8 Secrets to Maximizing Rental Income
Rental homes offer a great return on investment when done correctly and can offer a steady stream of income for retirement but as with anything else, there are some risks. As a property manager of residential and commercial real estate for 20 years, I have seen a lot of changes in the industry. Federal/State/Local laws change frequently and today’s landlord has more challenges than they used to. Renters have also changed so in order to maximize profits and cash flow, a good landlord keeps up on the changing environment.
I wrote this white paper to give you a starting point on some of the more important aspects of maximizing your rental income. There is much more to say on each of these topics but this covers the basics.
- Pricing correctly
When looking at maximizing your net profit for any venture, there are two immediate areas to review: Income and Expenses. As a landlord, the rental rate you set for your property determines your income and is subject to the market conditions. This can be tricky because if you price it too high, no one will rent the property but if you price it too low, you don’t maximize your income. Careful analysis is important so you can price the property just right!
There are many sources for information on rental rates. Ones that anyone can access are Zillow, Rental.com, and Trulia. A licensed property manager should be able to access other resources not available to the average owner. Best practice is to gather averages from a number of sources to determine the best rate. Compare location and similar features. Certain styles of homes and amenities can bring more rent and are more desirable to tenants.
Some of this comes with experience but it’s important to remember that renters are not necessarily looking at the same things a buyer would. They are more willing to live with some aspects and are not willing to pay extra for some amenities that may appeal to a buyer. Many things factor into what appeals to a renter and what they are willing to pay for. The location and average rental rate for the area will determine what type of prospects you will most likely encounter. Experience will help determine which aspects the prospects for that market will pay extra for.
- Show the Property
Many owners renting their own properties already do this but you may be surprised at how many property management companies do not actually show their rental inventory. Even if you are showing your properties, it is important to review how you are showing properties. The condition of the home, the availability of the appointments, and the presentation all affect how desirable your property is and how quickly it will rent. The quicker the home rents, the more income you receive.
Some owners and management companies show the home before all the repairs are made and this is not a good idea. The thought process is that it’s on the market sooner but it’s been my experience that you lose the interest of the best prospects when the house is dirty or need repairs. Even if you tell them it will be done before they move in, they only see the disrepair of the property and that is all they remember when they are making their decision. After seeing many house in a row, their first impression is the only one that stays with them.
When showing your property, let the prospect talk as much as possible. Answer questions but allow them to direct the conversation. Many times you will hear comments about what is important to the prospect. If it’s a doable request, you can make the offer to fix something they may not like right on the spot. When the prospect gets a key and see the property on their own, you don’t have the opportunity to make these decisions. These comments will also help you to learn what renters are expecting in your market.
I have heard a tenant talk about their job or family during a showing and the information on their application doesn’t match the comments they made in passing at the showing. This becomes a red flag to investigate the tenant further or possibly deny their application. The better a tenant you can find, the more you make on your investment property.
- Know your Competition
Do you know what other homes are available in the same price range in the same neighborhood? I bet your prospect does. They have done their homework and have probably seen a number of homes already by the time they are looking at your property. If you are familiar with those homes, you can price your home fit the market better. The prospect will not consider your home if they can get a better maintained home for the same price.
The competition changes frequently in the rental home market so constant review of the market is necessary. Unfortunately it is difficult for an investment owner to see what has already rented and for what price so maintaining a spreadsheet reviewing those statistics over a period of time is important. There is no guarantee that the available properties on Zillow are priced appropriately because the reason they are still on the market may be that they are overpriced for the area and condition. Without data obtained over a period of time, it is difficult to see trends.
- Screening the Prospects
One of the most crucial tasks for a landlord to do is to properly screen prospects. Many less desirable tenants purposefully look for properties leased directly by an owner versus a management company because they know that owners rarely screen their prospects properly. In many cases, they don’t have the resources a management company has to do all the screenings and bad tenants can find their way into your property. Bad tenants cost money in repairs and collection efforts.
Prospects should be screened for past evictions, money owed to past landlords and utility companies, criminal background, and credit. Income, employment, and past rental history should be investigated and confirmed as well. In order to comply with federal and state/local laws, an application and approval policy is good to have so that all prospects are subject to the same standards. A real estate attorney familiar with property management can assist with drafting up a policy.
There are people we like to call “professional squatters” that will find an owner leased property and move in at the end of the month. They’ll give you the pro-rated rent and promise to pay you the security deposit after their next pay check. The problem is that you will never see another penny from them. They know that it can take months to get through the eviction process and they will live there rent free until then. They then move on to the next property. Without proper screening, you could be one of their victims.
- Set Expectations for Tenant
Once you have located a good tenant, setting expectations is crucial. Tenants in most cases will do what you ask them to do. Telling them to keep the property clean and don’t damage anything is not sufficient. For the purpose of setting expectations, the more detail, the better.
Provide a list of items to do when they move out, such as make sure all the lightbulbs work and smoke detector batteries are fresh. Let them know if you will be doing periodic inspections so they will expect you to check on them through the lease. All expectations should be clearly listed in the lease but by verbally going through those items, you cement in the tenant’s mind that you will hold them accountable for these items.
Give them expectations on how and when you will respond to maintenance requests. In our leases and handbooks, we give a definition and examples of what is considered an emergency. This sets the expectation that you are not going to send a plumber out on the weekend at double rates for what is not legally considered an emergency. Comfort is important to keep a good tenant but not all requests and timeframes are reasonable to the situation. Tenants are typically happy if they know what to expect ahead of time instead of learning it on the fly and it doesn’t meet their idea of reasonable.
- Maintaining the Property
This one is paramount in controlling expenses in the long run. Some owners think this means going with the least expense fix or in some cases, not fixing minor issues. The problem with that thinking is that small issues can become large issues over time. Knowing the property inside and out can help to determine what needs to be maintained for the home. Preventative maintenance plans can save money by spreading the cost of maintaining systems over time rather than having a system fail and do major damage. The costs are usually higher because the failure damages other parts of the home and you may need to compensate your tenant while the home is not in condition for the tenant to stay there.
Another skill for an investment owner to have is a knowledge of basic home repair. By walking your tenant through minor issues like unsticking a flapper in the toilet to stop it from constantly running you can save the money of having a plumber go out to look at it. A great management company will have trained it staff to trouble shoot these issues over the phone. Even if a vendor is still dispatched, by correctly identifying the problem with a few questions, it may prevent sending the wrong vendor to fix a problem that was misidentified by the tenant.
- Allow pets
Some of you may say “I don’t allow pets because they cause too much damage!”. In some cases you may be right but I have found that there are no bad pets, just bad pet owners. Many investment owners in Albuquerque own single family homes or town homes and tenants looking to pay more for a home versus an apartment do so because they have pets. They are looking for a backyard for their pet and will pay extra rent to provide this for a member of the family.
By structuring realistic pet policies and setting expectations, most pet owners leave the home in good condition. The additional monthly rent and security deposit usually covers any minor damage that may come up. It is okay to “interview” pets as well to make sure it’s a good fit for the property. There are even pet screening services that charge the tenant to screen their pet. They check for past violent behavior and if the pet is vaccinated.
A word of caution regarding pets: The federal government has very specific guidelines for service and comfort animals. In some cases, you can not deny an applicant because of a pet if they are protected by federal law (and in some cases, local law). Make sure you consult an attorney to assist you with this topic. The fines are steep!
- Know the laws
This brings us to the number one loss of net income for investment property owners: ignorance of federal, state, and local laws. Nothing is more expensive than attorney fees to defend against a lawsuit. There are usually state landlord/tenant laws dictating the responsibilities and obligations of both parties. These change frequently so it’s not a one and its done situation. Having a good attorney or management company to help you keep current is priceless.
On top of state/local laws, the federal government has a number of laws/acts in place to protect consumers to include tenants. A couple to be aware of are the Fair Housing Act, Americans with Disabilities Act, and Fair Credit Reporting Act. The federal government actively looks for non-compliance of these acts and the fines are hefty.
Your insurance agent can be your best friend in protecting your asset. They can make sure you are adequately insured in case of a problem. They can also assist you in making sure your lease covers all situations on responsibility for insurance related claims. A yearly review of your insurance policies is a good idea.
One area of insurance that landlords don’t always consider is what type of insurance their vendors or management companies have. Does your management company have insurance to cover you in case of employee theft? If an employee steals the security deposits, will the management companies insurance cover you?
Vendors should have the appropriate general liability and workers comp coverage to cover you before they ever do any work on your rental properties. A vendor without insurance may be cheaper in the short run but if there is an accident or loss because of a vendor’s negligence or mistake, the cost will be to the owner of the property.
Having a great team on your side is crucial. A lawyer and CPA specializing in real estate is a good start. A great property manager can be the biggest asset you have if you are not comfortable with managing property on your own. They do this work full time and have resources many private owners do not have because it’s not cost effective with a few units.
Whether you manage on your own or have a professional company, we wish you happy and prosperous landlording!
If you enjoyed this report or have additional questions, I am always available by phone or email.
Blue Door Realty