As a real estate owner and investor you can profit from your real estate assets in essentially four different ways: cash flow, equity growth through loan payoffs, tax advantages, and property appreciation. Real estate has the unique benefit of allowing you to purchase homes that suit your specific financial and personal demands. There are several properties that are more focused on achieving one of these returns than the other. An investor with a sizable source of earned income, for instance, could prioritise properties with tax advantages and pay less attention to cash flow. Investors who are close to retiring can choose properties with a positive cash flow. And ultimately – everyone who invests hopes for growth and appreciation of your their investments over the years!
“How can I increase the profits on my real estate investment in each category?” – This is a question that successful real estate investors ask themselves frequently. In this blog article, we will go over more than ten of the most effective strategies to use rental properties to increase your return on investment.
1. Raise Rents
This is a no-brainer! Despite the fact that the majority of rental properties also have other sources of revenue, rents are usually invariably the main way to increase your returns. Real estate investors are prudent to start by realising that higher rent results in more cash flow.
However, one of the most typical problems experienced by property owners is setting the right rate and keeping the best market level rents after tenant turnover. Many landlords are hesitant to raise rents because they fear that their dependable tenants might depart.
This is a legitimate worry, but it shouldn’t stop as a home owner you from raising rents to market rate, which is one of the quickest and most straightforward ways to increase your cash flow. Of course, you should constantly seek out reasonably priced ways to upgrade the property and ensure that your rents are fair and competitive.
Instead of waiting two or three years and suddenly giving your tenants a significant boost, we advise slightly increasing the rental rate each year as is the market standard. This slower approach has the advantage that tenants are less likely to vacate because they are aware of the minor annual increase in operating expenses.
Most business agreements include annual rent increases or decreases based on a specified consumer price index. Apply this practical approach to any kind of rental property. If your rentals are already competitive with the market, consider improving the interiors of the property to support greater rents. Perhaps the installation of a deck or awning, a combination microwave / exhaust chimney over the stove, washing machine + dryer or other improvements could justify a higher rent. Increased market rentals can result from any upgrades that raise the standard of living or put the property on par with more expensive homes in the neighbourhood.
2. Reduce Turnover
Turnover is the single most crucial element in determining the costs of the majority of rental properties. Tenant turnover hurts the bottom line in both residential and commercial buildings. A vacated rental unit or home almost likely results in a loss of rental income – plus you’re saddled with higher maintenance, repair, and capital improvement costs to make the space ready to show a new potential renter. Tenant turnover can be decreased, which immediately enhances the Net Operating Income and cash flow, by signing long-term leases with quality tenants, keeping the property in top condition, and responding to the tenants’ needs.
Pre-leasing the rental unit is another practical method to minimise the loss of rent during tenant changeover. You can significantly reduce your lost rent and boost your cash flow if you can rent the property to a new tenant just a few days or weeks after the existing renter vacates. When a tenant gives you a notice to quit, you should ask for permission to access the property right away so that you can assess what needs to be done to prepare it for the next renter. Get the leaving renter’s cooperation so that you can start advertising and hunting for a new tenant.
3. Consider Lease Options
An arrangement known as a lease option gives the renter the right to buy the leased property for a set amount of time at a predetermined price. In slow real estate markets, sellers who do not mind renting out their property as well frequently offer lease options to generate more interest in the property and give even prospective buyers without a down payment the chance to one day own the same home after staying there for a year or two.
The owner of a rental property who is ready to give a lease with a purchase option has a lot of other advantages. The lease option agreement terms can be drawn up in such a way whereby the renter/buyer pays for a one-time option fee that you can keep if the buyer is unable to exercise the option, and you can frequently sell the property for a price over the going rate. Additionally, with a lease option, the renter / buyer often makes a greater monthly rental payment because a portion of the money goes toward the final purchase price. If the property’s present cash flows are negative, the larger monthly payments for a lease option may be more advantageous to you.
4. Develop a Market Niche
a. Senior Citizen
Senior-citizens-focused rental homes have long been in demand, and the demographics unmistakably support sustained focus on this rapidly expanding market niche. Many landlords find it challenging when senior housing targets folks who require specialised care and dietary services. However, there is a rising demand for facilities with social and recreational activities that are appealing to active seniors and don’t necessitate specialised knowledge or large capital outlays.
One of our clients has had luck renting out smoke-free apartments in Mumbai, of all places. A health-conscious nonsmoker resident doesn’t need smoke drifting into her rental apartment from her neighbor’s after a hard day at work in a smoke-filled atmosphere. This is just one of the many ideas home owners can do to make their homes more senior-citizen-friendly. The demand (and consequent occupancy) for such flats is high, despite the upfront costs of meticulous cleaning, repainting, and installing new flooring and window coverings.
b. Student Housing
Student housing especially in cities with a large number of educational institutes like Mumbai, Pune and Bangalore is also a fantastic opportunity. Some savvy real estate investors we know have converted all their investment properties into student housing andbelieve that the current market is ideal for remodelling rental homes since today’s college students prefer private homes with private bathrooms and high-speed Internet versus students of yore who would have been ok with substandard housing facilities.
5. Maintain and Renovate
Your property’s curb appeal, or the impression it makes, is crucial to your overall success. The most straightforward strategy to improve cash flow and value is to simply clean up and take care of the deferred maintenance that is present in most homes.
Simple supply and demand is one of the fundamental principles of real estate.
Your rental will remain occupied at the highest market rents if your property genuinely stands out and appears considerably nicer than comparable properties. That is the main focus of cash flow. In addition to the straightforward deferred maintenance, renovating the property is a fantastic method to boost cash flow (and value). The answer in this situation is to invest money exclusively on improvements to the property that have a speedy payback.
Here’s some sound advice –
The best internal return on investment for home rentals can be found in remodelling the bathrooms and kitchens.
Also many renters especially single women in urban areas worry about crime and thus access control for parking and good security at building entry can also be a benefit. The best return on investment for commercial properties typically comes from updating ageing interior common areas with higher-quality materials and fixtures that are more in tune with what one can find in co-working spaces like WeWork etc.
If you are fortunate enough to own a bungalow or a villa within a city, then it goes without saying that making landscaping upgrades is one of the most economical methods to raise the curb appeal and aesthetics of this type of home. If you wish to take serious action, ask your landscaping management company for recommendations or get in touch with a landscape architect. Read our past article on best landscape architects in India here – https://www.guptasen.com/top-ten-landscape-architects-india/.
6. Cut Back Operating Expenses
Evaluate existing running costs as one of your first moves after buying a rental property. If possible, you want to make improvements without having an adverse effect on your tenants.
You can find ways to cut costs by asking the power / gas utility companies to conduct an energy audit. The usage of hydronic systems and solar energy is becoming increasingly appealing thanks to new technology. Installing individual submeters to allocate and recover the cost from each renter based on her actual usage is now cost-effective due to the fast rising rates for water and sewer services in many sections of the country. Making your tenants directly liable for the costs of your properties is the best method to achieve resource conservation there. This not only helps you save money but also has lots of advantageous social effects!
Combining your different rental properties under one insurance policy is another excellent approach to save your operational costs while maintaining value. For further information on these aspects, talk to your insurance broker.
7. Scrutinize Property Tax Assessments
A review of the expenses for most rental properties indicates that the property tax expense is often one of the largest costs in owning real estate. Property taxes are frequently correlated with real estate values across much of the nation. Contact your local assessor and ask about seeking a reassessment if that is the case in your area and real estate prices are declining. Your property tax bill will be directly reduced by a lower assessment, which will directly boost your cash flow.
You may feel helpless against the bureaucracy, but remember that tax assessors have been known to make clerical errors or to fail to take all factors into account when valuing rental property. Contact your assessor if you believe that your assessment is excessive. If you support your argument for your viewpoint with thorough research and a compelling presentation, she might be open to making a change.
Other options include filing a formal property tax protest. Protests are frequently first heard by the local board of appeals or the assessor’s office. In many places, appeals may be made to a court if an issue persists.
8. Refinance and Build Equity Quicker
Remember that refinancing to a lower rate can have a significant influence on your cash flow even if you may have little control over interest rates and are at the whim of your lender unless you have a fixed-rate loan. Of course, choosing an interest-only loan or an amortisation schedule of 40 years can also lower your debt service costs and boost your cash flow, but these choices are exceedingly dangerous and are not recommended.
Through a refinance to a loan with a shorter term, you can increase the equity you accumulate. When you first buy a rental property, your rental income is usually quite limited, therefore you must use financing with 20 or even 30-year amortisation terms in order to meet your mortgage payments.
But after several years of ownership, you might discover that the cash flow has increased to the point that the house can support a greater mortgage payment. This occurs when you go from a long-term mortgage to a shorter-term one, greatly increasing the amount of principle reduction paid with each payment.
Verify that your loan does not contain a prepayment penalty before refinancing or making additional principal payments. Lenders may impose a penalty during the initial years of the loan since they rely on a specific rate of return on their investment and early repayment of a loan incurs additional fees. Furthermore, if they manage your refinance, some lenders will not charge prepayment penalties.
9. Take Advantage of Tax Benefits
The tax advantages associated with real estate differ from investment to investor, but for the majority of landlords, these advantages increase their profit. The capital gains exception for their primary residences offers considerable tax savings that even inexperienced real estate investors can benefit from.
If sellers meet the straightforward standards, this exclusion enables them to totally eliminate any income tax on their capital gain of up to a certain amount (check with your real estate lawyer for the latest update) in the case of a sale.
Every couple of years, the serial home-selling investment method can be employed to generate tax-free gains for investors who are willing to reside in the property while it is being renovated.
Large-scale residential and commercial real estate investors frequently use a simultaneous or tax-deferred exchange, which enables them to keep their money in the market and avoid paying taxes. Your income flow and wealth accumulation are better the more money you have invested in real estate.
Depreciation or cost recovery enables the owner to claim a noncash deduction that lowers the taxable income from the property. The value of the buildings determines the amount of depreciation because land is not amenable to depreciation. Aggressively assigning as much of the property’s acquisition cost to the structures as possible would result in a higher deduction for depreciation, which can be used to optimise the potential tax shelter offered by real estate!
Depreciation deductions are a noncash item, hence they frequently lead to a taxable loss even when the property actually has a positive cash flow. Even while you can’t utilise a taxable loss to immediately reduce other earned income, you can in years when you have passive income, like a successful taxable sale of another rental investment property.
Again – sit down with a knowledgeable real estate lawyer to know how you can work your way around the legalities and maximize your tax benefits. Here’s a list of top real estate lawyers you should have on your side if you are a serious real estate investor – https://www.guptasen.com/top-ten-real-estate-law-firms-mumbai/
10. Be Prepared to Move On
The majority of people who consider real estate do so with the understanding that appreciation is where the real money is to be found. Real estate has consistently shown to be an investment that both holds and grows in value. Even a modest annual appreciation of 5% has a significant long-term impact on your net worth.
However, factors like the state of the neighbourhood and the regional economy can have a significant impact on appreciation.
Because of this, real estate investors must do a comprehensive due diligence examination. However, even after purchasing a house, you can’t just sit back and let your investment grow as the neighbourhood around you declines! Be ready to sell and reinvest in a more vibrant region that offers greater upside potential if the neighbourhood you’re in begins to decline.
Add Value Through Change in Use
When real estate investors can boost their return on investment by enhancing value through a change in use, their entrepreneurial spirit is also rewarded. It is possible to repurpose land that isn’t currently being utilised to its greatest and best advantage, or as appraisers prefer to say, for its highest and best use, in order to increase its worth.
There are numerous typical methods to accomplish this, including:
A very effective technique to raise the value of real estate is to go through the process of getting the required approvals to utilise the land for a more beneficial purpose. Some land uses, usually agricultural, become less productive (or insufficient) as the region is developed in almost every city or town in the nation. The process of getting this land certified for a residential or commercial zone can significantly increase property value.
Conversion of use:
Although the idea of converting real estate to a different use is not new, real estate entrepreneurs have been putting the idea into reality more frequently lately as India’s cities and towns grow and the need for more housing arises. Other instances of change in usage include converting or developing rental apartments into homes for sale or converting old warehouses into lofts and offices.
This traditionally entails cutting up a bigger piece of undeveloped property into many smaller ones. The total amount paid out for each parcel exceeds the initial parcel’s worth by a significant margin. Another tactic is to build or find a home that can be divided into several lots, each of which would include one to four units.
Hope this article gave you some ideas on how to get the best ROI on your precious real estate investments. If you havent given the above information much thought in the past I suggest you get cracking on these actionable points ASAP because you could end up saving and increasing your cash flow from your real estate investments to the tune of lakhs and even crores of rupees – money which you may be losing right now because you haven’t given these points much thought!
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