Being a landlord seems like an easy way to make money, assuming you have the capital, some knowledge on real estate trends, and enough time to actively manage your property. But there are a number of obstacles that new landlords face when entering the real estate market for the first time. Among them, landlords frequently struggle to make their income consistent; some months, the rent you collect will far exceed your monthly expenses, resulting in a hefty net profit. Other months, you might end up in the negative.
Over the long term, a sufficient strategy can ensure these ups and downs are only temporary, but it may still be in your best interest to make your cash flow as predictable and consistent as possible. Fortunately, there are a handful of strategies that can help you achieve a more consistent income.
Step One: Ensure Consistent Rental Income
Your first step is making sure your tenants are paying you the right amount on time, every time. There are several things you can do to accomplish this:
- Screen your tenants carefully. Pay close attention to the type of tenants applying for your unit, and screen them. You’ll want to look at several factors here. For example, if income consistency is a priority, short-term tenants should be avoided, in favor of long-term tenants. Ask your tenants how long they plan to stay in the area. You’ll also want to make sure your tenants are able to afford this apartment, so ask for proof of income, where applicable. You can also check their references and credit score to see how consistent they’ve been about paying their bills and rent in the past. A single red flag shouldn’t disqualify a tenant immediately, but multiple red flags should make you wary.
- Price your units accurately (and stay up-to-date). You can also make sure you’re pricing your units accurately, and staying up-to-date on those prices. If you’re charging too much, you’ll experience more turnover and longer vacancies. If you’re charging too little, you won’t get enough to break even on your expenses. Pay close attention to how rental prices change in your neighborhood, and adjust your prices accordingly.
- Employ an effective rent collection strategy. You’ll also want to make sure you have a solid rent collection strategy. Ideally, you’ll have an automated system in place, or a system that makes it easy for your tenants to pay you. If they miss a payment or are late, you should be notified While it pays to be understanding of an occasional hurdle to on-time payment, you should also discourage late payments with a consistent late fee or similar penalty.
Step Two: Carefully Control Your Expenses
Your expenses are going to vary from month to month, especially if you’re considering renovations, but there are some steps you can take to ensure those expenses remain as consistent and predictable as possible. For starters, try to outline the expenses you can predict, and budget for them conservatively. For example, your mortgage, insurance, utility, and maintenance expenses might be $1,800 a month cumulatively; if this is the case, plan for $2,000, so an unexpected surge won’t affect your budget too much.
Then, plan for long-term and emergency expenses. You’ll likely need to budget for several thousand dollars of repairs, additions, changes, and upgrades every year, but instead of facing these charges as they come up, set aside a specific amount of money every month to deal with them. For example, if you plan for $6,000 of unexpected and more-than-average expenses in a given year, you can set aside $500 of expense contributions per month to deal with them, then withdraw from that account as necessary. It takes the sting out of major repairs and renovations.
Step Three: Avoid (and Prepare for) Vacancies
Tenant turnover and prolonged vacancies will wreck your cash flow, so it’s important to guard against them however you can. Keeping your tenants as long as possible will keep your cash flow uninterrupted. You can prolong the stay of your tenants by finding long-term tenants, providing strong perks and occasional upgrades, and responding to any tenant issues as quickly and proactively as possible.
That said, no matter how carefully you plan or how loyal your tenants are, you’re eventually going to have to deal with vacancies. At that point, your job should be filling those vacancies as quickly as possible. You can do this by marketing and advertising your property, pricing it competitively, and incentivizing tenants further with new perks, appliances, or features.
Step Four: Diversify Your Income
Owning one single-family property is going to provide you with inconsistent income no matter how carefully you plan. Accordingly, it’s in the best interest of any landlord to diversify their income. You can do that in the real estate space by investing in more units, or investing in different kinds of units; for example, you could upgrade to own a multifamily home, or a full apartment complex if you have enough cash. The more units in your portfolio, the less you’ll be impacted by a single vacancy, and the better you’ll be able to manage your expenses over the long term.
Of course, you can also diversify your income by offering peripheral services to your tenants. For example, you might offer onsite coin-operated laundry machines or an optional landscaping service. These can help you get more consistent income from each property without just increasing your rent prices.
If you’re interested in making your life as a landlord simpler, or ensuring your income and expenses remain as consistent as possible, one of the best steps you can take is hiring a property management service. Property managers can ensure your tenants pay you on time, help you find and screen new tenants effectively, and will make sure your expenses remain as consistent as possible. If you’re interested in learning more about how Green Residential can help, contact us today!