Tips for Maximizing Your Return on Investment on Your Currently Rented Unit
Renters Warehouse Blog
If you’re anything like most landlords, then your goal with your rental property is to generate a profit.
But what if you’re making money, but just not generating the returns that you’d like? The good news is that there are many ways that you can boost your rental’s ROI (return on investment) –and many of these things are steps that you can implement even if your rental is currently occupied.
How can you maximize your returns on your rental? If you’re looking to boost your ROI, then here’s a look at some things that you may want to consider doing –strategies to minimize your outgoing and maximize your returns.
Calculating the ROI on Your Rental Property
First things first, it’ll be difficult to boost your ROI until you know how to calculate it. Start by running the numbers for your property. What is your annual cash flow? What are your annual expenses? Start by taking your monthly cash flow –that is, the amount you’re left with after expenses, and then multiply it by 12 to see what you’re getting for the year. Next, divide it by your down payment –or, the amount of cash that you paid personally for the property. The resulting figure is your return on investment, or your cash on cash returns.
ROI = Annual cash flow / down payment
Now that you have your rental property’s ROI, let’s take a look at some ways that you can increase it. Starting with refinancing –one of the best ways to boost your returns.
- Refinance Your Property – Tap Into the Equity
First up, let’s look at refinancing your rental. One of the great benefits of owning rental properties is that you have the ability to use leverage, or other people’s money –to maximize your returns. With a property, you can go to the bank, and get a loan for part of the property’s value –you can then start generating returns on the total amount that’s been paid –not just the portion that you personally put in. This is something that you just can’t do with other investments, like stocks and shares.
Refinancing your property can be a great way to maximize your returns using leverage.
Often when you refinance, there’s a chance for you to pull some cash out. Many investors use this to then make a down payment on an additional property. This can be a great way to expand your property portfolio and start maximizing your returns, but you’ll want to ensure that you don’t take on too much leverage, it’s a good idea to leave some equity behind in your property –just in case.
Take a look at how this hypothetical rental property’s ROI drastically changes, depending on the financing used to purchase it:
Scenario #1: Let’s say you buy a rental property for all-cash. The property costs $100,000. You rent it for $1,000 a month, and after expenses, you take home $600 a month. $600 x 12 = $7,200
$7,200 / $100,000 (the amount you’ve invested) = 7.2% - Not too bad
Scenario #2: Let’s say you buy the same rental property for $100,000. But instead of buying it outright with cash, you make a downpayment of 25% and take out a loan for the remainder. You rent it for $1,000 and after expenses (including mortgage interest) let’s say you take home just $300 a month.
$300 x 12 = $3,600
$3,600 / $25,000 (the amount you’ve invested) is 14%. Even though your take-home is less, your returns are higher. You could potentially refinance this property in a few years, pull some cash out, and put it towards another property, further increasing your returns.
As a bonus, one of the great things about refinancing is the chance to secure a lower interest rate, which means you could see a significant amount that adds up each year.
More Tips for Increasing Your Rental’s ROI
Now, let’s take a look at some more tips for boosting your rental’s ROI. The good news is that your property doesn’t need to be vacated before you can implement these tips. Most of these are things that you can do even if the property is occupied.
- Treat Your Rentals Like a Business
First, it’s important to ensure that you’re treating your rental properties like a business. If you’re not doing this, then there’s a good chance that your rentals won’t be generating as much income as they could be. Treating your investments like a company means setting clear, achievable goals and putting systems into place to keep you organized, help you to manage your property, and allow you to ensure that you’re generating a profit. This also means establishing investment criteria and ensuring that you only invest in property that meets these standards –ones that will help you to reach your big-picture goals.
- Try to Reduce Tenant Turnover
One of the best ways to boost your ROI is to reduce your tenant turnover. Generally speaking, keeping your existing tenants happy is the best way to go, and is usually far more cost-effective than having to source new ones. It’ll save you from the expense of vacancies as your property sits empty in between occupants. Keeping tenants happy is easier than you might think. Maintaining good communication and keeping up with maintenance and repairs can go a long way toward keeping tenants happy. Likewise, creating (and sticking to) a rental agreement that both parties sign at the start of the tenancy is important for establishing expectations. You should also consider offering incentives to tenants for staying longer, such as offering discounts for tenants who sign a year-long contract.
- Collect Rent on Time
On-time rent collection can also help to boost your returns as well. When the rent is paid on time, there’s a lower risk of the tenant falling one or more months behind. Be sure your tenants know what to expect when it comes to paying rent. Make sure they’re clear on when it is due and what late fees will be levied for rent that is paid late. Ideally, you’ll want to get them to opt into a monthly bank transfer to help automate the process and cut down on late payments.
- Keep Up With Maintenance
A big mistake that many landlords often make is letting small maintenance issues slide. While it’s true that your ROI takes a small hit every time you make repairs, don’t defer maintenance. Putting off small repairs can result in bigger repairs down the road –that are usually much more costly to repair. One way to save money on repairs is by obtaining 2-3 different estimates from professionals who have been rated well online. This will allow you to ensure that you get the job done right the first time around and for the best price possible.
- Perform Regular Inspections
Regular home inspections can be a great way to catch maintenance issues or make changes to your property before issues become bigger than they are. It is also a good idea to check in with your tenants while you’re there to make sure everything is still going smoothly. Just remember that most states require landlords to give tenants notice (often 24 hours) before showing up.
- Consider Allowing Pets
To allow pets, or not to allow pets, that’s the question that most landlords ask. However, if you’re looking to boost your returns, then opening up your rental as pet-friendly could be the way to go. Some 68% of U.S. households own a pet. Not only will pets give you access to a larger pool of tenants, but you can also increase your rent. Often, landlords will charge a pet rent –an additional amount each month, for a pet. If you’re on the fence about allowing pets, consider taking steps to pet-proof your rental and protect yourself from potential damage by collecting a pet security deposit.
- Consider Upgrading Your Rental
Making upgrades to your rental can, in some cases, help to boost its value. These can help you to keep your current tenants happy. In some cases, these upgrades can help to boost your rental’s value, allowing you to charge a higher rent. Here’s a look at some upgrades –many of which don’t cost a lot, but can make a big difference.
- Update the Lighting
New lighting is a relatively inexpensive way to improve your rental’s value. If your rental’s light fixtures are looking dated and rusting, then it’s time to have them replaced. It’s a fast and easy way to help bring your rental up to date.
- Upgrade Old Appliances
Want to keep your existing tenants happy? Try upgrading one of their old appliances. Sure, a new appliance will take a short-term hit to your ROI, but it’s something that can quickly pay for itself. Once an older appliance starts breaking down, that means frequent call-outs for repairs –something that can add up quickly. Often, it works out more cost-effective to just replace the faulty appliance.
- Do Some Landscaping
A little bit of low-maintenance landscaping can go a long way in boosting curb appeal. Landscaping doesn’t have to be elaborate or high-maintenance, nor should it be. Some simple, trees, shrubs, and mulching along with low-maintenance perennials can help to spruce up your exterior and make your rental feel more inviting. Other relatively low-cost ways to create outdoor appeal include adding some exterior lighting, purchasing some outdoor furniture, and pruning back any sections of the property that have become overgrown or wild. Digging a shallow ditch and adding gravel around the perimeter of your house can help to improve drainage, keep the weeds at bay, and will make your property look much better as well.
- Replace Worn Out Hardware
Even minor updates like replacing the hardware on your cupboards and adding new faucets in the kitchen and bathrooms can be a fast, but effective way to boost your home’s appearance.
- Revisit Your Insurance Policy
Insurance is a necessary part of owning a rental property, but it doesn’t mean you have to settle for the first policy you find. When it comes to insurance, there are a number of different ways that you can save. Here are a few ideas:
- Shop Around
Going with the first insurance policy you find isn’t always the best idea. It often pays to shop around and get estimates from various insurance providers. You may be surprised to find a better deal by looking elsewhere.
- Reevaluate Your Policy
Every year or so it’s a good idea to reevaluate your insurance policy to ensure that you have adequate coverage and to make sure your premium hasn’t skyrocketed. While it takes time, reevaluating and asking if there are better deals available can often help to save you money.
- Bundle Policies
You might also consider bundling your insurance policies as many insurance agencies give discounts for having more than one policy. You can check with your insurance agent to see if they offer a discount for bundling policies, and if so, how much.
At the end of the day, you want to ensure that you’re making a profit on your rental. With the above tips, you’ll be able to calculate your returns quickly and easily allowing you to know, at a glance, exactly how your property is doing –and identify some easy steps that you can take to maximize your returns.
See also: The BRRRR Strategy Explained – Another great strategy for maximizing your ROI.
Looking to expand your rental property portfolio? Take a look at some rental properties for sale in our marketplace. Once you’ve found a potential property, make sure it checks out as a good investment. Head over to our Research Center to see data like housing appreciation, employment data, and migration patterns to assess the local housing market and get an idea about your long-term returns.
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