Rental properties are a fantastic source of passive income. Not only that, buying and maintaining a rental property, also helps you acquire an asset that generally appreciates over time. Once you build a sizable portfolio of revenue generating properties, you can simply live off this passive income. There are also a slew of tax benefits as well for owing and renting property. In this post, we will explore ways to identify and optimize rental properties for income generation.
Know Your Market
This is the first and most vital thing to do as this will determine the remainder of your strategy. Think about what kind of tenants would you prefer catering to? Do you want to find tenants who are students? Do you want to attract professionals or do you want families to occupy your property? Knowing your target audience will help you plan and optimize accordingly.
Young professionals with budding careers usually seek city center dwellings which place them close to their work as well as vibrant nightlife. If this is the demographic that you want to cater to, then you will have to seek a property near or close to downtown. If this proves to be pricey then another alternative is to seek accommodation close to public transportation that allows quick access to town center. These spaces will need to be modern, clean and somewhat spacious. In this case you can expect a great return on investment and a stable flow of income. Though this isn’t a huge concern but do make provisions for tenant churn as young professionals might be on the lookout for new career opportunities and may relocate.
On the other hand students look for cheap accommodation and in return, are willing to get by on much less. This means you can buy a cheap multiplex or a rental property with multiple rooms and rent out each room. The location obviously would need to be closer to educational institutions and/or public transportation. The upside to this sort of property is that you can buy a fixer upper at a low price and still be able to rent it out. But the downside is that usually there is maintenance involved with this kind of property which can eat into your profits.
Lastly you can acquire rental property in areas where families would like to settle and throw down roots. Usually these are neighborhoods with good schools, parks and grocery stores. These areas are usually pricey but the returns on these are great and you can expect a steady source of income because families do not move as often as other tenant demographics discussed earlier. Also, families are usually great at keeping your rental property in good shape.
Building Equity Upon Purchase
The best way to buy property is to ensure that you get a good deal to begin with. If you buy it at a bargain, you have already built-in equity and that puts you ahead from the get go. Though this is enormously difficult to do in today’s competitive real estate market, being prepared prior to the purchase will definitely help you if the opportunity ever arises. Do check out our post here on more info on how to do that.
Another way to acquire cheaper properties is by purchasing them at auction. But do set yourself a budget and do not exceed it. You might get carried away in the excitement of a live auction but never lose sight of the bigger picture. Do make sure to research the location prior to purchase and also read up on things to look for whenever surveying the properties quickly before auction.
Go Green
If and when you get a chance to update a property or are replacing something, try to go for eco-friendly options. Though some of these items will prove costly upon initial purchase, they will save you money in the long run and will even be a selling point to lure potential tenants. There are a number of ways you can do these improvements. The cheapest way would be to replace all light fixtures with energy efficient light sources. Then you can add aerators to taps and shower heads to reduce water waste. Make sure that windows and lofts are well insulated. Larger expenses are associated with big ticket items such as energy efficient boilers, radiators, washer/dryer and other larger appliances.
Check to see if your state government offers incentives to landlords for installing energy efficient fixtures to recoup some of this cost. Depending on what kind of property you own and where its located, you might also be able to raise the rent a little.
Furnishings
This might be an option to consider for properties geared towards students or young professionals. These two demographics usually pack light and have little belongings of their own. By offering them a furnished space, you could attract them by allowing them to save most of the headaches that come with moving. Though you may have to invest some money initially, you can recoup it by renting the place at a higher rate since it’s furnished. Also, you don’t have to splurge on furnishing either. Simple matching and neutral pieces should be the way to go and can be acquired from thrift markets and garage sales.
Interior Colors
When it comes to the color scheme of a potential rental property, make sure to keep things neutral. You might have your own personal preferences regarding what the interior of the house should look like. But keep in mind that you will not be the one living in this space and that personal preferences vary. Therefore, to appeal to a broad audience, keep things as simple as possible.
Try and provide a space that feels open, inviting and airy and to do so, go for white, cream or light grey walls throughout with warm wood flooring or a wood finished laminate. Choose simple permanent fixtures such as switches and lights. Keeping things light colored will allow tenants to add their own splash of color to a blank canvas which is appealing to them as it allows them to personalize the space.
Refinancing
Always be on the lookout for better mortgage rates. If it makes financial sense to do so, i.e. you are able to lower the interest rate significantly without shelling out much in fees and other closing costs, you should do so. Especially if you plan to keep this rental property as a source of income for a while. If you are looking to expand your property portfolio, this might always be means for you to take some cash out for down payment on the next property. If terms are favorable, refinancing is always a great option to explore as it can save you a ton of money in the long run.
Incentivize good tenants
Finding good tenants is hard, let along the headache involved with advertising the place, showing it and running background checks etc. So when you find good tenants, find ways to keep them. Some of the ways you can incentivize them to stay is by offering to waive a month’s worth of rent if they sign on for another year. Or give them a discount on their rent. Especially consider this if your property is in an area where good tenants are hard to come by. Consider the alternative and the cost you’d have to pay in maintenance and headaches if the new tenant moving in didn’t pay you rent on time or didn’t take care of the place.
Conclusion
Real estate has been one of the best ways to invest your money and generate a steady source of income. Depending on how big or small your operation is (i.e. if you own multiple properties or a few or a single one) you can decide on whether you manage the place yourself or get a management firm to do so. Either way, rental properties are a great side hustle if you can afford to acquire them. These can also help you build a sizable portfolio over time if you are patient and are willing to put in the work.
Disclaimer: Like all other posts on Hustle Domain, please keep in mind that this post is for educational and entertainment purposes only and is not meant to be financial advice. Please practice caution and do your own research before investing.