This article is written by guest writer Kate Mallison. Kate is a real estate investor who works for Tellus, a real estate tech platform helping landlords and property managers save time through effortless automation.
The 3 most ignored profit opportunities for landlords
As a landlord, you know cash doesn’t just come from the couch cushions. If you want a healthy rental yield, you need to make smart, informed business decisions. Unfortunately, too many landlords don’t take advantage of three easy opportunities for profit. If you’re serious about treating your rentals like a business, make sure you’re not leaving money on the table by missing these opportunities.
Before anything else
Before you try to look for ways to increase your profits, you need to already be keeping track of your rental income and expenses. Otherwise, it’s impossible to know how much money you’re making, which strategies are working, and what you need to change.
If you’re not already tracking income and expenses, you’re missing out on some valuable tax deductions. The IRS allows you to deduct repairs and improvements to your property, interest on mortgage payments, contractor wages, insurance, and even travel expenses. However, receiving these deductions is contingent on knowing the exact numbers for each expense category.
Expense tracking doesn’t have to be hard. While everyone has a different system, keeping track as you go helps avoid a big time sink at the end of the month. You can use a small notebook in the car to keep track of mileage, an envelope to store receipts, an Excel spreadsheet to crunch your numbers, or a property management app like Tellus to take pictures of receipts, log them as expenses, and create automatic reports.
Know your market
When you’re setting your rental price, there are different strategies. Some landlords keep up with the market and raise their rent a small amount every year. Others prefer to keep their prices the same (that is, below the market) to encourage tenants to stay.
The main goal here should be to keep your income as stable as possible. If your property taxes are rising and you’re struggling to meet mortgage payments, you should consider raising the rent. On the other hand, if you have a decent monthly cash flow and it’s a renter’s market, you may need to list your unit under market price to stay competitive.
All of these decisions start with knowing your market rate.
Understanding the market requires some research. If you look online for units like yours, can you find any at your current rate? Are they all a little less? A little more? In your search, you want to make sure you’re comparing apples to apples. Compare your unit to one that has the same number of bedrooms and bathrooms, similar square footage, and the same neighborhood. When looking at location, don’t forget to take school districts into account.
Once you’ve narrowed down your list with the above, also consider amenities and recent upgrades. In particular, in-unit washers and dryers, hardwood floors, new appliances, and recent renovations can significantly impact market price.
After making sure you’re comparing similar rental properties, you can choose whether you want your prices slightly lower to be competitive, or if you want to stay even with the market.
Option A: Raise the rent
Some landlords raise the rent regularly to keep up with market rate, especially since increased expenses such as property taxes, utilities, repairs or improvements will not allow the landlord to make a profit if they keep the rates the same. While most cities do not limit landlords with how much they can raise the rent, other cities are under rent control and have strict limitations. For landlords who plan on raising the rent in a non-rent-controlled city, the general consensus is that 3-5% is a reasonable increase.
If you’re a landlord with a signed lease, you can’t just raise the rent whenever you want. Be sure to stick to your lease and follow your state’s guidelines for notifying your tenants. For example, if you have a year-long lease, you can only raise the rent once the lease term has expired, although you will want to notify your tenants of the increase before then. If your lease is month-to-month, the amount of notice you are required to give varies by state, usually from 30-60 days. Additionally, city ordinances and rent controlled areas have their own regulations about acceptable rent increases (if any). Before taking action, it’s essential to do your research.
Option B: Keep it steady
Another strategy landlords use is to keep the rent increases minimal (or non-existent) in order to keep great tenants. Good tenants are the property’s caretakers and worth their weight in gold. Choosing not to raise the rent can be one way to show your appreciation. Losing a little money in extra rent may be better than losing a lot in vacancy costs or in the damage you would sustain from a nightmare tenant.
While no tenant enjoys rent increases, some landlords are able to deliver bad news in a way that is more palatable. If the market rate is 5% over what you’re charging and you have great tenants nearing the end of their lease, you can explain the situation and say you’ll only increase by 2% because you like your tenants and want them to stay. This makes your tenants feel good and gives you the chance to approach market rate without the risk of losing great tenants.
Tenants may ask for reasons why the rent is increasing. While you are not legally required to give an answer, having a good reason can help them accept the increase and will improve your relationship with your tenants.
It’s never recommended to price your rental significantly higher than the market rate, especially if there are many vacant units in your area. Tenants have access to all the tools they need to research prices and won’t hesitate to go elsewhere if they find a better deal.
For sharp increases in rent, a landlord should be prepared to lose tenants if they find the increase unacceptable. The likelihood of this happening depends on whether your rental property is located in a landlord’s market or a renter’s market.
In a landlord’s market, competition for rental properties is fierce. There are many applicants and landlords can usually increase the rent without having to worry too much about losing tenants. In contrast, a renter’s market has an abundance of vacant units from which to choose. The issue will be attracting and retaining quality tenants, so landlords may not be as willing to raise the rent.
Remember, the goal should be steady income. How you achieve that depends on your market.
Avoid tenant turnover
Experienced landlords know that having a vacant unit can be one of the more stressful situations of owning rental property. You’re faced with the prospect of no income while still needing to cover your monthly bills including your mortgage, utilities, HOA fees, and insurance premiums. Most landlords cannot afford to have a vacant unit for long, which is why tenant turnover can be costly. For example, having a one-month vacancy is equivalent to an 8% loss in rental income.
Even if you find new renters right away, you’re not just paying the cost of vacancy between your old tenants and your new ones. You also are paying to get the unit rental ready each time. This usually involves professional cleaning, a new coat of paint, or minor repairs every time a tenant moves out. Since this falls under normal wear and tear, these are costs that cannot come from the security deposit.
To avoid these costs, your aim should be to keep good tenants as long as possible. Part of this involves providing a great space for your renters to live. Once you have tenants, you also want to be responsive to maintenance requests. If they know you care about the unit and are willing to make repairs, they will be more likely to stay.
Be smart about your expenses
If you’re tracking your expenses, you already know how much you spend per month on average. The real question is whether or not that number can come down. Take a hard look at your spending habits for your rental property and see if there are areas where you can cut back. What can be minimized? What can be eliminated? Your goal should be to provide a safe and secure home for your renters. Not all renovations (even requested ones) are necessary.
Are you spending money where you don’t need to? For example, some landlords choose high-end materials for renovations (such as hardwood floors) when a lower grade material (such as vinyl planks) would do just as well and save you money. Are you choosing to replace appliances, flooring, and roofing instead of patching and repairing? Remember, repairs can be deducted in their entirety for the same tax year, while improvements (upgrades) must depreciate over the course of their lifetime. In other words, the deduction for improvements isn’t taken all at once, and it’s costlier for you as a landlord.
At the same time, upgrades and renovations have their place. Nothing lasts forever, and sometimes it’s not possible to make repairs. Although there is an initial cost upfront, some upgrades can be an opportunity to bring in extra money for years to come. For example, apartments with an in-unit washer and dryer will typically rent for more than those without. Even if you are locked into a lease and cannot raise the rent right away, choosing to make specific upgrades can give you a reason to raise the rent for the next tenants.
You don’t have to leave money on the table when you could make simple changes to improve your bottom line.
- Set a competitive rental rate by researching your rental market. Choose a strategy for pricing. For example, you could maintain your rates to keep great tenants, or make small increases each year to keep up with your expenses.
- Reduce turnover by providing tenants with a high quality unit. Make repairs when necessary.
- Be selective about unnecessary expenses. Not everything needs replacing, but some improvements let you raise the rent more than you would have otherwise.
Implementing these changes well starts with good communication with your tenants. You don’t want to shock them with steep rent increases or be unresponsive to maintenance requests. Whether you decide to take text messages,
Keep a good balance between conflicting factors. For example, raising your rent too high could lead to a vacancy and cost you more than the increase would have gained. Making too many upgrades in a single year will cause your cash flow and rental yield to suffer, not to mention you won’t be able to write them off that same year for taxes.
Don’t let a short-sighted view blind you to long-term opportunities. The goal is to analyze each situation, consider the important factors, and then make the best choice based on the data.