Investing in real estate can be a hobby or a business. No matter which, you can make serious money if you do it the right way—whether that’s by increasing cash flow, growing your equity, or simply getting creative.
When considering how to profit from real estate, keep in mind that with rental properties, you may not have the same flexibility as with owning a house. But that doesn’t mean that changes and additions can’t be implemented to increase your cash flow.
Increasing profits for rental properties
As a landlord, you’re looking to make the most money you can from your real estate. Sure, increasing rent is one way. But here are five more ways you can increase your rental property profits.
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. But if someone has to move out, you can also keep turnaround time to a minimum by lowering the rent. This is especially important if you only rent out one single-family home, where vacant months can have an even bigger impact on the wallet.
Every month of vacancy costs you 8.3% of your potential yearly revenue. You would be better off renting one month faster for 5% less rent and renting two months faster for 10% less rent, and so on.
2. Minimize turnover
Turnover costs money in multiple ways. There are advertising and repair work costs, since every tenant will cause wear and tear on an apartment during the time they live there.
Some people will inevitably leave because they are moving across the country or buying a home nearby. The last thing that you want is to lose your best tenants to the landlord down the street. Then you’re dealing with the expenses of acquiring a new tenant and losing revenue because of the vacancy.
Remember to offer good 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.
3. Increase rent strategically
As you learn how to profit from real estate, you come to understand how touchy the topic of rent is. 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 a good reason to do so.
Once you have acquired a tenant, there is a cost for them to move out. If the value of their current rental is significantly better than the value of a new one plus the cost of moving, you retain the upper hand.
Keep in mind that you should only raise rents when appropriate and with good information. Make sure that you know the rents in the area by researching sites such as Zillow, rentometer, Craigslist, and the MLS, if you have access.
4. Be diligent on late fees
Showing kindness and respect to your tenants doesn’t 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 essential to running a profitable business. Make sure that your tenants understand that this is a business and they have signed a contract. It is your job to complete this transaction, following the contract and all applicable laws (including eviction proceedings if necessary).
This is your business, and you are losing money by only loosely following the contract, such as allowing tenants to pay late and not charging them appropriate fees.
5. Add revenue streams
Profiting from real estate doesn’t end when you charge rent. Look for opportunities to add services and assets, such as coin-operated laundry and vending machines, which will not only provide revenue but also add resale value by raising the capitalization rate.
If you are particularly entrepreneurial, you may even find additional revenue streams in your single family rentals. An idea I 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 but may not be excited about taking on.
Of course, getting rent from long-term tenants is one way to get paid, but now that services like Airbnb have popularized independent short-term rentals, old-fashioned renting may not be the model that offers the greatest profit potential.
If you have a unit that’s vacant, consider short-term renting. You can charge only a few thousand dollars per month renting long-term, but you could make several hundred dollars in just a few days on the shorter side. Consider this tip when getting your unit ready and make it a vacation rental.
1. Get the property vacation ready
A vacation rental isn’t like a yearly rental agreement. Because the duration a person will be staying on your vacation property is much shorter, guests tend to have higher expectations for the way things look and feel. Think of a hotel-like experience when prepping your place. Renters want to escape from their apartments, not trade them in for another version of the same thing.
To make the renter’s experience that much better, consider adding in modern luxuries like high-speed internet access, flat-screen TVs and cable. And if you’re using this property for continuous rentals, consider putting in some higher-end furniture to really set it apart from other places.
2. Create the kind of listing that attracts renters
The work you put into preparing your short-term rental won’t mean anything if you don’t advertise it effectively. Include the following to make it stand out and get more offers.
- A detailed description. Use a detailed and realistic description that highlights the best features of your property.
- A complete list of amenities. Create a list of everything your property has to offer to get even more people interested.
- High-quality photos. People will want to see what the property looks like before they make a final choice. Having a portfolio of pictures makes this much easier. It’s clear to see why listings with low-quality photos don’t do well.
Get more returns when flipping real estate
When it comes to real estate flips, there are different costs to navigate right from the beginning. The costs of buying the property, hiring contractors, buying building materials, and more can easily add up. Luckily, there are ways to minimize costs without losing quality.
- Use the same materials on every deal. That means everything, including light fixtures, tiles, toilets, and so on. This not only saves time when it comes to the decision-making process but also saves money because it ensures no one accidentally buys the wrong thing and all the materials bought will be used.
- Use data to your advantage. This means doing a lot of research before you even purchase a property … but buying the right one can save you so much money at the end of the process. Research the area the property is in, the price changes over time, etc. This will you save time during the actual buying process. When you find the right property, you’ll know how much its truly worth and how much you should charge for rent with the right kind of renovations.
How to make bigger profits through appreciation
One of the most unfortunate parts about rental properties are maintenance costs. They’re impossible to avoid. Eventually, something will break, and you’ll have to fix it. There will also be fixes on big-ticket items, which are known as CapEx, or capital expenditures.
Capital expenditures are used to maintain or upgrade the larger physical aspects of a property. Replacing things like hot water heaters and roofs are good examples of this. When shopping for real estate investments, these should be factored into your overall costs. There’s a key way to benefit from a property’s appreciation and avoid CapEx: buy a newly or fully renovated property. These don’t require much work, if any, in the near future. The important part is the timing of when you buy the property.
Pay close attention to the real estate market for the property you’re interested in. Buy the property as soon as possible when you see an increase in the market’s prices. If you can secure the property right before a boom, you’ll profit from that appreciation. Then, hold onto that real estate throughout the boom or until it stops benefiting you. During this time, try to keep repairs as minimal as possible.
Experienced sellers will know it’s time to let the property go: when their profits begin to level out or go into the negative. You can then buy another newly renovated property and start the cycle all over again.
More on profit from BiggerPockets
Creative real estate investing strategies
Because investing is such a creative field, a real estate investor can do a number of things to maximize the profits they gain from their properties. Not every option will work for everyone, but even implementing a few of these things can make a big difference to your wallet.
1. Real estate investment trust
Also called a REIT, these are trust companies that own and operate real estate that generates rental income. Although the cash flow is typically steady, they don’t offer much appreciation like other options do. However, REITs own all kinds of property and many of them are publicly traded like stocks.
2. Private lending
This option is pretty self-explanatory. Here, people lend their own funds to investors to buy property. This can range from loans from family and friends to from a private institution. It’s an alternative to getting a loan from a big bank.
In this kind of arrangement, there’s usually an agreement between the lender and the investor on how the money will be paid back and what kind of interest rate will be applied. This option is especially helpful for new buyers or those who wouldn’t qualify for a traditional loan.
Pay attention to the little things
Not every part of owning a property is expensive, but there are things people may overlook or not realize is costing them money. Here are just a few to consider doing to make larger profits:
- Manage your own property
- Do as much of your own maintenance as possible
- Add a coin-operated laundry
- Implement pet fees
- Get a real estate license
- Make your own keys
- Implement lease termination fees
- Charge holding fees
- Collect application fees
- Enact extra occupant fees
- Put in vending machines
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.