When I decided to become a landlord in one of the hottest rental markets in the United States, I thought all I would have to do is buy a property, put it up for rent and watch the money come in.
Over the years, I’ve learned that providing rentals that are not only great for tenants but are also sound investments requires a thoughtful consideration of everything from how you market your properties to how you price rents and maintain your units.
If you’re looking for ways to maximize returns on your investment property, here are some of the lessons I’ve picked up about how to do so.
Price the rent appropriately.
Many of the landlords I meet aren’t just in it for the money. They believe that offering fairly priced rentals, particularly in hot markets like Boston, is extremely important for the community.
As a landlord myself, I’m firmly in this camp. Still, I caution landlords against offering rentals at price points that are significantly below market rate, or not raising rents at all.
The carrying costs of your rentals will increase for you every year — between common area utilities, insurance, taxes and maintenance, it adds up. Even modest inflation will make it feel like you have less money in your pocket from one year to the next.
While you don’t have to be the most expensive property in the area, you should still aim to find a price point that is close to fair market rate. At the very least, you should increase rent 1-3% each year to keep up with inflation and increases in your property expenses.
When it comes to determining fair market value for rent, there are a number of free tools worth trying. You can simply type in your address on Zillow to see what their estimate is for rent. Although, I wouldn’t rely on Zillow’s estimate alone. I would also do a manual search on sites like Apartments.com to see what similar units in your area rented for in the last year, and what asking prices are right now.
Don’t take the photos of the unit yourself.
Getting market rate for your investment property requires finding prospective tenants who aren’t looking for the cheapest property, but a property that they’ll love to live in. Since the first impression people have of your unit is from the photos they see on Craigslist, Apartments.com or a local real estate agent’s site, it’s important that these photos make them want to see the unit in person.
Don’t try to save money by taking these photos yourself. Find a professional real estate photographer in your area, and commission them to take photos. Most markets have a cache of photographers and photography companies who focus solely on shooting real estate for sale and for rent. If you’re in a market that has a lot of people moving in from other states, you can also consider paying for a 3D tour of the property. This helps quite a bit with people who won’t get to see the property in person before renting it.
Perform preventative maintenance.
Maintaining your investment property is much easier said than done. Particularly if you have a day job and own investment properties for supplemental income, the temptation can be to only fix things when they’re in need of repair.
Reactive maintenance is, almost by definition, more costly and far less convenient.
Not taking the time to maintain your units will cost you more time and money in the long run. After all, appliances and major systems will break more frequently when they’re not maintained. For you, this means more disruptions to your day-to-day from urgent tenant calls and expensive repairs instead of routine maintenance. In contrast, if you maintain your investment properties, you can do so on your schedule and for less money.
Make sure you have the right insurance policy.
Overpaying for insurance can kill your margins. When you’re looking for insurance, here are a few ground rules:
1. Shop around for quotes: No matter how convincing the first insurance salesperson you speak with might be, don’t go with the first quote you receive. Take the time to get at least a few quotes to compare with each other.
2. Consider using a local insurance office: I’ve found over the years that local insurance offices offer better service. After all, reputation is everything for smaller insurance offices, and they require word-of-mouth recommendations to stay in business.
3. Reevaluate your insurance every few years: While you might not want to take the time every year to see if you can get a better deal on your insurance, it’s worth reevaluating every few years.
4. Bundle your policies: Insurance carriers will give you better rates if they’re insuring more of your assets. Your primary home, rental property and car insurance should all be on the same carrier.
Consider refinancing your mortgage.
Take a moment to look at the mortgage rate you’re currently paying on your investment property. Compare it with today’s mortgage rates. If it looks like you might be able to lower your mortgage rate by half a percent or more, refinancing could be a good option. Yes, refinancing can be a pain, but a lower rate could save you thousands of dollars every year.
When you refinance your mortgage, there’s often an opportunity to pull some cash out for other investments. Lots of investment property owners will refinance their first property and use the cash as a down payment on an additional property. This is can be a sound strategy, so long as you don’t take on too much leverage. I always say that leverage is like a chainsaw: It’s a powerful tool, but one that must be used responsibly.
Each of these five steps requires a little more time and effort than a landlord may have bargained for. But if you follow through on even a few of them, you will have more money in your pocket at the end of the day.