The following is a list of six tips for rental property owners to follow in order to maximize their cash flow and profits. I’ve learned these tips over the 21 years in which I’ve rented out a home that I own.
When I was 23 years old, I bought my first house on the advice of a friend of mine’s father, who said it was always better to own a home than to rent an apartment. I bought a brand new three-bedroom, two-and-a-half bathroom home in a small city that was over an hour away from where I worked. I bought so far away, because that is where I could afford to buy a new home.
To buy the home, I got an adjustable rate mortgage. By year four, interest rates had gone through the roof and my monthly payments were 50 percent higher than they were when I first bought the place. I tried to sell my home, but the only offer I got was for almost 20 percent less than I paid for the place.
So I decided to start renting the home out, and I moved in with my girlfriend who lived much closer to where I worked. For the first couple of years I had negative cash flow, meaning I had to pay some of my own money to cover the mortgage and expenses each month.
By year three, thanks to lower interest rates and the ability to significantly raise the rent, I turned cash flow positive, meaning I was taking in more money each month than I was paying out. Today, some 20 years later, I make a not insignificant amount of money each month by renting out my home.
Here are six tips I learned over the years that have helped me to maximize my profits on my rental home.
Six Tips New Rental Property Owners Should Follow to Maximize Profits
Let Your Tenant Be Your Handyman
If you can arrange it, let your tenant do small handyman jobs around your rental home in exchange for rent deductions. My current tenant is a retiree who has owned a number of houses in his life.
As anybody who owns a home knows, there are always a myriad of things in a house that need updating. My retiree tenant is more than happy to stain the deck, paint the garage door, or replace the light bulb in the refrigerator for small deductions in his rent to cover the costs and a little extra.
As an example, I took $200 off my tenants rent when he stained the deck recently. The $200 covered the cost of the stain, and a little extra for the work. That was far cheaper than if I had hired a contractor to do it, and far easier than going down to the house and doing it myself.
Use Local Advertising for New Tenants
When I started renting out my house I worked for one of the largest newspapers in New Jersey. One of the perks of the job was a free classified ad per month, so I advertised my house in the paper, even though my house was located at the outskirts of the paper’s reach.
I also placed an ad in the largest paper in New Jersey, which delivered right to the small city where my house is located. Despite the ads in two of the largest papers in New Jersey, I got no calls from prospective renters. So I went and placed an ad in a small local paper that was published right in the small city where my house is located.
That really did the trick because I got over 20 calls within a few days from prospective renters. Always try to advertise as locally as possible for prospective renters. It will save you time and money.
Check Prospective Tenants Credit Reports
I always run a credit report on prospective tenants before I will actually rent them my home. The last thing you want as a landlord is to have a deadbeat tenant. People can tell you all kinds of things, but from a credit report you can actually determine if they have enough income to pay you your rental income each month, and what the likelihood is that they will pay you each month.
Try to Rent to Older Couples
When I first started renting my house, I tried to get middle-aged tenants who I thought could end up renting my house for years at a time. It never worked out that way, as the middle-aged tenants were usually just using my house to transition to owning their own home.
After ten years in which I rented out my home to nine different tenants, I started selecting older couples to rent the house. The first retired couple that I rented my house to stayed for three years. The second retired couple are my current tenants and they are going on eight years now.
Older renters are much better for other reasons too. Most old couples have social security, pensions, and assets they have worked a lifetime to acquire, so they have the money to pay the rent every month. Old couples are also less likely to have pets who can damage your home, and are far more likely to take care of your rental home as if it was their own.
Set Aside Money Monthly from the Rent for Future Problems
If you have a positive cash flow from renting your house, make sure to set aside a percentage of that positive cash flow each month to pay for future problems. When you own a home things like furnaces, appliances, air conditioning units, roofs, carpets, and a host of other things are going to wear out and need to be replaced.
By setting aside some money each month out of your positive cash flow, you will have money on hand to deal with any problems. I’ve been setting aside 15 percent of my positive cash flow per month for many years now and have built up a pretty good cushion.
I sleep well knowing I can pay for a new furnace or any other problem I might encounter with my rental property from the cushion I have built up over years, while still keeping 85 percent of my cash flow each month. I can count on that 85 percent each month to live on without worrying it might go away, and I know I will not have to dip into my savings to fix problems with my rental property.
Do Not Overprice Your Rental Property
I’ve been renting my house out for 21 years now, and the longest the property has ever sat empty over those 21 years is two weeks. That’s because I don’t try to get every last dollar from my tenants. I charge a fair and reasonable rent compared to the other rental homes in the area.
A friend of mine has been renting out her house for eight years now, and she always tries to charge her tenants as much as she possibly can. She always has trouble getting tenants and her house often sits empty for many months at a time as she tries to get top dollar.
An empty rental property brings in zero cash flow. Charge a reasonable rent and keep your rental property occupied to maximize your cash flow and profits.