When it comes to real estate strategy, I am a big fan of holding property with a long horizon. Whether you like rentals or not, they will produce for you if you give it time. Rentals are in a limited supply, and people will always need a place to live. All real assets will do well over time, which is why I believe investing in rental properties is much safer than stocks, bonds, or other paper assets. It’s also a good idea to diversify. I am not necessarily saying that you should pour all of your money into rentals, but if rentals are not a part of your portfolio, you should certainly consider them.
If you hold or are going to hold rentals, don’t expect to reap the benefits without doing a little work. The following are five tips I have learned over the years that will help to improve your profits.
How Do You Start Out As A Landlord?
Becoming a landlord can be a scary proposition, especially if you’ve heard some of the horror stories about unruly tenants that I have. However, while land-lording might not be the best fit for everyone, most investors would benefit from adding rental properties to their investment portfolio. The following are a few tips on how to get the best return on your dollar.
Find The Best Property
For the most part, real estate is a numbers game. Usually, the best strategy is to buy properties based on the strength of the numbers; but this isn’t always the case. For example, I own a handful of properties in Memphis that have great rental numbers. I bought them for less than $30,000 each, and they all rent for $650 or more a month. Those are excellent numbers, but these properties also have higher maintenance needs and higher vacancies, making them much less attractive than initially anticipated.
When considering a rental property investment, always consider the rent, the expected vacancy, the expenses (which will be higher for older homes), and the type of tenant you will attract. Don’t forget to consider the actual challenge of managing the property — it’s much harder to manage properties in a location where you don’t know anyone.
Scout The Best Location
The first step to finding the right property for you is to focus on a location. As a general rule, I would suggest looking at locations close to where you live or work. This way, the property will be much easier to manage. Save the out-of-state investing until you have a handful of properties under your belt and can better analyze the risks.
Although you should invest in properties near you, be sure to buy in the right rental areas. These are areas where the average rent amount compared to the average purchase price will make for a good investment. The last thing you want is a negative cash flow, so always buy positive cash flow properties — but keep in mind that this can be challenging in nice areas. If you live in an area that can support this, you might want to use the 1% rule to help you narrow your search. The 1% rule dictates that if you can rent the home out for 1% of the purchase price, it is a deal worth considering. In Colorado, where I live, it is almost impossible to implement this rule, so we use a modified rule that fits our market and lets us analyze deals quickly. Pick a rent-to-purchase ratio that works for you to promptly screen buying opportunities.
Create A Long Term Strategy
You cannot lose if you have a positive cash flow and a long horizon. Even if the market crashes, you will not take a loss unless you sell. Being in a position to hold property as long as needed can virtually eliminate risk.
Maintenance Is Everything
Maintaining your properties will pay huge dividends over time. Not keeping up with your properties’ maintenance needs can cost you big time. I know from experience. There have been a few occasions where I’ve failed to inspect my properties and maintain their HVAC systems. These failures have cost me big time every time. If you want to maximize your return over time, don’t ignore your properties’ maintenance needs.
How Do You Increase Profits As A Landlord?
Once you have a foundation in place and a few rental properties under your belt, use the following five tips to increase your profit.
1. Use Rent-To-Own To Reduce Maintenance Costs
I love to use the rent-to-own agreement, which I discuss in great detail in the book “The 45 Day Investor”. Rent-to-own is an agreement with your tenant to sell them the home at some point during their lease term. Usually, a rent-to-own deal requires a much larger deposit (some being non-refundable) and higher rent. Such an agreement is also a great way to reduce or eliminate maintenance expenses and headaches. If the tenant plans to buy the home eventually, they will usually be willing to maintain it. If this is the case, I will write that into my contract with them. There is always a chance the tenant will ask for your help to pay for something. Still, it does eliminate many of the maintenance problems landlords typically deal with, not to mention that the tenant will take better care of the property, so there will be less damage and less money out of your pocket.
2. Make The Tenant Pay The Water
I always believed that tenants expect their landlord to pay for the water. I was taught this because the water company is the only utility provider that can place a lien for non-payment in the states in which I have invested. The truth is, most tenants will pay for their own water if you set that expectation in your agreement. Not only is it becoming more common for tenants to pay for their own water, but it will also make a big difference to your bottom line. The fact that the water company can lien your property should not scare you — the very worst that can happen is that you might get stuck with the water bill.
3. Negotiate With The Deposit
When a qualified tenant prospect needs to reduce the cost of moving into your rental, always negotiate the deposit and never the rent. The deposit is their money, so if you end up taking a little less, it won’t affect your profit. Most tenants worry about how much money they need to move in, not how the money is applied. If you are willing to take the deposit in payments or take a little less, you could land a fantastic tenant without it costing you a dime.
I love this strategy to increase my monthly cash flow on a rent-to-own. I also like to ask for more option consideration than the tenant has so you can take some of it in payments. Option consideration is similar to a down payment. It is applied to the purchase if the tenant ends up buying the home, but it is not refundable if they don’t. This strategy should increase your monthly cash flow on each rent-to-own property by $100 or more.
4. Use An Off-White Semi-Gloss Paint
When I was building a home for my family, I did not even think about what kind of paint the builder would be using. I picked out the color I wanted, and that was that. Once we moved in, I realized the builder had painted the entire house with a flat paint. I understand why the builder chose flat paint — it’s the cheapest option. However, it was not the best option for a household that included two young girls. My youngest, Lexi, loved to draw on the walls (where she was getting the markers she was using remains a mystery). I discovered that even washable markers do not come off of flat paint. Had the builder used a semi-gloss or even an eggshell paint, the markings would have wiped right off, and we wouldn’t have had to touch up the paint.
If you spend a little extra on a semi-gloss or eggshell paint, it will be much easier to get your rental back into good renting condition once tenants move out. You can just go in and clean the walls without having to worry about needing to repaint them. I also advise you to select a neutral color, such as off-white and note the color you used. This way, it will be easier to match if you ever need to touch up a wall that a tenant damaged.
5. De-Carpet Your Units
De-carpeting is something I’ve been told to do over and over again. The idea is to make your rentals as difficult to damage as possible. The harder it is to damage, the less damage you’ll have to worry about fixing once a tenant moves out. Unfortunately, carpeting is easy to damage. It’s not uncommon to get only one or two years out of a carpet that should last at least seven years due to heavy tenant use.
On the other hand, wood flooring will last forever. Even if the wood is scratched, it will still look nice and does not usually require repair. Even if the damage does require repair, it’s much cheaper to sand and stain damaged wood than it is to re-carpet the floor. Yes, it can be a little expensive initially to remove the carpeting and replace it with a hard surface. However, potential long-term savings are worth it if you’re in it for the long run.
Earn And Collect Your Rental Money
More millionaires hold the wealth or have made their wealth in real estate over any other investment. The reasons are clear: if you invest smartly, real estate is one of the safest and sure bets out there. Just be sure to take your time locating the right properties and then follow these five strategies to maximize your returns. Doing so will undoubtedly accelerate your wealth and create the financial freedom you are searching for.