Rental property can be a great investment. That’s why there are over 8-million independent landlords across the country.
Owning rental property can also be a real challenge, and it’s important to make sure you’re getting maximum return for your investment and effort. If you’re looking for ways to make more money on your rental property, here’s where to start.
Seven Ways to Maximize Rental Property Income
1. Set the rent appropriately and raise it frequently
Without a doubt, the single most effective way to make more money from your rental property is to price it in line with the local market. If you set the rent too high, you risk losing income to vacancy. If you set it too low, rent control laws could prevent you from correcting your mistake. And if your unit is subject to rent control, not increasing the rent by the maximum amount each year can have expensive long-term repercussions.
Consider a rental unit in Berkeley, California. The city limits rent increases to once per year, and sets an annual cap (in 2022, it’s 2.1%). If you rent that unit for $1,000 per month and never increase the rent, you’ll net $60,000 over five years. If you increase the rent by the maximum amount each year (assume 2.1%), you’ll net an additional $2,573.
The City of Berkeley allows landlords to set any rent they want when advertising a vacancy. If you set the initial rent at $1,050 (just $50 higher) and take the maximum increase each year, you’ll earn an additional $3,129 over five years.
2. Avoid vacancies
You can only collect rent 12 months a year. Each month a unit sits empty, 8.3% of its earning potential disappears.
Going back to our Berkeley example, imagine you list the unit for $1,100 but you endure a three-month vacancy before finding a tenant. Not only will you earn $2,700 less that year than if you had rented it right away for $1,050, rent controls mean it will take you 70 months – almost six years – to break even!
The best way to deal with vacancies is to stop them from happening. Set up your lease to require your tenants give at least 60 days notice before moving out and use the time to prepare and advertise the unit. Even a “coming soon” sign in the yard can help generate interest and start attracting prospective tenants while you’re getting ready.
If you own multiple units and are struggling with vacancies, consider offering your tenants an incentive for referrals. Even something simple like a $100 gift card could be enough to get a new renter when you need one.
Of course, some amount of vacancy may be inevitable. Check the vacancy rates in your area to get an idea of what to expect.
You can also use our handy analytics tool to make sure you are still profiting if you do have some unexpected vacancies.
3. Screen prospective tenants carefully and thoroughly
To that end, every landlord’s nightmare is a tenant who doesn’t pay rent. It can take months to get rid of a bad tenant – and cost thousands of dollars. SmartMove conservatively estimates a cost of $3,500 to evict a tenant, not including unpaid rent.
Proper tenant screening includes verifying the applicant’s income, doing a credit check, and searching court records for past evictions and criminal convictions. You should also take special care when calling references. It’s a red flag if the applicant’s references are overly positive, too personal, or just vague.
If you have multiple applicants, strongly consider selecting the applicant who is likely to stay the longest. While a student with a guarantor might be stronger financially, a young adult with fair credit may be likely to stay beyond the initial lease – saving you time and money on turnover.
4. Charge for ancillary services
Every time you include a service in the rent, you leave money on the table. Airlines have discovered they can make fares appear low and make more money by charging for everything from soda, to bringing a carry-on bag to printing a boarding pass. In fact, the research firm Hopper says those extra charges now account for 10% of airline revenues.
For you, this means expecting your tenants to pay for everything that’s not a home to live in. Tenants should pay for their own utilities, pay separately for parking and storage space, and bring quarters on laundry day. Not only can this strategy help you extract more money from your rental property, ancillary services are typically not subject to rent controls, so you can raise the rates over time as you see fit.
Make your own opportunities to add services by renting out the garage or charging for basement storage.
5. Rent by the room
If your rental unit has several rooms, you may be able to make more money by renting the rooms separately rather than renting the entire home. For example, a 4-bedroom house that would rent to a family for $2,000 per month might attract four individuals willing to pay $650 for a room, adding $600 a month to your bottom line.
The downside to this strategy is the extra work and risk you take on by having to manage four separate renters. Turnover is likely to be higher, and roomers may not care for your property as well as a family would.
6. Use the property for short-term rentals
If your rental unit is in a good location, you might be able to make more money by listing it as a short-term rental on Airbnb than as a long-term rental. A one-bedroom condo in a trendy part of town might rent for $1,500 a month, but can earn $3,750 per month if it’s rented for $250 per night with 50% occupancy.
Short-term rentals are a much more active business, however, so be prepared to work hard for the extra money. You’ll need to actively manage reservations, respond to guests’ questions, clean the unit after every rental and provide fresh linens for every stay. There will be added costs, too. You’ll be on the hook for all utilities, and don’t forget cable TV and high-speed internet are table stakes for vacation rentals. Oh- and the apartment will need to be fully furnished, too.
7. Maximize tax deductions
Income tax on profits is one of the hidden expenses of being a landlord. Fortunately, nearly all of your rental property expenses – from interest, to property tax, to the cost of driving to and from your properties – are tax deductible. To maximize your deductions, keep excellent records and use rental property bookkeeping software to keep everything in one place.
Five Red Flags That Could Lower Your Profits
If you’re in the market for an investment property, there are some red flags to watch out for that could spell trouble for your return on investment.
1. The capitalization rate is low or unknown
In the simplest terms, the capitalization (or “cap”) rate is a way of quickly calculating whether a residential property is likely to be profitable by dividing the property’s net income by its market value and is one of many insights you can get with rental property analytics. If you’re considering a property that’s already rented but getting wishy washy answers about its cap rate, that could be a bad sign. According to Nolo.com, a reasonable cap rate between 4% and 10%.
2. There are vacant units
It’s natural for very large buildings to have some vacancies – the national vacancy rate according to the U.S. Census Bureau was 5.6% in the fourth quarter of 2021 – but a smaller building with two units vacant out of four could be a bad sign. There’s a reason those units are empty, and you won’t want to be the one to solve the problem unless you particularly enjoy taking on risk.
3. Major repairs are looming
Sometimes, a “fixer-upper” can be a great opportunity. As they say, it’s a good idea to buy the worst house in the best neighborhood. But behind every major job is a potential surprise: A roof needs to be re-shingled, and then the roofer points out the rotting plywood underneath. A boiler breaks down revealing lead pipes that need to be replaced. An aging bathroom turns out to be harboring black mold that needs remediation.
Inspect any property you’re investing in thoroughly and ask yourself whether it will still be profitable if the work you know about leads to work you’re not expecting.
Inspect any property you’re investing in thoroughly and ask yourself whether it will still be profitable if the work you know about leads to work you’re not expecting.
4. The property doesn’t match the neighborhood
A neighborhood with mostly four-bedroom homes will attract families with children. If you buy the only two-bedroom bungalow on the street, you might not be able to attract the retired couple the house is right for. At the same time, it could be difficult to attract young urban professionals to live in a beautifully renovated property in a working-class part of town.
5. Some areas are off-limits
It would be foolish to buy a property you haven’t seen in its entirety. It can be a sign that something’s wrong if the seller isn’t giving you access to certain areas. And if tenants aren’t letting you in to view their units, they won’t suddenly become easy to deal with when the house is in your name. Insist on seeing all areas of the property yourself and perform a thorough inspection so you know what you’re getting into.
Keep detailed records to get better information
It’s impossible to know whether you’re making a profit on your rental property if you’re not keeping good records. Using rental property management software is a great way to track your income and receipts, and run reports to get realtime information about your financial performance.
Final thoughts
Making more money from your rental properties takes hard work and careful planning – but it can be done. Set up the right conditions to be successful, and use rental property management software to track your finances and get data about your best opportunities for growth
FAQs
A landlord’s top expenses are usually (but not always) mortgage interest, property tax and maintenance. A $200,000 30-year mortgage at 3.75% will cost a little over $7,000 per year in interest on average in the first five years. The average property tax bill for a single-family home is $3,719 according to mortgagecalculator.org. And according to the US Census Bureau’s 2019 American Housing Survey, the average homeowner spends $931 per year on routine maintenance activities. However, if you’re doing it right, a rental property should be profitable – meaning the money you earn from rent and appreciation pays for all of your expenses.
Tenants leave when the property no longer meets their needs. There are many factors that are outside of your control, and many that you can influence. Start with careful tenant screening to ensure your applicants are a good fit before they sign a lease. Work to develop a relationship with your tenants and keep an open dialog so you can be responsive to their needs as they change over time.
To be sure you’re profiting from your rental property, treat it like a business. Our rental property management software makes it easy to track your income and expenses, and generate rental property analytics to quickly determine your top opportunities to drive efficiency.
There’s no limit to how long you have to remain in a home paid for with a VA Home Loan before renting it out. However, the rental property must remain your primary residence. It cannot be used as a pure rental property without you living there.