Seven Things: Profit Points | Think Realty | A Real Estate of Mind
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Seven Things: Profit Points

You don’t have to add another property to your portfolio to increase your monthly net. Here are seven ways to make your current properties more profitable.

1. Minimize vacancies

Vacancy is the “biggest profit-killer for rental properties,” according to Brian Davis, co-founder of Spark Rental, an online educational resource and rental automation website. Every day you don’t have a tenant is a day you don’t have income to cover that mortgage, and that loss affects the overall profitability of the property. On top of that, you still have to pay utilities and make repairs, which could cost thousands of dollars, depending on the tenant. (Davis points out that many tenants leave the carpets and walls in bad shape.)

Even if the property needs only minor work to get it rent-ready, you’ll still have advertising expenses and the cost of your own time to show the property, screen tenants and run credit checks. If you use a property management company, you’ll pay a tenant placement fee instead, typically the equivalent of one month’s rent.

So, how do you keep your rental occupied in the first place? Make it a property that people won’t want to leave. Keep it well-maintained, respond to tenant calls and provide good customer service. When it comes time to renew a good tenant’s lease, offer incentives for signing a longer-term lease.

2. Raise your rates

The easiest way to increase your monthly income is to raise the rent, if you can. Some local jurisdictions have rent control regulations that limit how much you can charge, the percentage of your increase and under what circumstances you can increase rent. Consult an attorney or local housing authority to learn what regulations may affect your property.

If rent control isn’t an issue where your property is located, consider systematically increasing the rent every year (or whenever the lease is up for renewal) based on the local market. Zillow, Craigslist and even real estate agents who know the neighborhood can give you an idea of the going rate. For a more comprehensive look, purchase a detailed report from a company like RentRange, which provides comps for nearby rentals, market trend data and area vacancy rates.

Assuming rent rates are rising and not declining, you can probably increase your rent rates a modest 1 to 3 percent without the risk of losing your tenant. (It will cost the tenant money to move, so unless your increase is out of line, he or she will probably stay.) To make the increase less painful, you can tell the tenant it reflects an adjustment in your mortgage rate or HOA fees. Or time it to coincide with an improvement to the property.

3. Reduce expenses

In addition to raising the rent, audit your monthly expenses to see if you can cut costs. Start by asking for discounts on services, such as landscaping or pool, if used at multiple properties. You’ll also want to compare prices. Are you overpaying for landscaping, property management or insurance? With insurance, also consider the coverage you have. Are you paying for more insurance than you actually need?

Taxes can also cut into the profitability of your property. Davis recommends appealing your property tax assessment if it’s above market value, which he says it often is.

You can write off expenses to reduce your tax bill, too. Keep track of all maintenance expenses and repair costs on your properties as well as mortgage interest. Other deductible expenses include insurance, business-related travel and the expenses of a home office, if you have one. Meet with an accountant to be sure you’re not missing important deductions.

4. Collect late fees

Most leases include a clause entitling you to collect a late fee when the tenant does not pay the rent on time. Always collect it. When you don’t, you send a message to the tenant that you’re not so concerned about when the rent is paid so long as it is paid. To make matters worse, the tenant likely will pay late again because there are no ramifications, and if words gets out to your other tenants that you don’t collect late fees, they may get a little lax about when they pay their rent, too.

Even one late-paying tenant can have a dire impact since you likely rely on the rent payment, to some extent, to make your mortgage payment and to pay other property expenses. If the tenant is not paying, you may have difficulty paying your obligations on the property, which can lead to late charges and even a black mark on your credit.

Avoid this by informing new tenants that there is a late fee and how much it is. Then, if they are late, collect the late fee. No exceptions. If they pay the rent late but exclude the late fee, let them know that you can’t accept payment until they include the late fee. Begin the eviction process if they fail to make the payment in full. It’s better to lose a tenant over one infraction than to let the problem—and the financial loss—compound month after month.

5. Upgrade your property

People are willing to pay more to live in a nice rental property than they are to live in one with broken door knobs, stained carpets and past-their-prime appliances.

“The more outdated a property is, the lower the rental rate will inevitably have to be,” says Dennis Cisterna of Investability, a website providing free access to exclusive listings, data and services. But, he adds, if you make smart, cost-effective renovations either up front or between tenants, you’ll be able to charge at least the current market rate—maybe even more—for rent in the neighborhood.

Furnishing the rental is another option if you have a property in a market with plenty of decent rentals but few furnished ones, says Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties in Bloomington, Ind., who also owns 20 rental properties. You’ll probably only get a few hundred extra dollars a month for a furnished rental, but it could make your property more marketable.

Just be sure you don’t spend an unreasonable amount on the furnishings, she cautions. Think in terms of earning an extra $200 per month ($2,400 per year) on a furnished rental. It wouldn’t take long to spend that much furnishing a home with beds, bedding, tables, plates, a couch, TV, artwork and everything else that your tenant expects. She recommends using extra furnishings you already have and shopping at secondhand stores.

6. Hire a property management company

It may sound counterintuitive, but if you don’t have the time to manage your own properties or don’t feel like you can stand your ground when it comes to enforcing a lease, hiring a property management company just might save you money.

“They can definitely save landlords money, particularly when the landlord is inexperienced,” Davis says. “Most novice landlords are far too lax about late rent, don’t keep clear books and find a million other ways to sabotage their ROI. If a landlord isn’t 100 percent committed to managing their rentals as a business, they should outsource to a professional property manager.”

A good property management company will thoroughly screen tenants, reducing the risk of late payments, evictions and damage to your property. When the tenant needs something at 3 a.m., he’ll call the management company, not you, and if he pays late, the company will collect late fees and evict when necessary. A good management company will also jump on a vacancy, quickly readying it for the market and minimizing the vacancy period.

If you can’t do that for your properties, you will probably save money by hiring a property manager.

7. Add revenue streams

You can also generate a little extra income by adding revenue streams. If you own a multifamily property, consider installing vending machines or on-site laundry services. With the vending machine, you’ll have to pay for the actual unit and items in it, plus transaction fees for having a debit/credit card reader, taxes on the sales and maintenance fees. Depending on how many tenants you have, you could earn an extra $200 to $300 per month—minus water, electricity and either rental or maintenance fees—by adding washer and dryer units to your property.

If you own single-family residences, you can add a revenue stream by offering services like landscaping or house cleaning. You’d get paid for acting as a contractor. For example, you would negotiate an arrangement with a landscaper to maintain the yard for $80 per month and offer those services to the tenant for $100 per month.

You can get creative. Some landlords install solar panels to their properties and generate extra income by selling the excess energy to the grid. Others rent out extra storage space. There’s really no limit to what you can do as long as the tenant is willing to pay.