
- Vacancies. Rental cash is your primary income so minimizing disruptions is key to maximizing profits. Not only does a vacancy mean no income but it also means you have to cover all of the fixed costs out of your pocket rather than from the rent check. Rental demand is currently high which means it doesn’t take much effort on your part to reduce both turnover and the length of vacancies. You lengthen tenant stays by having desirable investment property and delivering excellent customer service – make repairs and keep obligations faster than required. Every time you have a turnover it costs you money sprucing the place up for a new tenant. When a tenant does notify you they are leaving, begin advertising for a new tenant immediately. There’s seldom a reason you should go more than two days without a rent-paying tenant.
- Strategically increase rent. Do the math. Today’s tight rental market doesn’t mean you shouldn’t raise rents to avoid vacancies. However, if the cost associated with a vacancy will cost you eight percent of your annual income, you’re financially better off accepting a two or three percent rent increase even if the going rate in the neighborhood is a little higher. Raising rents two or three percent each year is less painful to tenants than a ten percent increase every two years. When you do need to bump the rent a little more, tie it to an improvement the tenant will enjoy and maintains/improves the value of your property. Maybe a new coat of paint or new carpet.
- Collect the fees. Collecting money is a task that few landlords enjoy but this is what you are in business for. Your lease agreement should be clear about rent due dates, the amount of the late fee, and other fees such as security deposits and pet fees. Be respectful to your tenants but be sure they understand this is a business arrangement when they sign the lease. It’s a good idea to verbally go over each item in the lease and have them initial all fees that apply. If the rent or other fees are paid late, don’t just shrug your shoulders and tell them to pay on time next month. In writing, let them know the rent or fee is not considered paid in full until the late fee has been paid. If you let them get away without paying the late fee once, they’ll develop a habit of paying late and not expecting to pay the late fee. If you’re renting a duplex or other multi-unit property, the other tenants will expect the same lenient treatment.
- Manage your property manager. If you use a property management company, these are the people delivering customer service to your tenants as well as assuring you have a steady income from the property. Before selecting a property manager, check online reviews to learn what both tenants and other landlords say about the company as well as check references given by the company. Some property managers will try to nickel and dime you for services you assumed were included in the basic contract. Go over the contract in detail with the property manager before signing. Property managers that don’t perform proper and prompt maintenance can end up costing you large repair bills. Ask for examples of how they perform maintenance as well as arrange for significant repairs. You might even check with their contractors about working relationships.
- Add income streams. Apartment buildings can provide additional income streams such as paid preferred parking, adding coin operated laundry, or possibly discounted TV/internet service. Single family residences can consider offering lawn care and maid services.
Being a savvy and highly profitable landlord isn’t only about controlling as many properties as possible. There is money to be made by better managing the properties you already control.
What property management ideas can you add? Please leave a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.
Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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Excellent list Brian!
To expand on point #1 - vacancies are inevitable. Tenant's needs change and they will eventually move out. Having a streamlined turnover process can have a big impact on your overall profitability. I use a 42-point checklist I've developed over the years to make sure I don't miss anything and can be as efficient as possible. This alone has saved me thousands over the years!
In addition, always look at your costs. Can you challenge your property taxes? Are you using an insurance broker t make sure you getting the best rates? Have you automated your processes to the extent possible or are you driving around collecting rent checks?
Thanks for the great article!
Thanks for the comment. You made great points about even better managing what I classified as "fixed costs".