The number one reason to venture into the world of real estate investing is the potential for profit. Unfortunately, every market is different. There’s no “one size fits all” roadmap to show you how to make money from your investment properties.
But there are smart strategies that you can employ. Let’s look at some of the top ways you can maximize your profits from real estate investing.
Find Emerging Neighborhoods
The easiest way to make money with real estate investing is through appreciation. In a hot market, trendy neighborhoods are going to be at the top of their price point. Even if you’re lucky enough to place a winning offer, chances are you’ll have to pay top dollar. That won’t make it easy for you to maximize your profits.
Instead, check out properties in emerging neighborhoods. Areas with low crime rates and good schools that are located near in-demand areas might be a better bet. Prices will be lower, meaning you’ll have a greater potential for earnings.
Budget Your Rehabs
Even if you don’t buy an extreme fixer-upper, chances are you’ll be putting some money into the property. A little TLC can go a long way towards a higher rent — and increased earnings for you. But overspending on your chosen renovations can quickly cut into your profits.
Instead of buying all top-of-the-line materials, look for a balance of quality and value. Look at options for fixtures, counters, flooring, and anything else that needs replacing. Same goes with any appliances you need to replace.
However, don’t get the cheapest products just to save money. You could end up having to replace them sooner. And that might end up costing more than having bought a mid-priced product to begin with.
Stay on top of Maintenance
Minor repairs can turn into major headaches if they aren’t taken care of quickly. Staying on top of monthly or annual maintenance issues can save you hundreds (or even thousands of dollars), plus a lot of stress. Even something as simple as peeling window caulk can end up costing you hundreds if a severe thunderstorm hits at the wrong angle.
Add regular inspections into your rental leases, so you can nip any maintenance issues in the bud. It’ll be up to you how often you want to do a walkthrough, but most experts recommend anything from quarterly to once a year.
Have Cash for Unforeseen Expenses
It’s tempting to use all your cash reserves to buy multiple properties. But part of being a real estate investor is being prepared for surprises. It’s a good idea to always keep money in the bank for those occasions.
You never know when an appliance will need to be replaced or your HVAC will need repair work. As the landlord, those expenses will fall on you. You’ll need to have cash available, or you’ll end up going into credit card debt to make those repairs.
Foreclosures have long been considered an easy way to buy a property for less than its value. But that isn’t necessarily the case anymore. With the popularity of home improvement shows and online tutorials, many home buyers are ready to DIY their next home. This means that even foreclosure auctions can be filled with competing buyers.
And even if you place the winning bid on a foreclosure, it can still be a tricky situation. If you’re lucky, you might be able to get a list of addresses ahead of time, but you won’t be able to inspect the interiors. You’ll have no way of knowing for sure what you’re getting into and might end up spending thousands on repairs.
Go for a Larger Down Payment
The larger your down payment, the lower your monthly payments. And if you can put 20% down on your investment property, you’ll avoid having to pay PMI. A lower mortgage and no PMI can lower your monthly payments by hundreds of dollars.
The lower monthly payment is crucial because you never know when you’ll be faced with a vacancy. You might have to do some renovations when a tenant moves out and not be able to rent your unit for a month or two. Or you could be faced with an unexpectedly long vacancy between tenants.
If you can’t cover the mortgage on your own for those few months, you’ll risk falling behind on payments.
Cut Back Operating Expenses
As a landlord, you’ll have to carefully decide which expenses you’ll cover and which ones the tenant is responsible for. Some landlords include utilities, lawn care, or even pest maintenance in their monthly fees. It may be more appealing to some renters, since they know upfront what they’re paying per month. Other renters might be turned off by the high monthly payment.
But regardless of what services you pay for, try to keep them as low as possible. Energy efficient lighting can help you save on electricity. Low-flow showers will reduce the water bill. And if you work with a landscaping or pest control company, you can try to negotiate their fees or find someone less expensive.
The less of your investment income that you have to put into paying bills, the more quickly you’ll build your wealth.
Carefully Screen Tenants
You won’t be able to make money from your investment property if your tenants aren’t paying their bills. And perhaps the easiest way to avoid that is by carefully screening your tenants.
As a landlord, you have the right to check your tenant’s credit history, verify their income, and run a criminal background check. You’ll also want to call past landlords, for a more personalized review of your tenant. While not perfect, it’s a way of finding red flags before you find yourself with tenants who don’t pay on time or cause property damage.
There are plenty of online services you can use for background checks, and they are typically inexpensive. But the amount of money and stress they can save you makes them money well spent.
Your real estate investing career has the potential to generate high profits. These tried-and-true strategies can help ensure your financial success with your properties.