Ask any self-made millionaire or billionaire for a list of the best ways to build wealth and generate income, and almost every one of them will put real estate at the top. It’s one of the single most versatile and lucrative investment vehicles … and, when properly leveraged, real estate can generate thousands of dollars in additional income every single year.
The harder question can be: What do you do with the income it produces?
The Best Ways to Use Rental Income
The great thing about rental property income is that you can employ it for a variety of purposes. Depending on your personal and professional objectives, here are some of the ways we recommend using your monthly profits.
Build Up an Emergency Fund
If you don’t already have an emergency fund in place for your rental property(ies), you should use at least some of your income for this purpose. Feel free to come up with your own definition of an emergency fund, but a typical example would be three to six months of base-level expenses in a savings account that can be easily accessed.
Thus, if it costs you $1,200 to pay the mortgage, cover taxes and insurance, and pay for the occasional repair, you’d want $3,600 to $7,200 in your emergency fund for that property.
Pay Down the Mortgage
If you don’t already own the property in cash, it’s wise to put the rental income back into the item in the form of additional principal payments on the mortgage. This may not be the most exciting way to use your revenue, but it’s the smartest option in the long term.
Think about how much more monthly income you could bring in if the property has been paid for in cash. If you’re currently bringing in $1,500 per month but your mortgage payment is $1,000, you’re making only $500.
But once the mortgage is gone, your income triples. From this point on, your investments start to snowball and the income becomes truly substantial.
Improve the Property
Are you maximizing your rental property’s value, or is there something you could do to enhance it? If there’s untapped potential there, returning your monthly income to the property in the form of upgrades, renovations, or additions could be highly rewarding — particularly if it enables you to increase the rent.
For most rental properties, money is best spent on adding a bedroom or bathroom, or renovating the kitchen. All of these upgrades will directly enhance the market value of your rental property. (Not to mention they also increase its resale value.)
Save to Purchase Another Property
One rental property is great, but what if you could have two, three, or more — each generating income on a steady basis? A lot of real estate investors use their monthly profits to save for the down payment on another rental. You could do the same.
In the beginning, the process is slow. Let’s say you own a property which nets you $400 a month. In order to save up $20,000 for a 20-percent down payment on a $100,000 property, you’d have to save diligently for four years.
But once you’ve acquired that second rental unit, the timeline accelerates. Now you’re putting away $800 per month. At the same price point, it would take only two years to buy the third property.
Then, with $1,200 per month in income, you would only need 14 months to have enough for a fourth property in the same price range. Before you know it, you have a portfolio of properties that generate thousands of dollars in monthly income.
Pay Down Other Debt
You don’t have to use your rental property income on the business. Another option is to use that money to pay down your personal debt.
For example, you could direct the money toward paying off a car or reducing the mortgage on your own, primary residence. Both are smart options!
Don’t overlook the fact that when you eliminate debt payments in your personal life, that will free up additional cash in your budget to direct toward further real estate purchases. Again, this can have a snowball effect on your overall financial picture.
Lower Your Tax Burden
Are you tired of getting slapped with taxes every April? Are you a high-income earner who has to pay a large percentage to the government?
You may benefit from using your monthly rental income to lower your tax burden. You’ll have to speak with an accountant to get proper advice on how to proceed, but there are plenty of strategies you can turn to for re-investing your profits with the primary objective of reducing your taxable income.
From basic strategies like investing in tax-deferred retirement accounts or health savings accounts (HSAs), to starting a business or giving to charity, you have a multitude of options to choose from.
Save for Retirement
Speaking of retirement accounts, you can always use rental income as your primary source of retirement planning. Not only can you put aside the profits in a retirement account or mutual fund, but you may continue to add properties to your portfolio in an effort to build up a sizable stream of passive income that can be tapped once you retire from your primary career.
Now’s the time to begin setting goals. What would it take to have $10,000 in monthly income after retirement? Do you need 10 rental properties, 20 properties, or one large apartment complex? Crunch the numbers and don’t be afraid to dream.
Finally, give yourself permission to enjoy life. Though you should definitely start by building up an emergency fund and paying down your debts, feel free to use some of the income for pleasure.
Take a vacation, buy a car with cash, or renovate your home. It’s your money, and you should be able to use some of it now!
Maximize Rental Income With Green Residential
At Green Residential, we specialize in providing Houston-area landlords with comprehensive property management services. From property marketing and tenant screening to rent collection, accounting, and repair coordination, our team of experienced professionals can help you with every last detail of your rental property business.
Please contact us today for your free property analysis!