Investing in residential rental properties is proven way to earn consistent monthly income while building equity at the same time. Real estate investors can see excellent returns in the long run, especially if they get strategic and take advantage of tips, tools, and best practices to optimize the performance of their rental properties.
Whether it's shaving dollars off the monthly energy bill or leveraging data that informs smart decision-making, there are myriad ways to maximize rental income from your investment property. For fresh perspective on this frequently asked question, we tapped six experts for specific, actionable advice.
1. Reduce your turnover rate
Sacha Ferrandi, Founder & Head Principal at Source Capital Funding, Inc. believes that keeping your tenants in place long term is the best way to stay in the black.
“As a real estate investor looking to increase your bottom line, an effective way to do so is to reduce your overall property vacancy and tenant turnover rate. Having a vacant rental property or a property that has a high turnover rate can cost you money in several ways. Of course, you are not making money while no one is renting it. However, in addition to not making money, you will have to spend on advertising, as well as any repair cost needed to fix damages left by the previous tenant. The longer you keep a tenant in your rental property the lower your overall cost will be for advertising and repairs. Therefore, minimizing the overall turnover rate is in a rental property owners best interest.”
Tip: At Roofstock, we set all of our investors up with local property managers who serve the tenants' needs and work to ensure low vacancy rates.
2. Consult a tax professional
John Bowens from Equity Trust Company offers a different angle. He says real estate investors should look to defer taxes on their investment properties.
“One potential way real estate investors can increase their bottom line is by eliminating or deferring taxes on real estate investment income and profits by investing with their retirement account. Known as a self-directed IRA, it’s possible to invest in real estate, notes, tax liens and a wide variety of assets in these tax-advantaged retirement accounts, in addition to stocks, bonds, and mutual funds. The impact on an investor’s bottom line can be dramatic.”
Tip: There are many tax tips that can benefit real estate investors. Be sure to educate yourself and discuss potential strategies and write-offs with your CPA. One example is a 1031 exchange, a move that can help scale and optimize your portfolio when executed strategically and under the right circumstances.
3. Lower your energy costs
In the age of smart home tech, there are many ways to reduce the energy costs of your income property. One unique solution for saving money on your income property—as well as generating more income—comes from Chris Bisson, VP of Business Development at Grid.Technologies.
"Profitably reducing tenant energy costs. Sound’s crazy, right? Nevertheless, that’s what we do," he explained.
Grid’s model empowers property owners to generate and sell solar energy directly to tenants for additional monthly income while also passing a cost savings benefit to the tenant, hence the term “profitably reduce."
"Buy and hold real estate is all about cash flow and increasing property value," Chris continued. "Investors want to ensure that their property is attractive to current and prospective tenants while also maintaining optimal net operating income. Grid leverages innovative smart metering hardware & software with solar photovoltaic to approach multi-family needs with a win-win scenario for tenants, owners, and property management alike. Grid offers tailored turnkey billing solutions, or a direct plug-in to existing billing systems already in place. The end result is a seamless stream of additional cash-flow, increased net operating income, property value, marketability, and a better tenant experience."
4. Increase your rent when it’s appropriate
Broker/owner Kevin Vandenboss of Vandenboss Commercial cuts right to the chase. He says if you want to increase your bottom line, you should increase your rent to match the current market rental rates.
“The best method for increasing the bottom line of your real estate investment is to increase the income. Many investors are reluctant to increase their rents in fear of higher vacancy rates. Get to know your market and what the competitive rental rates are. If you're maintaining a high occupancy rate, slowly increase the rents as leases expire. As long as the tenant can't find another similar rental for significantly less, they're not likely to leave.”
Tip: Determining the right rental rates for your income property is a good thing to discuss with your property manager. They will be highly familiar with the dynamics and demand of the local rental market. Additionally, when you are browsing investment properties on Roofstock, we show you what the current rent is as well as the market rent, so you can see if there is an upside in rent potential.
5. Pay attention to what's happening in the market
“One of the methods you can use to increase your bottom line is identifying what residential, mixed-use, and commercial developments the city is considering approving. We have found in our analytics and working with some of the largest real estate brokerages, that the price of the proposed (not yet approved) development is often not priced into the market - providing a good opportunity to invest in adjacent properties or complimentary land uses and maximize returns with a few simple steps such as attending the council meetings, readings recent planning committee meeting agendas and minutes, or subscribing to a service like Boulevard Software.”
Tip: Roofstock's Neighborhood Rating is another great way to drill into the local area and quickly ascertain the risk/return appeal of buying in a certain neighborhood.
6. Wait a little longer for the right tenant
Denise Supplee, Operations Director of SparkRental, advocates discernment when it comes to selecting your tenant, and not rushing any decisions without conducting the proper due diligence.
“Do not settle on a tenant that looks bad on paper. If there is an eviction, problem with a job, bad credit, etc., don’t let desperation become your motivation. Waiting for a long-term, dependable renter can make all the difference for your return on investment. It eliminates the cost of vacancy, eviction and possible destruction of your property. I would rather wait one vacant month for a good tenant than spend six months trying to remove a bad one.”
Tip: This is another reason Roofstock sets all of its real estate investors up with certified local property managers. Your property manager will know how to properly vet tenants and provide you with a recommendation for whether to approve tenants who submit rental applications.
>>Related: What does a property manager do for you?
Investing in buy-and-hold real estate is a marathon, not a sprint. You have time to educate yourself, leverage new technologies and experiment with different strategies. Taking steps to increase your bottom line can be as passive as asking your property manger to install a smart home thermostat, or as hands-on as making landscaping improvements that get your property rented quicker and help fetch top dollar for it. Whether you take a more passive approach, or live near the property and want to be more more involved, there are dozens upon dozens of profit-boosting strategies to test out.