December 31, 2013
You’ve purchased an investment property and it’s doing all right, but it’s time for your rental property to start generating more cash flow. After all, your taxes and insurance keep going up and the cost of repairs is cutting into your profit margin.
As with any other investment, there are two primary ways to increase your return – by increasing your income or lowering your expenses.
Increasing Income
1. Raise the rent
How long has it been since you’ve raised rents on your property? Are your rental rates keeping up with local market rates?
Even if you’ve increased rents recently, use each vacancy as an opportunity to raise the rent on a particular unit for new tenants. Make regular, anticipated increases to long-time tenants. Make sure, however, that any rental increases won’t be offset by increased vacancies.
A $50 bump in rents on a $500 apartment sounds great, but if it means it stays vacant for an extra month, it will take you 10 months to recoup that loss.
2. Make improvements
There are several inexpensive ways to improve the appearance of your property that will justify rental increases. Enhancements as simple as adding shrubs, replacing old carpet, updating an appliance, or repainting the trim can help justify an incremental increase in rent.
For tax purposes, separate the costs of repairs and improvements, and keep accurate records. Repairs made to your rental property can be deducted from taxable income, but improvements made to rental property are not deductible. Improvements that better your property can be capitalized and depreciated over time, with records maintained for when the property is sold.
3. Enforce late charges and bad check charges
If you haven’t been doing this already, start now. You don’t want your tenants to think it’s okay to pay late. After all, your bank requires you to pay your mortgage on time.
One way to be sure your tenants pay on time is to increase rent by $50, but offer an incentive ($50 discount) for paying on time. Be sure to also include a late charge if rent is received after a specific date, for instance the 7th of the month.
4. Install a coin-operated washer/dryer
Coin-operated washer/dryers can be added to a basement or other common area. A two-unit set typically brings in $10 per unit each month (more for apartments with children). Even if you opt to lease your machines (with income going to the leasing company), the convenience of on-site laundry facilities may justify rental increases.
5. Rent unused space
If you have a shed, garage or basement that’s not being used, rent it out to tenants or others. Be sure to safeguard tenants and their property, however, by not allowing non-tenant access to common areas.
Lowering Expenses
6. Review utility bills
Consider conservation measures such as plumbing repairs to cut down on water usage, timers on lights, etc.
In particular, if you’ve seen water usage increase significantly, you should suspect a plumbing issue. Ask tenants to promptly report any leaking faucets or toilets, and follow up on those reports immediately.
7. Consider transferring utility charges to tenants
If you’re currently paying for electric or gas charges for your tenants, consider having separate meters installed and making tenants responsible for their own utility costs.
When prospective tenants evaluate a property, they look primarily at the rental rates, not utility charges.
8. Try to get real estate taxes lowered
If you believe your property taxes are too high, go to your county tax assessor and ask to have your taxes lowered. The assessor will take your net operating income into account, so bring along income and expense reports to justify your request.
9. Review your service contracts
Consider managing the property yourself if you aren’t already, or mowing the lawn if you currently pay someone else to do it. You could also possibly pay your children to do some of these chores for you.
10. Reduce advertising costs
Take advantage of listing your property at no cost on Craigslist as well as placing flyers in area churches, laundromats and community centers. Be sure to let your best tenants know a rental is available and even consider offering a small referral incentive. You’ll not only save money on advertising, but you’ll also gain loyal tenants in the process.
By carefully reviewing your expenses and looking for ways to increase the income from your property, you may find several ways to give the owner a much-deserved raise.
This article was originally posted on December 31, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.