In the past year, much of the real estate landscape as changed. Becoming a real estate investor is harder than ever in this market. With inflated real estate prices, high mortgage interest rates, and the rising costs of PMI, home insurance, utilities, and home contractors, can you still make money as a real estate investor? Here are 8 ways you can maximize your earnings.
Do Your Research & Calculate The ROI
The ROI is your return on investment. Thousands of people make the mistake of buying an investment property without calculating the ROI or considering the tax implications. Use the “Recently Sold” feature of most real estate listing websites to see what properties are actually selling for. This will give you an idea of how much the property is worth. Next, use the Rental Estimate feature of listing websites and compare it to the actual rental prices in that neighborhood for similar homes. Finally use a mortgage calculator to see how much your mortgage, taxes, PMI, and home insurance will be with your downpayment and current interest rates.
ROI Calculation
If your ROI is less than 10%, it’s probably not worth the effort. Being a real estate investor is not exactly a passive income. It can take lots of effort to maintain properties and find renters. To calculate your ROI, you take your total income (after your mortgage cost(s) and expenses) for the year then divide by the total purchase price including all closing costs and any remodeling costs.
For example, you get a mortgage with a payment of $800 per month. However with home insurance, PMI (if applicable), property taxes, estimated income taxes, utilities, and home maintenance, that $800 per month is actually an average of $1400 per month. You rented out the property for $1700 per month which means you are making a profit of $300 per month. That is $3600 profit in your first year. Let’s say you put $10% downpayment on a $200,000 property and spent another $5,000 in closing costs and $5,000 in remodeling That means your upfront investment cost was $30,000. Your ROI would be $3,200 / $30,000 = 12%
If you are like me, you will want to include your home equity in the ROI. Using my Amortization Calculator, you can figure out how much of your mortgage payments will go towards your principal in your first year. If $4,000 of your mortgage principal is paid off in your first year, you can add that to your $3,200 rental take home income for a total income of $7,200. Your ROI will then be $7,200 / $30,000 = 24%. The higher the ROI, the better your investment is. In this market, it is very difficult to get any return.
Pick The Right Type Of Property
Think about who you want to rent to. Is it a small family? Are you targeting college students. Maybe you just want temporary short term leases for those transitioning between homes. The area, property type, and renters you choose could make the difference between a long term lease with no problems, and several trouble tenants that leave your place trashed. If you want the best renters, you will need to buy an investment property in a nice area with high property values, low crime rates, and great schools. At the same time, those premium renters will want more premium finishes and appliances in their homes. If you go the college student route, you can rent out a low quality property for a very high ROI. You can spend the minimum on repairs because you know most college student tenants will destroy your property.
Consider Other Avenues
Leasing is not the only way to make money from your Residential Investment Property. You have the potential to make way more with Airbnb and Neighbor.
For those not familiar, Airbnb lets you rent out your home, bedroom, couch, or even yard to anyone who is looking for a place to stay the night. Airbnb has become the popular choice for making money with vacation homes or properties located near tourist attractions, mountains, lakes, and the beach. With single room hotel prices at $400 per night in these locations, you can rent out your entire beach house for $400 per day and make $12,000 per month in the summer months. If you have a house with several bedrooms, Airbnb may be the better choice because it makes it easier to rent out each bedroom individually. If you offer your property on Airbnb, be sure to keep the property clean and be respectful to your renters. With great reviews, you can raise your prices and earn more.
With the Neighbor app, you can rent out your bedroom, parking spot, driveway, garage, shed, or basement as a storage unit. Have people pay you to store their personal items, equipment, boats, or cars on your property. Imagine you are renting out your New York City apartment. The apartment includes a parking spot, but your tenant does not have a car. What do you do? You can easily rent out your parking spot for $500 per month in New York City as long as the parking spot is not part of the lease with your tenant. My sister-in law rents out her Washington D.C. parking spot for $150 per month.
Weekly or Bi-Weekly Rental Payments
For those who don’t know, there are 52 weeks or 12 months in a year. One month does not equal 4 weeks. A monthly fee means that your tenants are paying more in February, or less in December, because the number of days differ between months. Charging a tenant weekly or bi-weekly will get you an extra month of rent. Weekly rent also helps your tenants budget so that you will experience less late payments as a landlord.
Don’t Include Free
Some landlords offer free water, free electricity, free internet, free furniture, or free cable TV. Tenants will take advantage of that. You want to reduce your liabilities and your costs as much as possible while making the tenant happy. What if your tenant installs an inflatable pool and spends $500 in water to fill it up? You will be liable if the water bill is in your name. The only thing I would consider offering is bi-weekly lawn care. Too many tenants ignore the lawn care, causing complaints from neighbors and citations from the city.
Charge For A Background Check
Zillow’s $20 application for rental properties includes a background check. You can charge potential tenants a $25 application fee and do the background check yourself. Just ask them about their employment status, salary, and free credit score found on most banking and budgeting apps. Remember you can’t ask a tenant their race, gender, religion, disability status, political affiliation or culture. No discrimination is allowed in selecting a tenant.
Set The Appropriate Deposit
As a landlord, you have the right to charge a higher deposit for pets or college students who are more likely to damage your property. Set the deposit based on the risk level of the tenant. Dog and cat owners are wiling to pay a higher deposit and rent if you allow their pet. A typical pet fee ranges from $100 per month to $400 per month, depending on the area.
Know Your Taxes
Make sure you depreciate your property to save on taxes. You can subtract your depreciation from your income to reduce your taxable rental property income. Document ALL expenses including maintenance, repairs, mortgage interest, home insurance, driving from/to property for inspections or service calls, and more. The more expenses you can find, the more you can deduct from your taxes.
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