Owning a rental property (or several) is a great way to make passive income. Andrew Carnegie once said:
Ninety percent of all millionaires become so through owning real estate.
But before you go diving in, there are some things you should know about getting the best return. We will review some things to consider in our latest blog.
How To Get The Best Return on A Rental Property in Southern California
Within each geographical area, are sub-markets. A home on one side of the street might rent for more than a home on the other side. Make sure you have a good understanding of what these sub-markets are doing real estate wise. What sub-markets are seeing the highest rents in your area?
Add Perceived Value
Often times you can come up with a few low-cost upgrades that will make a big impact on the space. Of course, there is always a fresh coat of paint. You can do this yourself and completely revive a room. If cabinets are weathered, you can consider a fresh stain or coat of paint to give them new life. Update fixtures such as faucets, doorknobs, and drawer handles. In some cases, sheet vinyl can be laid right on top of old, dingy tiles. Small cosmetic fixes can go a long way to increase the property’s value.
Don’t Forget The Yard
Whether people are buying or renting, it is important that they get a great first impression of the home. A neat and tidy yard, with some low maintenance flowers, will make people want to come in and see more. Your curb appeal should be warm and inviting. In addition, you will want to spruce up the backyard or patio area, depending on what your particular rental offers. Treat the outdoor space as if it were another room in the house. Create another space people will want to use and it can turn into a huge selling point for your prospective renters.
Whats It Going to Cost You?
You should put serious thought into your fixed and variable expenses. Your fixed expenses include things like taxes, HOA fees, insurance, property management, etc. Your variable costs would be things such as repairs, vacancies and turnover costs and CapEx. CapEx is the IRS’s way of describing major repairs that are not part of routine maintenance. A new roof for example. It’s safe to put away about 6%of your gross rental income towards CapEx costs, 5-7% away for repairs and another 5% or so for vacancy and turnover costs.
Another trick investors use is the 50% rule. This simply states that 50% of your rental income will need to go towards expenses and maintenance on the property. If you follow this rule, you should be able to generate positive cash flow from your rental property.
Ultimately you want a low-maintenance tenant, who is timely with their rent payments.
- To ensure you are getting the highest return for your rental property, look for someone who wants to rent long term.
- Create justifiable rent increases. Make repairs and upgrades coincide with the lease renewal. Add new energy efficient windows at the same time you are raising the rent so the tenant will feel like it is a fair trade
- Condo’s can be a low-maintenance alternative to a single family home. Just make sure you factor in the HOA fees and that the community is approving of your desire to rent out the unit.
- Make sure you have an iron clad lease that covers EVERYTHING. Don’t get stuck paying utility or landscaping bills that should have been the responsibility of the tenant.
The more you rent out your properties, the less overwhelming it will all become. To get the best return on a rental property, make sure you are offering a house that you would want to live in yourself.