As you start to do your research into investing in a rental property, you may start to think it is a great idea as an alternative investment strategy. But the real question is, how do you actually turn a profit?
While many people try to navigate this portion of their rental property expenses and rental property circumstances on their own, it is well-advised that you work closely with a lender to handle your financial responsibilities along with a property management company to help handle your landlord responsibilities. This will help you to make sure that you have all of your financial, legal, and ethical responsibilities covered.
So where do you start when trying to determine how to make a proper profit from a rental property? Take a look at these next few steps to get you started.
Gross Scheduled Rent
In order to actually make a profit from renting, you need to take into consideration your net operating income (NOI) and all of your other expenses. This is what is known as your gross scheduled rent.
Other expenses would include your:
- Maintenance Fees (this includes things such as finding your tenants or evicting them if need be).
- Vacancy Allowance
- Mortgage Principal, Interest, Taxes, and Insurance Payment
- Delinquency Fees (this is the cost when someone doesn’t pay their rent).
- Landlord Insurance
- Other Operating Expenses
As you start to take inventory of all your recurring expenses along with various unexpected expenses, you will start to realize the importance of having a reserve fund to bridge the gap to help you make a profit.
Let’s take a look at some of the expenses that could incur while being a landlord and how you can save money within each of these areas.
Handling repairs are a part of the job as a landlord. It is your responsibility to make sure that any issues that arise with plumbing, electricity, or other various maintenance issues are dealt with in a reasonable manner. Unfortunately, many of those maintenance issues that come up end up costing more than one might expect.
HVAC repair, for instance, can vary in cost depending on what the actual issue is. On average, newer home in good to great condition could easily spend upwards of $500 to repair. That is an extra expense you would need to cut out of your gross scheduled rent.
If you have the qualifications and experience to be able to manage these types of repairs, you may want to consider doing them yourself. Some states require that certain issues such as electrical maintenance, are handled by certified companies or electricians to be able to repair.
This is another reason why working with a property management company could help in the long run. They have the resources to be able to handle maintenance requests that come up and can arrange for someone within their resources to be able to address the issue appropriately and professionally.
Delinquency fees are when a tenant does not pay rent. This issue can be harder to predict and can easily be avoided when a proper tenant screening is done. However, situations can arise just like the COVID-19 global pandemic.
No one saw it coming and when it did, it hit everyone incredibly hard. Many people were unable to pay rent and landlords were giving grace periods for people in order to find ways to pay. Many tenants weren’t allowed to be evicted if they were unable to pay.
As a landlord, you will need to consider this expense as well. One month of a tenant not paying rent is only the minimum. If a situation where they do not pay rent happens once, there is a fair chance of it happening again. This will be another expense to deduct from your gross scheduled rent.
Mortgage Principal, Interest, Taxes, and Insurance Payment
Also known as PITI, your mortgage principal, interest, taxes, and insurance all end up equalling one of your biggest expenses as a landlord. These expenses occur annually so the amount will happen within a lump sum. Although many circumstances do allow for payment plans to happen such as your annual taxes however we suggest avoiding this if possible since these expenses can creep up on you after time.
You will also need to consider how rent prices fluctuate over time as well-meaning your taxes and other annual expenses will increase as well. You will need to account for this and raise your rent accordingly to ensure that you do not end up losing money or at best, breaking even.
If you hire a property management company to handle a lot of this leg work for you, it can alleviate not only the time and work you would be putting into it, you also would be saving a substantial amount of money as well.
Calculating Your Appreciation
Your appreciation is one of the biggest aspects people tend to forget. The appreciation of a home depends heavily upon the housing market along with the state of the economy. According to Zillow, houses appreciate at a rate of about 3% to 5% every year. Again, these are dependent upon various local factors over time.
This can drastically affect how you set your overall rent every year, as well as what you could earn on the home itself if you intend to sell at some point. You may be able to make even more money on top of what you were earning on rent from your tenants once you are ready to sell if the housing market is in your favor. This, in turn, could allow you to have more money to invest in another property for rental in the future.
At the end of the day, investing in rental property can be a major gamble. But if done correctly with the proper advisement and management, you could make a hefty profit. If you are in need of help in the San Antonio, Texas area, contact Green Residential, your local property management company that can help you make the most profit possible on your rental property.