Ensuring you maximize your return on investment (ROI) is crucial for Landlords. In this blog we provide five definitive strategies on how you can optimize your investment outcomes, even if some of your costs have increased with inflation!
1) Hire a Professional Property Manager
The first step in maximizing your return on investment from property management is to choose an experienced property manager with a strong value-proposition. You find value by interviewing the property manager as to what service they provide for the cost. Be careful to evaluate beyond the cost of the management fee alone… some property managers have separate service fees and packages, a few might have unexpected markups elsewhere in the process. You get what you pay for, and you’ll end up paying far more for a property manager that can’t define their value proposition to you or if you don’t ask them too! A property management firm with a model that emphasizes expertise in each phase of the rental property lease cycle and can provide you a strategic plan to minimize your risks and liabilities and maximize your total potential benefit – that guidance and advocacy of your interests, if discernably professional, creates the highest probability for you the overall success of your investment property.
2) Rental Pricing Strategy
Optimizing the return on your investment requires a market-savvy rental pricing strategy affected by several significant internal and external variables. You’ll leave a lot of money on the table if the rent is too low. However, if your rental rates are artificially high and too static, you may learn later that the opportunity-cost of vacancy is often the greatest cost you will incur as a landlord. Your property manager must be able to advise you on the optimal rental strategies for the property to secure the highest return on your investment. You will make better business decisions as a landlord when you look at the annual rent less probable vacancy, and a real estate professional/property manager that has a strong track record of delivering results in the rental market can help you weigh the balance of higher pricing vs vacancy.
The “would you rather?” game is a smart litmus test for you to review before finalizing the rental listing price and other lease terms that may have magnetism for the potential rental offers you receive.
Example1: Would you rather your property earns $2800/month in rent, or $3000/month? Everyone in their right mind would say “$3,000/month” yet the decision matrix isn’t fair because it has no data points or calculation for vacancy.
If the question was more complete, look how it affects the outcome…
Would you rather your property earns $2800/month in rent with no vacancy over the next 12 months, or $3000/month with two months of vacancy (10 months of rent) over the next 12 months?
- 12 x $2800/month = $33,600 of rent revenue over the next 12 monthsOR
- 10 x $3000/month = $30,000 of rent revenue over the next 12 months
Even this example is too simplified because matters regarding tenant quality, potential for lease extension and other variables aren’t calculated, yet still the information on vacancy alone shows that you would now have $3,600 more net rent revenue for the year after considering vacancy in the pricing decision. The goal is to maximize your total net rent revenue for the time period the property is available for rent, which sounds so obvious, yet as we just demonstrated; you need to see past monthly cash flow and consider annual cash flow for your rental property – even before you set your initial price point!
3) Be Both Efficient & Effective with Maintenance Costs
You can create efficiency in the costs of sustaining your investments by implementing effective property management. A knowledgeable property manager will be aware of potential issues and be able to tell when anything needs to be fixed vs replaced. The right professional will also be able to suggest alternative solutions to the problem rather than just picking the most expensive reaction to a repair inquiry or emergency. Some property managers “buy in bulk” for you, whereas you represent one potential transaction for a contractor (i.e. plumber, HVAC contractor, painter, etc) – the property manager represents dozens, or potentially even hundreds of properties, they can leverage their purchase power with a contractor to whittle down to the best value in repair work necessary to solve the problem. BE WARY of property managers that perform repairs with their own internal handyman or have financial interests in each repair being performed… make sure your property manager has a fiduciary responsibility to you, and that the economics of their business model is logical.
4) Utilize the Latest Technology & Reflect on Your Investment
Understand the platforms utilized by your property management professional and be sure to emphasize your need for transparency, consistency, and organization of financial reporting to monitor the performance of your rental property. Many facets of property management, including income management, tenant screening, and maintenance, can be enhanced by automation and technology… and yet the technology that benefits you most should matter most to you.
The more transparency, the better, and the organization of the reporting reduces the cost of time as a participant in verifying the accuracy of your financial statements. Evaluating your investment is crucial to maximizing your ROI. You ought to be able to request in-depth information from your property manager on parameters affect your rental income and maintenance expenditures.
5) Finding the Real Estate Investment with the Highest ROI
Real estate investment can be an excellent strategy for building wealth, yet your choice of which investment property to acquire can significantly affect the trajectory of your ROI. Maximizing returns with a calculated risk strategy starts before you even become a landlord!
There are several actions you can take to assist in locating and profiting from the most successful real estate investments. Here are a few steps to discovering the best real estate investments with the highest return on investment:
- Research Different Markets: Researching different real estate markets is an essential step. You want to identify the markets with the highest potential ROI and understand factors like population growth, job opportunities, rental rates, etc. It’s important to note that no rental market is perfect, and each market has a variety of pros and cons that vary by investor. Be on the lookout for the “Realtor Paradox” (every Realtor will tell you why the market that they are in is the best market to invest in… and lucky for you they can help you make an offer and guide you through to closing!). Realtors can offer valuable advice and guidance, listen carefully to their rationale on why/how their market is the best one to invest in.
- Analyze Property Values: Researching the values of the properties in the area you’re interested in is necessary for a successful real estate investment, this will help you accurately project any potential returns. A legitimate real estate investment analysis will include a comparison of projected (or established) CAP rates for similar properties in the same market of the property of interest, AND then you can compare CAP rates for properties of interest in different markets. Additionally, understand and research any available incentives or tax benefits for investing in the areas you are most interested in (Federal “Opportunity Zones”, etc).
- Consider Local Amenities: Look into the amenities offered in the local area. Analyze the local schools, shopping, entertainment, and more to understand the area’s appeal. Properties in desirable areas may bring higher returns over time because tenants are drawn to these areas! This is the qualitative measure of a real estate investment, yet this is also speculative, be careful not to be seduced into an unprofitable choice because you were over fixated on local amenities.
- Choose Wisely: Determining if the property is a good investment requires an extensive study of the operational expenses after you own it. Just as important: recognizing that real estate is not normally considered a liquid-asset… once you own it, you’ll have considerable capital tied into the property until you sell it. Owning an investment property is a serious cash commitment that doesn’t end with the purchase, that’s where it begins!
Optimizing the real estate investment process and achieving the highest potential return on investment may seem challenging, yet your vision to be a successful real estate investor can be realized with a thoughtful strategy and when you’re partnered with intelligent real estate professionals in the acquisition and management processes.
Full Hearts & Full Homes!
Chambers Theory Property Management
Real Estate with Intelligence
