There are essentially four basic ways that you can receive a return on your real estate investments - cash flow, equity build-up from loan paydown, tax benefits, and property appreciation. A great aspect of real estate is that the investor can buy properties according to his particular financial and personal needs. Different properties are geared more toward achieving one of these types of return than another. For example, an investor with significant earned income may focus on properties with tax bennefits and not worry as much about cash flow. Investors nearing retirement will prefer properties with cash flow. And all investors look forward to appreciation.
Successful real estate investors continually ask themselves: How can I improve the returns on my real estate investment in each category? In this blog, we highlight some of the best ways that you can enhance your return on investment with rental properties.
Raise Rents Although most rental properties have other sources of income, the largest source is almost always the rents. So real estate investors wisely begin with an understanding that rent increases lead to greater cash flow.
However, setting the proper rent and maintaining the optimum market level rents on turnover is one of the most common challenges faced by property owners. Many rental property owners are reluctant to raise rents, because they're concerned that their good tenants will leave. This is a valid concern but shouldn't prevent you from getting rents to market level - one of the fastest and simplest ways to improve your cash flow. Of course, you should always look for cost effective ways to improve the property and make sure that your rents are competitive and a fair value.
We recommend raising the rental rate modestly each year rather than waiting for two or three years and then hitting your tenants with a major increase all at once. Tenants are less likely to move as they understand that the costs of operation are rising slightly each year.
If your rents are already at market levels, look to make upgrades to the property to justify higher rents. Maybe the addition of a combination microwave/exhaust vent unit above the stove or the addition of a deck or awning will be an improvement that justifies higher rent. Any improvements that enhance the quality of living or bring the property to a level similar to higher priced properties in the area can lead to increased market rents.
Reduce Turnover The single most important factor in determining the expenses of most rental properties is turnover. In both residential and commercial properties, tenant turnover is simply bad for the bottom line. A tenant moving out almost certainly means a loss in rental income, plus you're hit with the increased expenses (maintenance and repairs and capital improvements) to make the rental unit or suite available to show a prospective tenant. Signing long-term leases with qualified tenants, continually maintaining the property in top conndition, and being responsive to the tenants can help reduce tenant turnover, which directly improves the net operating income and cash flow.
Another effective tool to reduce the loss of rent during tenant turnover is to prelease the rental unit or tenant suite. If you can prelease the rental to a new tenant only a few days or weeks after the current tenant vacates, you'll dramatically reduce your lost rent and increase your cash flow. After you receive a tenant's notice to vacate, immediately seek permission to enter and determine what you'll need to do to make the property ready for the next tenant. Also begin advertising for a new tenant and gain the cooperation of the departing tenant to show the property.
Consider Lease Options A lease option is an agreement that allows the tenant the right to purchase the leased property at a predetermined price for a certain period of time. Sellers typically use lease options in slow real estate markets to create additional interest in the property - even a potential buyer without a down payment has the opportunity to eventually become a homeowner.
There are many other benefits to the rental property owner willing to offer a lease with an option to purchase the property. The landlord/seller is often able to sell the property for a value above the current market, and the lease option usually requires a one-time option fee that the seller can keep if the buyer can't exercise the option. Also, the renter/buyer will typically pay a higher monthly rental payment with a lease option because a portion of the payment is applied to the ultimate purchase price. The higher monthly payyments can be beneficial to the owner if the cash flows for the property are currently negative.
Develop a Market Niche For example, Robert has had success in Las Vegas (of all places!) with smoke free apartments. After a long day at work in a smoke-filled environment, a health-conscious nonsmoking resident doesn't need to have smoke wafting into their rental unit from their neighbour. Although there are additional costs up front in thoroughly cleaning, completely repainting, and installing all new flooring and window coverings, the demand (and thus the occupancy) for these units is high. Rental properties catering to seniors have always been popular, and the demographics clearly support continued attention to this dynamically growing market niche.
According to a recent study by the National Multi Housing Council (NMHC), student housing is also a great opportunity with the "Echo Boomers" (those born between 1976 and 1994) coming of age and going to college in record numbers. Management of student housing can be difficult for the uninitiated, but with the majority of private (and much of the university) housing being 30+ years old, some real estate investors find the market ripe for renovating rental units for the upscale tastes and surprisingly affluent desires of college students. They'd rather have a private rental unit with their own bathroom facilities and a high-speed Internet connection than a traditional dorm.
Maintain and Renovate The curb appeal or first impression that your property gives is critical to your overall success. Far and away the easiest way to increase cash flow and increase value is to simply clean up and address the deferred maintenance found in most properties. One of the fundamental rules of real estate is simple supply and demand. If your property really stands out and looks much better than comparable properties, then you generate high demand; your rental will stay full at top market rents. That's what cash flow is all about.
Besides the simple deferred maintenance, another great way to increase cash flow (and value) is to renovate the property. The key here is to spend money only on items that enhance the property and provide a quick payback.
For residential rentals, the best return on investment inside the units is found in updating the baths and kitchens. Access control for parking and building entry can also be a positive enhancement in urban areas, because crime is a concern for many tenants. For commercial properties, upgrading dated inteerior common areas with higher-quality materials and fixtures generally offers the greatest return.
One of the most cost-effective ways to increase the aesthetics and curb appeal of any type of property is through landscaping improvements. Often you can simply replace dead plantings. If you want to do more, have your landscaping maintenance firm make suggestions or contact a landscape architect. Be sure to look into the installation of an automated, water-conserving, drip irrigation system.
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