Ways To Increase Real Estate Rate of Return
If you own real estate investment property, then you know that small, incremental savings add up over the long haul. Conversely….small, incremental costs add up as well. This article will share five different ways to increase your yield or return on your investment properties. This article is not an exhaustive list but perhaps will reveal new ideas not thought of before.
1. Raise Rent or Lower Rent
This one is pretty obvious. It's a no brainer that if you raise the rent, of course, your return will increase. However, it's vital to keep tabs on the rental market in your area so that your rent is not too high or low. If it is too low, then you're missing out on an opportunity to collect more rent. If your price is too high, your rental unit may remain vacant longer than if you had priced it right, and a month or two of lost rent is far more costly and painful than pricing your unit a little below market so that the vacancy fills right away.
2. Refinance
Refinancing may seem like a no brainer if interest rates have decreased since you first purchased your property, but what about after you've been paying your property off for ten years. Let's say that you originally had a 30-year mortgage, and you're in year 20 of paying it off. What if you refinanced to a new 30-year mortgage in year 20? As an example, a $200,000 30 year mortgage at 5% interest would have a $162,000 remaining balance in year 20. If you refinanced to a new 30-year mortgage at 5%, your monthly payment would go from $1,073/month to $869/month. That's almost 200 dollars of extra cash flow that you could use or roll into your next rental property.
3. Self-Manage
If you hire someone else to manage your property, they are going to take anywhere from 8 to 12% of the gross rents. On the one hand, this is good because it will motivate your management partner to keep the property occupied. If you aren't collecting rent, they aren't getting paid. However, on the other hand, this is a chunk of change! If you eliminated this expense, you would be sure to add 1 to 2% to your long term rate of return or IRR. But then again, to do this, you'll have to pay with another scarce resource, which is "time." As with anything, it's a balancing act.
4. Maximize Tax Deductions
A large percentage of first time rental property owners are unaware of the tax deductions and advantages that get afforded to them as real estate investors. Any expenses that get used in the managing of the property, whether that is maintenance, advertising, or "fill in the blank" can be deducted against the gross income generated from the property. Be sure to save all receipts for all expenses so you can have proof in case there is ever an audit.
Also, there is this thing called depreciation, which, although it sounds like a bad thing, is a beautiful thing for real estate investors. When you own real estate as an investment, the IRS allows you to deduct a certain percentage of your home's original value each year from income. Depreciation is what we call a "non-cash" expense because it doesn't actually cost you anything. When this gets used in conjunction with your other tax deductions, you can end up saving hundreds if not thousands in taxes each year.
5. Add An Extra Bedroom
Adding an extra bedroom isn't always a good idea because, first and foremost, the numbers have to make sense. If you don't increase rent enough to justify the cost, then don't do it. The ability to raise rent is going to vary from market to market as well. Some people like to throw in the extra bath as well, but again, it has to make sense.
One investor uses a rule of thumb where if the added bedroom doesn't pay for itself in 4 years of extra rent, then he doesn't do it. Another investor likes to create basement egress windows so that an extra room in the basement qualifies as an extra bedroom when it's time to sell. Whatever way you want to do it, adding additional living space is always going to create potential increased rent opportunities.
Conclusion
These are five ways to increase that return on rental property. The limit to ways you can increase your profits on your property is as limitless as your creativity. That is one of the great things for the creative personality types in real estate.
It would be advisable that as you are looking at ways to increase returns, that you have a way to track how different ideas might affect your long term rate of return. That's where this rental property investment calculator from IQ Calculators becomes extremely useful. After all, it's a lot more fun increasing your rate of return when you can measure it.
