A man was having dinner at his friends’ home. They served him a juicy steak, an oversized potato, and a single green bean. Confused, he looked at his smiling host, who explained his wife had planted a garden that year. But there was no good soil on the property. The wife tried her best anyway. She purchased organic mulch and the most expensive seeds she could find. Her labor resulted in one green bean. The good-natured husband laughed and said, “My friend, we want you to have the world’s most expensive bean. It costs $237. Enjoy.”
Maybe your rental property investment is feeling a lot like the couple’s garden. Poor tenants and unexpected expenses will make any rental investment feel like an overpriced pile of sticks and bricks. Real estate success begins with understanding your rental property ROI and using the following strategies to maximize your rental property profits.
Know Your Rental Property ROI
Your rental property ROI is your profit margin, and you should aim for higher than 10 percent.
First, calculate your initial out-of-pocket investment. Add the amount of cash you paid for your property (as down payment or full cash payment) and improvements you made. Include closing costs. Don’t include the amount you financed.
Next, calculate your return by subtracting your annual expenses from your annual rental income. Your expenses include your mortgage payment, taxes, insurance, and repairs. Look for overlooked expenses, such as fees for electronic rent payments or online rental marketing sites.
Finally, divide your annual return by your initial investment. Move the decimal point two places to the right to find your rental property ROI. For example, a return of $3,000 divided by an investment of $25,000 is 0.12, or an ROI of 12 percent.
Maintain Your Rental Property
Don’t skimp on maintenance items just because the cost may chip away at your rental property ROI. Repairing one or two roof shingles is inconvenient, but cheap. Replacing an entire roof and the rotted wood underneath will cripple your real estate business. An annual rental property inspection will help you catch all those pesky little problems before they balloon into catastrophes.
Purchase High Quality Fixtures for Your Rental Property
Emphasize durability as you make improvements to your rental property. From faucets to flooring, spending a little extra on high-quality products can lower future maintenance costs.
Take Time to Choose the Best Tenants
It’s tempting rush through your tenant search when your rental sets empty. But never forego the background and credit checks. Never. Not even when your best friend’s wife’s brother knows a really great guy looking for a place. One or two months of an empty rental may reduce your rental property ROI a little. But rushing to approve poor tenants could increase your collection and maintenance costs.
Create Great Tenant Relationships
A rental property business is a little different from other businesses because your customer—the tenant—is also your largest liability. As a result, landlords tend to focus on everything their tenants could be doing wrong. Maybe they’re constantly dropping by or repeatedly reminding their tenants to not park on the grass.
The problem with this approach is that good tenants quickly tire of the excess supervision and are more likely to move.
Instead, show appreciation to tenants who are good customers. When they move in, leave flowers on the kitchen counter with a list of the area’s restaurants, shops, and services. If they pay their rent on time for a year, send them a gift card with a hand-written thank you note. Finding small ways to make good tenants feel great will help you avoid an empty rental and improve your rental property ROI.
Invest in Rental Property Management
Your rental property ROI will suffer if skimp on any of your landlord responsibilities. If you’re having trouble finding the time to do everything, hire a property management company to help. Landlords can benefit from a rental property management partner that can provide a great tenant experience while also protecting the owner’s investment.
Are you ready to increase your rental property ROI? Contact us today.
Photo by Leonardo Wong on Unsplash
