Maximizing your profit on a rental property begins with choosing which opportunities will be most beneficial for you as well as your tenants. A happy tenant will help take care of your property like it’s their own. If you are able to rent a property to the best tenants, you can make a higher profit and in doing so, your Return on Investments (ROI) will depend on maintaining and protecting your rentals, which requires effort from both you and your tenants.
At Lafayette RE LLC, we want to help you attain greater profits with your rental property investments. That’s why this article makes simple profit-enhancing suggestions to help you achieve your rental investment goals.
How To Choose Profitable Rental Properties
What Types of Properties Attract the Best Tenants
Research what types of properties attract the best tenants. Studies show that single-family homes attract longer lasting tenants. On the other hand, multi-family buildings provide management efficiency which saves money. It would be wise for you as the investor to consider what your goals and preferences are to understand which you prefer.
According to Bigger Pockets, a popular real estate investing social network, “three or four bedroom houses tend to make the best rentals because they attract long-term tenants, cutting down on your vacancy expenses”. In addition, they are “generally the best kind of property to sell”. Therefore, 3- to 4-bedroom single family homes make a good rental investment.
On the other hand, according to the same Bigger Pockets article, multi-family buildings consisting of “two bedroom apartments are incredibly popular. Single bedroom and studio apartments tend to attract a more transient tenant with more turnover.” So, 2-bedroom units in the same building provide better management efficiency and long-term tenants than studios and 1-bedroom units.
Return on Investment (ROI)
How To Calculate ROI
Calculating ROI involves determining the Annual Investment Gain minus the Annual Investment Costs divided by the Total Cost of the Investment. This results in a percentage or a ratio. Here’s how the ROI formula looks:
ROI = Annual Investment Gain – Annual Investment Costs
Total Investment Cost
Real estate investments require calculating several variables to determine Total Investment Cost. Purchase price, leverage (amount of money borrowed with interest), closing costs at the time of purchase and sale, real estate commissions and appraisal costs must all be included.
Annual Investment Costs
Annual maintenance, repairs, insurance, property tax, and advertising costs to find tenants must be added up.
Annual Investment Gain
Determined by the actual cash flow from rents and other sources like vending machines, laundry mat, etc.
Example of a Non-Leveraged Rental ROI
Determine the Investment Gain
Calculate how much you receive from your rentals annually. If your rent brings in $2,700 a month for one rental, multiply by 12 months to equal $32,400 per year.
Add up the total investment related expenses for the rental
This includes taxes, insurance, repairs, maintenance, advertising, etc. Let’s say your investment costs equal $2,000 for the year.
Subtract the investment cost from the investment gain
Example: $32,400 – $2,000 = $30,400.
Divide by the total investment cost
If you bought the rental for $300,000 the calculation looks like: $30,400 ÷ $300,000 = 0.101
Convert the decimal into a percentage
Using the above example, converting 0.101 into 10.1% which means you will receive 10.1% on your investment each year.
According to Mashvisor, a real estate investment data analysis company, recommends at least 10% ROI for the U.S. real estate market in 2018.
The Balance, writing about personal finance for the past 20 years, also agrees that in 2018 U.S. real estate ROI “stabilized at 10%” for non-leveraged properties.
How To Screen Tenants For Rental Property
After choosing the type of rental property to purchase with the help of its ROI, the next step involves renting to good tenants.
Screen every potential tenant. Require a copy of a recent credit report. If the applicant refuses, don’t rent to them.
The credit report contains valuable data regarding credit history, unpaid debts, lawsuit history, bankruptcies, and a credit score which lenders use to determine creditworthiness. Forbes Magazine provides an excellent explanation of credit reports and credit scores.
You can obtain a credit report yourself on a prospective tenant. Provide the following information on a credit check application form:
- Tenant’s full name
- Date of birth
- Social security number
- Addresses for the last two years
- Current landlord
- Current employer; and
- Tenant’s written authorization (dated and signed) allowing you to conduct a credit check.
Furthermore, you must follow the Fair Credit Reporting Act guidelines.
Why You Should Always Have Everything In Writing
Never rely on verbal promises alone. Get all promises in writing, signed and dated by you and your tenant.
A written record of all promises you and your tenant make amount to legal evidence in a court of law (if it ever comes to that).
Full Property Inventory
Require the new tenant to sign and date a full property inventory of all included items to prevent theft and verify their current condition. This includes appliances, lighting, fixtures, furniture, and kitchen items.
At the end of the tenancy, the inventory list allows you to deduct the costs from the security deposit for repairing or replacing items. This saves you money.
Sensible Property Improvements
Maintaining your rentals makes tenants happy who tend to stay longer.
Periodic inspection of your rentals to detect potential hazards prevents personal injury lawsuits. Slippery stairs, missing guardrails, poor flooring, and unsafe electrical outlets invite personal injuries.
Avoiding lawsuits protects your investments and saves you money.
How To Protect Your Investments
Protect your investments with insurance
Comprehensive insurance covering all types of loss, defects, and hazards including lawsuits protects your rentals. Require your tenants to obtain renters insurance to protect them and yourself.
Know when to sell
Consult a real estate investment analyst to advise you about market fluctuations, upcoming market downturns, and other factors requiring you to sell to protect your ROI.
Well-maintained properties with good cash flow make selling for the highest price obtainable even during a slow market.
- Buy Profitable Rental Properties.
- Determine ROI before Purchasing.
- Properly Screen Tenants to avoid bad ones.
- Get Everything in Writing to prove all promises.
- Prepare Full Property Inventory signed by the tenant to deduct all replacements and repairs from the security deposit when the lease terminates.
- Maintain Your Rentals to make your tenants happy for longer-term occupancy and for higher sale value.
- Protect Your Investments from bad tenants, lawsuits, and knowing when to sell.
We hope these practical suggestions help you to obtain higher profits from your rental investments.