The Top 5 Ways to Make More Money on Your Rental Properties
Are your properties being fully utilized?
Have you maximized profits on the properties you already own?
If you cannot confidently answer yes to these questions then continue reading.
The 5 Tops Ways to Make More Money With Your Rental Properties
Rather than just acquiring as many properties as possible, let’s take a step back and think about whether or not the best way to make more money right now is to focus on your current portfolio.
1. Decrease Vacancy
To maximize the profit of your rental properties you must first minimize vacancy.
The best way to do this is to find a long-term tenant so that you don’t have to deal with turnover. This is covered separately by my next point because it is not the only way to keep your property occupied.
In the event that your tenant must move, vacancy can also be minimized by keeping turnaround time to a minimum. A friend of mine owns a condo in the D.C. area that is rented to 3 individual roommates.
Although multiple tenants have moved on, he has kept occupancy at essentially 100% by posting ads the minute he learns of the move. Demand in the area is so high that he will have immediate interest and line up a new tenant to move in on the coat tails of the old one.
You might be thinking “how does that apply to my property in an area with lower demand”. The thing is, nearly every property in every neighborhood has solid demand at a price.
What do you think would happen if you lowered the rent of this property by 25%?
People would be falling over each other to live there, even if it meant breaking their current lease, wouldn’t they?
If not, then you have invested in a seriously economically depressed neighborhood!
I am not suggesting that you offer your properties for ridiculously low rents, but am exaggerating to make the point that if your vacancies are high you may be doing it to yourself and need to think about your price point.
Every month of vacancy costs you 8.3% of your potential yearly revenue, so you would be better off renting every property one month faster for 5% less rent, two months faster for 10% less rent, and so on.
Another way to think about vacancy is this. If a property does not have some characteristic that sets it apart from the rest and sells itself such as a prime location or a to-die-for kitchen, you can give it one by providing the best value in town.
I once had a vacancy problem that cost me almost six months in rent. By my calculations above, I would have made out much better if I had lowered rents by 30% and found a good tenant immediately! Of course, I was not expecting such a problem in the beginning.
The property is a large 4 bedroom 2.5 bath home in a very family friendly community. It became vacant right around Thanksgiving, which I learned is the worst possible time to be selling or renting a home to families since very few want to move during the holidays and in the middle of the school year.
The first mistake that I made was to slow play the work that needed to be done to make the home truly desirable as a rental. It needed new interior paint and carpeting, and rather than taking care of it immediately, I prioritized a big vacation to New Zealand that I was about to embark on.
Two months later there had been very little interest and I realized I needed to lower the rent a bit and get the home in prime condition right away. The work took a few weeks and I waited some more. Still no one was biting. I could not figure out why there was no interest.
Finally, I lowered the rent to about 8% below market value. I had lost almost 50% of the property’s annual revenue before I found a renter! What I learned from this is that it hurts much more to keep a property vacant than it does to drop rents, pay a contractor to put it in prime condition immediately, and provide value to a new tenant.
In retrospect, I would have been better off lowering rent by 10% or more at the first sign of trouble. For this type of property in this area, I also learned to make sure that leases come due in the summer months when there is a much larger pool of renters.
2. Minimize Turnover
Turnover costs money in multiple ways.
There are advertising costs, the cost of patching and painting walls and replacing flooring that your previous tenant would have lived with, and, of course, vacancy. It’s a little counter intuitive, but this is another area where relatively lower rent may have the tendency to increase revenue.
Recall my example of lowering rent by 25%. For that price, your tenants may never want to leave. It would take a job transfer or personal situation to force them to give up such a deal.
One of your goals should be to find quality tenants that take care of your property and pay consistently. When you find these people, do what you can to keep them!
Some people will inevitably leave because they are moving across the country or buying a home, but the last thing that you want is to lose your best tenants to the landlord down the street, dealing with the expense of acquiring a new tenant and lost revenue in the vacancy.
The price of rent is not the only factor involved in tenant retention. The other key that is in your control is customer service. Whether you personally manage your properties or have a property manager, make sure that your tenants are treated with respect and professionalism, their concerns are valued, and matters are dealt with urgently and to their satisfaction. A good tenant/landlord relationship keeps tenants from thinking about moving.
To assess whether your property manager is performing in a way that fosters good tenant/landlord relationships, send a post card soliciting feedback from your tenants, letting them know that their opinion is valued and they can contact you directly if a they are dissatisfied with their manager.
3. Increase Rent Strategically
Now for the contradiction.
After telling you that lower rents can lead to higher revenue, I will proceed to tell you to increase your rents on your longer-term tenants. This is really not a contradiction at all. Rather, it is a delicate balance that requires knowledge of your property’s value relative to your competition.
Increasing rents is a touchy matter. As I mentioned, tenants may be more loyal if they can’t find lower rent elsewhere. But this doesn’t mean that you should never raise rents when you have good reason to do so.
Once you have acquired a tenant, there is a cost for them to move. If the value of their current rental is significantly better than the value of a new rental plus the cost of moving, you still have the upper hand.
Make sure that you know the rents in the area, researching sites such as Zillow, rentometer, Craigslist, and the MLS if you have access. You may find that there is plenty of room to increase your revenue a small percentage each year (1-3%) while remaining competitive, and there is no reason to give this up.
Two tactics that I use to increase rents are to communicate an offset to new costs such as increased HOA fees, which cover utilities and amenities that they enjoy, and to have them coincide with an upgrade to the rental.
For instance, I may plan to paint the exterior of the home or upgrade old windows from single to dual pane anyway, but I will schedule the work to coincide with a lease renewal and the tenant feel they are getting something out of the deal.
I may even ask them if there is anything that would make them more comfortable and select items from this list that will justify rent increases while increasing the market value of the home. In other words, make improvements that are necessary for maintenance or have immediate return on investment.
4. Be Diligent on Late Fees
Showing kindness and respect to your tenants does not mean being a pushover when it comes to rent collection and late fees.
Collections are not the most enjoyable part of being a landlord, but are an essential part of running a profitable business. Make sure that your tenants understand that this is a business, they have signed a contract, and it is your job to complete this transaction, following the contract and all applicable laws (including eviction proceedings if necessary).
Realizing that this is your business, you are leaving money on the table by only loosely following the contract and allowing tenants to get away with paying late without the appropriate fees.
By doing this, your tenants will likely see if they can get away with late payments several more times, causing you extra work and stress which should, of course, be compensated through those fees.
If your tenant goes as far as sending you a late check without including the late fees, politely explain that rent is not considered paid until all fees are collected, and that unfortunately you cannot accept this payment until all fees are paid. If you hold firm, they will quickly learn that you cannot be taken advantage of and will most likely comply.
5. Add Revenue Streams
This form of revenue does not apply as easily to single family residences (SFRs), but can be a great way to increase cash flow in multi-family properties.
Look for the opportunity to add services like coin-operated laundry and vending machines, which will not only provide revenue but will add resale value by raising the CAP rate.
If you are particularly entrepreneurial, you may even find additional revenue streams in your SFRs. An idea that I have had is to offer house cleaning and landscaping services to my tenants at the time they sign the lease. These are responsibilities that they have per the lease and may not be excited about taking on.
Basically, you become a one stop shop for taking care of their home. You can negotiate the rates of independent landscaping and cleaning services, contract them out, and collect a fee as the contractor. For instance, if a cleaner agrees on a $75/month fee, you may offer the service to your tenant for $85/month, increasing your annual revenue by $120.
Before you worry about buying additional properties, think about whether or not you are maximizing those that you already own.
Are vacancies and turnover as low as they could be?
Are you increasing rents in a way that will not cause you to lose quality tenants?
Are you collecting all of the fees that you are entitled to?
Could you easily create new revenue streams?
You may find that you can reach your business goals not only through acquiring a large number of properties but by operating a smaller number of properties more intelligently.
This article originally appeared on BiggerPockets, the real estate investing social network. © 2015 BiggerPockets Inc.