Over the past 6 years, I have amassed a real estate portfolio that includes 14 rental units. As most landlords know, owning rental property isn’t always a walk in the park. But if managed properly, rental property can be a great investment. The key difference between a good investment and a great investment is how you maximize your rental property ROI. Here are 12 strategies that I’ve learned so far during my tenure as a small-scale real estate investor.
1. Increase rents: This seems like a no-brainer, doesn’t it? Yet you’d be surprised how many landlords are complacent and don’t evaluate their rental prices on an ongoing basis. Every quarter I take a look at which leases are coming up for renewal and evaluate the rental price. Then I go to Zillow.com and look at our local MLS to see what other landlords are charging for similar units. If it appears I’m charging less than others, I know it’s time to increase the rent. I calculate fair market rent by taking the average price of similar rental units, subtract $25 and then increase the rent to that amount. For example: If I’m currently charging $1350/month for a unit but similar apartments are renting for $1500/month, I’ll increase rent to $1475/month. To be sure, not all property managers agree with this strategy. Some will tell you not to “rock the boat,” especially if you have good tenants who consistently pay on time. This is definitely something to consider because solid tenants are worth their weight in gold. That’s why I knock some money off the top. I don’t want my current tenants to leave (vacancies are expensive!) so I am careful to stay just under fair market rent. The small increase benefits me, and my tenants still get the benefit of paying less than they would elsewhere.
2. Shop around for insurance: Every so often, landlords should evaluate their insurance policies. I had been using a large, national insurance company for years. The coverage and price seemed reasonable so I hadn’t considered looking elsewhere. Eventually, I spoke with an insurance broker who was able to save me a few hundred dollars per year. What’s more, he moved me from a residential policy to a commercial policy which increased my coverage by 10-fold! The overall cost savings might not be that big in the grand scheme of things, but I feel more secure knowing that my new policy is more comprehensive.
3. Charge pet rent: With the number of boutique pet stores and doggy daycares popping up, it’s become more evident than ever that pet owners are willing to shell out big bucks to take care of their furry friends. I started charging tenants $25 per month in pet rent. This not only boosts my bottom line, but it also helps to cover any damage, wear and tear caused by the animals. You may even be able to charge more if the tenant has more than one pet (e.g. $25 for the first pet, $15 for each pet after that). Before agreeing to allow pets, though, be sure to confirm that your homeowners’ insurance is pet-friendly…because the liability costs will far outweigh any pet rent you collect if something bad were to happen!
4. Put down as little money as possible: We keep hearing grumblings that the Federal Reserve Bank will increase interest rates…but we haven’t seen that happen just yet. Interest rates are hovering around 3.75% to 4.5%, making it really inexpensive to borrow money. To put this in perspective: the first two properties I purchased had interest rates above 6.3%. With interest rates this low, one of my strategies for maximizing ROI is to put down as little of my own money as possible. I’d rather take out a larger mortgage at these low-interest rates and keep my funds ready to invest in other deals in the future.
5. Refinance into a lower rate: Along the same lines, if you haven’t refinanced yet – now is still a good time to take advantage of today’s rock-bottom interest rates. Earlier this year, I refinanced one property that ended up saving me $197 per month! While banks charge fees to refinance, these can be rolled into the loan. My fees were about $5,000 – an amount that will take me roughly two years to recoup. I plan on keeping the property for at least another decade, so this still turns out to be a good deal for me. And don’t forget, you can write off the refinancing costs on your taxes so there are a bit of savings there, too.
6. Charge tenants for utilities: Many landlords, particularly those who own larger multifamily complexes, already build the costs of heat and hot water into their rents. Another strategy is to bill tenants for water and sewer bills. There are a few ways to go about doing this… When I have a multifamily property on a single water/sewer meter, I bill each tenant a flat fee (e.g. $75/month) in addition to their monthly rent. Explain to them that this is one of the ways you can offer your rentals at below market rents. I use a different strategy when units have their own individually metered water/sewer utilities. In that scenario, I tell tenants that they are responsible for paying the water/sewer company directly. I then ask the utility company to provide me with a landlord copy of the bill so I can monitor how much it’s typically costing my tenants. Neither strategy has ever impacted my ability to rent the units, and it has saved me thousands of dollars – particularly with my tenants’ that were known to take hour-long showers and run the washing machine ALL DAY, EVERY DAY (or at least, so it seemed!).
7. Tenant-proof your rentals: There are really only two common things that can substantially impact your ROI. The first is having a vacant unit (or non-paying tenant). The second is costly maintenance and repairs. Regarding the latter…. We’ve found that tenant-proofing our rentals can save time and thousands of dollars. The key is to find products that improve the longevity of the property.
8. Do your own property management: This rental property ROI increasing strategy is a little trickier. While I do subscribe to the notion that time is money, I also know that successful rental property owners need to provide a little personal TLC – especially as they start out and are still building their rental portfolio. Novice real estate investors usually have less wiggle room for error, so maximizing ROI is all the more important. While hiring a property manager may reduce the day-to-day obligations associated with owning rentals, most property management companies charge 10% of total rental income generated. You automatically boost returns by that amount by self-managing your properties. Until recently, I had never used a property manager. I’ve relied on several tools to manage my rental properties. On average, it only takes me about 4 hours per week. My strategy has started to shift a bit now that I’m starting to buy long-distance real estate. Managing rental property from afar is much more difficult, so I’ve decided to hire a property manager. I plan to re-evaluate in a year or two. If it seems possible to use our systems to manage from a distance, I’ll consider self-managing these properties, too.
9. Make tenants responsible for lawn maintenance: Self-managing is even easier when you make tenants responsible for lawn maintenance! Instead of paying $120/month to have someone come by to mow the lawn and trim the hedges, I hand over the responsibility to the tenants. I set very clear expectations up front and include language in the lease to that effect. I also do drive by’s every so often to see whether the tenants are actually taking care of the yard. If it seems neglected, I sent them a notice and ask them to remedy the situation, which they usually do right away.
10. Use reward credit cards for all expenses: I have one credit card that I use for all of my rental expenses. As I earn points I put them towards a statement credit, vacations or other rewards. One time I paid the City of Arlington $14,000 on my credit card for a new water service and was thrilled to get 28,000 points from that purchase. One caveat, though: you should ONLY do this if you are diligent about paying off the credit card at the end of the month. You don’t want to rack up interest and fees. You might also think twice about using your credit card if the person, agency or company you’re paying charges you a fee for using a credit card instead of paying by cash, check or direct bank transfer.
11. Consider Ebates for purchases: I run my rental portfolio like a business which means I inevitably have business expenses. I often have to buy paper, ink, light fixtures, etc. One of the cost-saving strategies I’ve learned is to go to ebates.com first to see whether there are any rebates being offered by the stores that I already purchase from. For instance, Home Depot might be offering a 7% cash back rebate through Ebates that day! The process is so easy, and while it’s not a huge savings, the savings eventually add up over time. If you’re going to be spending the money anyhow, you might as well try to get the rebate while you’re at it. Use my Ebates referral link to earn a $10 reward when you make your first purchase through Ebates.
12. Track your mileage: Did you know that you can write off mileage incurred from managing your rental properties? For example, if you drive by to check on the lawn or if you have to swing by to collect rent – that mileage is all tax deductible. Although it fluctuates every so often, the current IRS rate for mileage deduction is $0.54 for every mile. This can really add up! To save time, I use an app called MileIQ. You can get 20% off an annual subscription by using this link. For $4 per month, it’s well worth it!
There are so many ways to increase rental property ROI, but these are a few that have proven highly effective for me. I’m sure there are others that I’ve missed – perhaps strategies that I’ve never even considered! Chime in and let me know if there are other ways you’ve managed to save money or boost cash flow as a rental property owner. I’m always open to new ideas!