Rental property and real estate are lucrative side gigs and/or full time jobs. The problem is that countless number of people jump in with both feet, without doing any research whatsoever. They buy rental property or rent out their first house and end up losing money because they aren’t doing the small things right. If you can’t increase revenue, that you should decrease expenses. It is a basic business principle that especially applies to rentals.
Profitability is not a small feat. To use toddler vocabulary, real estate is hard. Loads of people fail. Focus on being a professional and minimize your losses. Winning big is fantastic, but consistent profitability, even during hard times, is what keeps a business afloat.
The Age of The Property
Property age is a piece of the pie that many buyers look past and shouldn’t. Your maintenance costs are directly linked to it. The older the building, the more upkeep you should allocate per year towards it. Ideally, items like lead paint, asbestos, galvanized pipes, and knob and tube wiring are fixed before you purchase.
There is a chance that a previous owner just hid these items and played dumb on the property disclosures. It is a BIG no-no to do, but people do it. Don’t let yourself get screwed over if you can help it. Hopefully your home inspection will find these items, but they can be missed.
YouTube has some great videos detailing these costly items and what to look for to find them.
Utilities: Tenant paid or owner paid
You may not think this makes a big difference, but if you have a multi-unit property, this can get expensive. Tenants do not care how much your energy costs are and they will do family members’ laundry in your machines, using water and electricity you paid for. Tenants will take long showers. THEY DO NOT CARE, unless they are paying for utilities.
Their world changes if they pay utilities. They take better care of everything better for some reason or another. It’s weird, but maybe they get more of a sense of ownership for their place of residence. Still don’t believe the profitability behind it?
If your units do not have laundry hookups in the units, but have a shared laundry space, use a coin laundry. This will recoup most of the cost of the water and electricity to run them. Also, tenants run fewer loads, so your washers and dryers last longer.
Most cities have a coin laundry service that will put their machines in your property and pay you a certain amount based on their usage. They charge a fair amount. Financially, you are better off buying your own coin operated laundry machines. They are only about $600-$1000 for decent machines and these will pay off in the long run.
Property taxes vary widely based on which part of town or which town you are in. On one property, they may be $2000 per year, but across the city, the same type of property may have to pay $4000 per year.
It is best to check the county auditor’s website before you purchase. That is extra money in your pocket every year, so long as the rents and everything else are the same. Taxes suck, don’t pay more than you must.
The perfect property is different to each person. A few items are the same though. No one wants an area with more crime rather than less. A high crime area can be profitable, but it can also be disastrous. A questionable neighborhood can go bad in a heartbeat and this can make your rents go down. The higher the crime rate, the lower the rents. The inverse is also true.
An up and coming neighborhood is great, if you buy at the right time. It can make your property appreciate, but that is not something that you should plan on happening. A rental property should not be counted on to appreciate. You may disagree, but it is better to be pleasantly surprised rather than disappointed.
There are some useful crime maps out there and Trulia.com has one integrated with their listings tool that can be used, even if it isn’t quite perfect.
Zillow.com is a controversial and not always accurate site, but it can be used for certain things. See Bill Gassett’s article explaining more in depth as to its inaccuracies. Zillow is terrific for listing open apartment units you may have open, but is not perfect when it comes to its appraisal estimate or Zestimates.
Size of Each Unit
The size of each apartment or unit makes a difference in your bottom line for a few reasons. Obviously, the rents are more expensive cause the units have more room. Less obviously, this means that you are hopefully dealing with people who are slightly more established in their lives, since they can afford more space.
Along the same line of thinking, this tenant may take care of your place slightly better than a tenant who’s thought is, “well, it’s just a cheap apartment.” This is not to say there aren’t exceptions to every rule/guideline, because there are, but the chance that you may have less maintenance is a risk you should take.
Property insurance is a necessary item for everyone, but how much you spend and on what amount of coverage is completely different. Only you know what amount is best for your situation. There is one certainty, more coverage is better when you have the unexpected happen.
For example, the first rental property I purchased, is in a flood zone. I bought flood insurance. Within 6 months of purchase, there was the worst flood in the area for at least 50 years. My building did not have water in it at all, but only by mere inches. I am never that lucky, except that one time… No one gets that lucky.
Buy more than you need! You may pay an extra 40 bucks a month, but it is worth it to have it when you need it.
No tenant enjoys a rent increase, but at a minimum, rents should keep pace with inflation. This means that each lease should increase at the same rate, which is typically around 3 % per year. Few owners keep pace with market rent rates like they should because they are afraid to lose a tenant. Having to replace a tenant can be costly and it is sometimes better to keep the rents a little lower than market to keep a long-term tenant.
Now this is not always the case. If a unit can go for $100 more per month, but you have long-term tenants that you do not want to scare away, what is the best solution? The best solution depends on your goals.
One solution can be to increase the rent by a fair amount, maybe $40-$50, but not too much as to scare anyone away. A second option is to increase the rent by the full $100, but only on the worst tenants. This accomplishes one of two things: either they pay the full $100 difference or they leave and you get a better tenant paying the full $100 difference. It is a win-win for the property owner.
Raising rents has a habit of increasing the vacancy rate, because again, no tenant enjoys rate increases. Once you have a plan and raise rents in small increments, ideally your vacancy rate will be more predictable. Make sure you do your best to keep good tenants as best as possible.
You want the quiet, pays their rent on time, doesn’t destroy your property kind of tenant. They are hard to find and the happier they are, the happier your bank account will be also.
A tactic that you can try to use is to attempt to place people that are of similar demographic closer to each other in the property. This is not to say that you can discriminate in any way, because that is highly immoral and illegal. Think more along the lines of putting the little, old ladies closer to each other and not next to the loud and boisterous twenty somethings. It helps keep the peace within the property and keeps the vacancy rate lower.
Being in the black is not guaranteed. Countless people buy real estate for use as rental property, own it for a couple years, and sell it because they are losing or have lost money. Maximizing your return on investment now, compounds greatly the longer you hold onto a property. For example, see this rental property calculator. The more knowledge you have, the more profit you can make. This is why real estate investment associations (REIAs) are vital to attend. Membership is usually about $100 a year, and most will let you attend one meeting for free so you can see for yourself how valuable it is.
Knowledge is not the only item you should gain from these. Networking should be your other goal. You may meet someone, get along great, and they may speed up your learning or tell you helpful hints for your market. You never know who you may meet until you go. Just last week, I ended up sitting next to the person who runs the National REIA (I really did)! Now, for full disclosure, the National REIA’s headquarters are in my city, but you may meet a big shot investor or guru. Go to the meetings!
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Memphis Buy And Hold is specializing in locating, purchasing, renovating and managing single-family and multi-unit properties and possesses over 12 years of experience in real estate investing and property management in the Memphis and Nashville markets… Learn More…… www.memphisbuyandhold.com