Buying a home to rent out for profit can be a sound investment. In the ideal scenario, you spend some money initially on a down payment, repairs and necessary services, then collect rent that covers the cost of your loan payments and expenses, with some left over to gradually repay yourself for the down payment. Once you’ve broken even, the extra income above your expenses becomes your net profit.
Add to that the likely appreciation of the property over time—and your equity in it—and the investment can pay off well for you down the road.
But what if it doesn’t go so smoothly? Some landlords find that after all the expenses, their income isn’t enough to generate a positive cash flow. Instead of a goose that lays golden eggs, they end up with an ordinary, squawking bird whose feed costs more per month than a daily omelet.
Don’t let that happen to you. Here are some tips to help you save big and earn bigger on your investment property.
Table of Contents:
1. Go for Two.
If you haven’t purchased your investment yet, you may want to consider a duplex. Having two units to rent out on one property can produce significantly more income.
Alternatively, you can live in one unit and rent out the other. With this approach your tenant can cover or greatly lower your living costs, and you can keep a close eye on the property.
You’ll see additional benefits at tax time. You can still take the deductions you would for a single-family home, including your half of the mortgage interest, mortgage insurance premiums, and property taxes.
Duplexes are also subject to fewer municipal regulations as compared to larger multi-family dwellings.
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2. Consider short-term rentals.
Say that the going rate in your area for a 3-bedroom home with a typical 1-year lease is $2,000 per month. If you divide that out by 30 days, it’s about $67 per day.
By renting out the home as a short-term or vacation rental, you can charge by the day, instead—say, $150 per day, or up to $4,500 per month.
Of course, there are major costs to this approach. Faster turnover can mean a much higher vacancy rate, frequent cleaning, more maintenance, and time on customer service and problem resolution.
Then there’s the host of additional regulations, tax complications and zoning issues.
On top of all that, you’ll have to furnish it.
Be sure to do your research before you take this path. Is there a constant demand for lodging in this area? What else is nearby? How will you handle inevitable slow seasons and unexpected vacancies?
For those with the time, skill and hospitality—not to mention the financial security to handle dry spells—a vacation rental can be a great choice.
Another example, if you’ve got an apartment in a prime location such as New York City which you don’t use often, you could rent it with Airbnb. You’d be surprised at how many people are snapping up the chance to rent a furnished apartment in NYC. Many business travelers are looking for a temporary apartment to stay when they are in town conducting businesses.
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Or, you can rent the entire apartment all year round for a regular monthly income. To minimize any headaches, you can hire a property management company to manage your property for you. They will screen potential tenants for you, take all maintenance commitments off your hands, and even arrange flexible rentals to ensure that you’re getting the most out of your property.
The great thing about renting a property out is that it will continuously give you the opportunity to earn from it, and the prices that you can expect from a property in a popular city like New York City will certainly make it worth your while. Don’t forget to check out rent control laws in your area.
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3. Invest in more for less.
One of the sad truths about being a landlord is that tenants will break and destroy things. If you choose the cheapest materials, they may not last long. Conversely, high-end purchases may be broken or damaged too soon to be worth their while.
When it comes to the finishes in your rental, think like Goldilocks. Not too expensive, not too cheap—just right.
The same goes for style. You can make better money if your unit looks fresh and up-to-date, but if it’s too trendy it will soon look dated and become a liability.
Think durability, modest costs, and timeless appearances.
Vinyl sheet flooring, for example, comes in much more attractive designs than it used to. It is easy to clean and is scratch-resistant. Laminate planks are durable, too, although they can cost even more than hard wood.
Paint colors should tend neutral, and finishes should be easy to wipe.
Window treatments often suffer damage, so this is one place to go cheap. Try inexpensive yet attractive honeycomb blinds instead of wood blinds or curtains.
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4. Maintenance is key.
Keep a detailed checklist, and examine the rental unit with care.
Fix things as soon as they begin to cause a problem; don’t wait until the problem has gotten too large to ignore.
A dripping pipe, for example, is easier and cheaper to fix than a water-damaged floor.
One more benefit to keeping the property at its best is an improved relationship with your tenants. They will see you as responsible and detail-oriented, which will give them confidence in their home, and they may be more respectful of the property as a result.
The more you can competently fix yourself, the more money you’ll save. Not every clogged sink requires a plumber. But when in doubt, hire it out—you’re liable to worsen the problem if you don’t know what you’re doing.
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5. Maximize efficiency.
If you’re paying the utility bills for your rental, your tenants could be costing you a small fortune in order to keep the place tropical in the middle of winter, bathe six times per day, or attempt to air condition the entire backyard.
Water, electricity and gas expenses can vary tremendously with use, but you can make a few changes that will keep them lower.
Make sure your windows and doors are insulated and weather-stripped appropriately. Add insulation where it’s needed, and when replacing appliances, look for items that are Energy Star certified.
If you handle lawn care, consider gradually replacing grassy areas with low-maintenance landscaping.
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6. Let them order à la carte.
All-included pricing might be nice for renters in terms of its consistency and predictability, not to mention avoiding the responsibility for making payments, but it may not be the best for you.
When you don’t include water, gas and/or electricity in the rent, you can advertise a lower rate, and prospective tenants might be optimistic that they can reduce costs and save themselves money.
Alternatively, you can charge a premium for any item the tenant wants rolled into the rent. This might include cable and wi-fi in addition to standard utilities. As long as you increase the price sufficiently, so you’re more than covering the expenses on average and paying yourself for the time handling bills, you can come out ahead.
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7. Shop around.
Insurance is critical when you’re leasing out your property, but you typically have many options when looking for coverage. Don’t be impatient; if you can find good coverage for a lower price, it will be well worth the time spent finding it.
The same goes for any service you use. Lawyers, accountants, cleaning services, repair services and management companies are just a few. It can’t hurt to let them know you’ve cast a wide net; they may be motivated to offer deeper discounts.
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8. Be wise with your taxes.
Taxes can get complicated when you have an income property. For most, it’s a smart idea to hire a tax preparer. While it’s cheaper to do it yourself, hiring a professional could save you in the long run.
CPAs and other tax preparers can keep you from making a small mistake that becomes a big problem later. They can also help you figure out what expenses you can deduct, such as replacements, repairs and refinishing.
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9. Fill it up.
All of your beautiful spreadsheets show a tidy margin of profit, and you can watch the numbers add up over time. What could go wrong?
Vacancy. While there are many expenses involved in your investment property, the income comes from just one source: tenants. If you find your property unoccupied, you’ll still have to cover the same expenses, without a rent check to help.
To be profitable, you must do your best to maximize occupancy. That may mean spending a larger amount on advertising right away, rather than waiting to see if prospective tenants come to you. It may also mean accommodating your existing tenants if they have complaints or requests.
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10. Talk to people.
It sounds simple, but with more information than you could ever read available on the internet, you may miss out on the value of a real conversation.
Talk to neighbors in the area where you want to buy, lenders who may have information about financing, repair professionals who can offer advice on replacements and upgrades, real estate agents who know what people are looking for in a home today, and tenants who have good and bad experiences to share.
Most of all, talk to people who have owned rental property. Your reading may make it seem easy, glamorous, and highly profitable. Your friends and relatives, on the other hand, might tell you that it’s a terrible idea because you’ll get a call every time there’s a plumbing issue in the middle of the night.
Who can tell you what it’s really like? Other investment property owners.
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Owning an income property is not a get-rich-quick scheme, but it can be a smart way to set yourself up for a nice income stream in the long run. The more you can minimize your expenses, maximize your income and make smart decisions with the long view in mind, the better the return you’ll get from your property.