Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Mia in Tampa, FL: Hi Brian, I’ve been investing in real estate for about 28 years. It’s mostly part-time but it does take a lot of my time. I’m at a point in my life when I’d really like to be working smarter rather than harder. I’ve dabbled in several investing strategies over the years including flipping houses and seller financing. Today, I have six rental houses that I manage myself. These are going to be a major part of my retirement income. I’d like to add a few more rental houses to my portfolio before I retire but I don’t want to take on more work. My goal right now is to improve my profits without increasing the amount of work that I have to do. What do you suggest?
Answer: Hello Mia. How about if you do a little more work upfront to fine-tune some of your business and investment strategies so that you have less work to do long term? My suggestion is that more profit will come from a combination of a little more work today to position yourself to work smarter as you approach retirement. Reviewing the performance of your investments helps you find places where you will increase profits long term. Here are some basics.
Are you collecting the full amount of rent your property is worth? The fastest way to increase revenues is by increasing the rent that you are collecting. Many long term landlords get terrific tenants in the property and become reluctant to raise the rent to keep pace with market rates for the neighborhood and comparable properties. Not only are market rates going up steadily but also your ownership expenses for property taxes, maintenance costs, and insurance. Typically, rentals are on a yearly lease although some default to a month-to-month rental after the first year lease is up. Mia, at your next opportunity and after reviewing market rates, you might be able to increase the rents. Along with being aligned with market values, you’ll know you’ve maximized profits when you get a little pushback from the tenants. However, try not to make a huge increase that goes beyond their budget and could result in a vacancy. Especially if you currently have desirable tenants in place. If they are on a month-to-month, it doesn’t hurt to gradually raise the rent every three or six months until it matches market rates. It helps if you tell the tenants what you are doing so that it isn’t a complete surprise every few months or the next time the lease comes due.
Have a solid maintenance plan. Good maintenance serves two important purposes. Renters will pay more to live in a well-maintained home and as the landlord, your property will be in better shape when you enter your retirement years. Mia, you’ve been in the rental game for many years, so you probably know the basics. Have a schedule for seasonal maintenance like cleaning gutters and changing furnace filters. But as your property ages, think about preventive maintenance that can save you large repairs bills. Replacing something like a sump pump after 15 years can mean not having expensive flood damage if some minor flooding happens. Having an emergency repair fund is also prudent. Something else to do is encouraging tenants to report needed maintenance and repairs in a timely manner. It might be extreme but you should consider putting timely-repair-reporting in the lease and include a reasonable fine for not complying. Another good practice is annually scheduling a time to talk to the tenants about possible maintenance needs and taking a walk through your property to inspect it. Make sure you comply with any tenant notification requirements. If you require the tenant to perform some simple maintenance tasks, make sure these are in the lease and have the tenant initial each task. This could be as basic as lawn mowing, cleaning the lint trap in the clothes dry after every use, or cleaning the oven on a schedule. Performing regular maintenance is always less expensive than hiring a contractor to repair or replace neglected appliances, equipment, and building structures.
Look for other income streams. What are tenants willing to pay extra for? Allowing pets can mean some extra cleaning between tenant vacancies but can also mean collecting a higher monthly rent and/or non-refundable cleaning deposit (check your local regulations). Other options take a little creativity. One is looking at the possibility of installing a laundry room if you have a triplex or fourplex. There will probably be a significant expense to install it but coin-operated machines can bring in well over $150 a month. Other possibilities are offering services for maintenance that the tenants are required to perform. You might be able to set up profit-sharing agreements with local housekeeping, landscaping, or pool services. Often these can be arranged with individual service providers rather than a large company.
Mia, those are a few basic things you can look at to increase revenue and decrease expenses. If you want to put in more work, you can do a deep dive into your current rental portfolio. If you’ve been a landlord for 28 years, there very could very well be more profitable rental properties that you would be better off owning as you near your retirement years. Changing your holdings will require plenty of research along with the hassles of selling your current rentals and purchasing other properties. But now might be the best time for you to consider this option. Something to keep in mind is using a 1031 Tax Exchange to avoid paying capital gain taxes.
Please add your thoughts about increasing rental income in general along with preparing for retirement as a landlord.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].