How Much Profit Should You Make on Rental Property_

How Much Profit Should You Make on Rental Property?

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article on How Much Profit Should You Make on Rental Property was PUBLISHED On September 11th, 2018

How Much Profit Should You Make on Rental Property?

Do you own a rental property? How then do you increase your income and profit? Is it by increasing the value of your property? Or, is it by raising the rent? What about cash flow? Have you ever thought of ways to make money from your property, besides rent?

And where do your tenants enter the picture? As you probably know, long-term tenants increase occupancy, lower turnover, and increase profits. So, how do you keep them from leaving while attracting new ones like them quickly? In short, how do you earn a profit and gain money on rental properties?

Tips On How Much Profit Should You Make on Rental Property

Let’s see these 5 tips:

1. How Much Profit Should You Make on Rental Property: Reduce Tenant Turnover

Losing long-term tenants is acceptable if they move after buying homes or finding jobs in other cities. What’s not acceptable, however, is losing them to another landlord. Remember, every lost tenant leaves behind a repair bill. Walls must be painted and floorboards or tiles replaced. And then there’s the cost of advertising and that of lost revenue.

What does this mean for your bottom line? Simply this: With a high turnover rate, you incur this cost repeatedly and, more importantly, unnecessarily. To avoid it, give tenants a reason to stay. Upgrade kitchens and bathrooms or enlarge rooms. Next, improve customer service. Be courteous and professional, address any problems promptly, and ask for feedback. Or, have your property manager do likewise.

2. Increase Occupancy

How to increase the occupancy rate?

A vacant property costs you money. But do you know how much? Here’s the surprising answer. Every month of vacancy lowers your annual revenue by as much as 8 percent. Obviously, keeping occupancy close to or at 100 percent is the key to profitability. But how do you do this in the face of stiff competition?

You act the moment a tenant leaves. Post ads about the vacancy, and if the property is in a prime location, tenants will start lining up for it. If they don’t, offer them an incentive. Lower the first month’s rent by about 5-8 percent. This way you break even. After all, this discounted rate approximates the 8 percent annual loss we’ve just seen.

3. Collect Late-Payment Fees

No landlord loves the inevitable task of rent collection, which is partly why most leave their properties to property managers. But let’s assume you don’t, that you manage your property yourself. Regarding rent collection, what difficulties do you face? More often than not, it’s late payments.

Appealing to your kind side, tenants pay later and later each month, all the while giving excuses. And when they finally hand over the rent, they leave out the fees associated with late payments. What should you do?

Be firm, yet professional. When a tenant pays late, explain that you consider the rent fully paid only if it includes all the fees. Then, politely decline the money until they comply. This way, they respect and abide by your boundaries.

4. How Much Profit Should You Make on Rental Property: Raise Rent

After upgrading a property, you can safely increase the rent without turning away tenants. In fact, you do just the opposite. New tenants want the property because nothing else matches it in the neighborhood. Existing tenants, on the other hand, hang on to it for the same reason. Also, moving comes with extra costs they may not be prepared to incur.

However, exercise caution while you’re at it. Research the rents in your area first to know how much to rent to increase. Otherwise, you stop being competitive. As a general rule, aim for an increase of not more than 3 percent, which adds to your revenue without adversely affecting your competitiveness. And if possible, schedule the increase to coincide with lease renewals. This gives tenants the chance to opt either in or out.

5. Increase Income Streams

How to increase your income streams

As much you can is the best answer. So, look beyond rent and property appreciation. Also, focus on cash flow. Let’s assume you own a multi-family apartment, for instance. Have you ever thought of installing vending machines in them? How about coin-operated laundry equipment? Both increase not only your income but also the value of your property.

And don’t stop there. In one-family residences, clean houses and landscape yards for your tenants, but for a fee. As they already hire out these dull tasks to others, convince them to hire you instead. And after negotiating a price with them, collect the fee. Then, approach cleaning and landscaping companies and negotiate a lower rate. By keeping the difference, you make an extra few hundred dollars per single-family home per year. Increasing rental income isn’t that difficult if you keep tenants and attract new ones quickly. And besides, increasing rent and income streams, also improve on how you collect rent. But above all, treat tenants with dignity and respect, but be firm, especially on rent collection.

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