Real estate investing can be a lucrative endeavor, but doesn’t carry a guarantee. In order to enjoy the full benefits of real estate investing, you have to optimize and maximize cash flow at every step along the way.
Here are six smart money tips that will help you get the most out of each of your properties.
1. Work With a Property Management Company
This first suggestion may seem counterintuitive. Doesn’t a property management service cost money? The answer is yes it does, but that’s only part of the story.
While a property management company will unquestionably add to your expense sheet, you have to think about the matter in terms of net profitability. When you work with an experienced property manager, they can actually have a net positive impact on your bottom line by reducing vacancy, improving rent collection, and giving you back your time (which can be reallocated to expanding your portfolio).
In other words, working with a reputable property management company is almost a no-brainer.
2. Carefully Screen Tenants
Whether you hire a property manager or self-manage your own investments, careful screening of tenants is a must. Good tenants will take care of your property, pay on time, and turn over less frequently.
Bad tenants, on the other hand, could cost you copious amounts of time and money. Good screening can’t guarantee good tenants, but it certainly helps.
3. Conduct Thorough Condition Reports
Each investment property you own is a long-term asset (and must be treated as such). Take good care of your properties by assessing their condition before and after each tenancy.
“Filling out condition reports when a tenant moves in and moves out will ensure you know the full status of your rental property before and after their time there,” real estate investor Sarnen Steinbarth writes. “Schedule walk-throughs with your new tenants and even complete the condition report with them present so there are no surprises at move-out.”
In order to protect yourself, you should include both written descriptions and images of the property in your condition reports. This will prove useful should a tenant challenge you on anything.
4. Stay On Top of Maintenance
A landlord who is only reactive will inevitably have cash flow problems somewhere along the line. He or she might enjoy good months (even good years), but the long-term ramifications of neglect will always turn out to be costly.
The most successful landlords are proactive. They perform regular preventive maintenance to attack small issues before they can evolve into big problems.
This may include replacing appliances when they’re nearing the end of their useful life, regularly inspecting main systems (including HVAC and water pipes), changing out air filters, and attacking any pest problems immediately.
5. Keep Rents Competitive
Many landlords are hesitant to raise their rental rates for fear of backlash. But if you want to maximize cash flow, you have to keep up with the market.
If you’re struggling to do this, here are several suggestions:
- Raise the rent incrementally each year, as opposed to a single big increase at once. Another option is to implement half of the increase today and set the other half to increase in six months.
- You should never raise the rent by eight percent or more at one time. (And if you’re in a position where you need to do this, it means you’ve fallen way too far behind.) A two-to-four-percent annual hike is a safe place to land.
- Consider alternatives to raising the rental fee (especially in situations where a current tenant pushes back). For example, you might offer to keep the rate the same if they sign a two- or three-year lease agreement.
There’s plenty of room for creativity – just make sure you don’t sell yourself short.
6. Leverage the Tax Code
Tax deductions and credits exist for a reason – so use them! The tax code is written to benefit investors, but nobody is going to take these write-offs for you.
Work with an accountant to get personalized advice on how you can deduct maintenance costs and business-related expenses. Also, be mindful of details such as property tax and depreciation.
In some cases, you can save thousands of dollars a year by taking what the tax code allows you.
Adding it All Up
One of the beautiful things about real estate investing is that no two properties are the same. Yet despite the differences, the same general principles typically apply across the board.
The more you utilize the tips outlined above, the better your chances for long-term success. It may require short-term sacrifice, but the rewards over the long run can make it more than worth it!