In order to become a profitable real estate investor, you need to dedicate time and effort to manage your financial situation. As a landlord, you have to handle rental income and spend money on maintenance, repairs, taxes, and other expenses related to property.
While some properties generate more income than others, regardless of the type of property you own, you can optimize your return on investment. The key lies in how you manage your finances. The more effectively you manage rental income and expenses, the stronger your profitability.
There are multiple avenues for profit in real estate. For example, you can rent out properties, renovate and sell, or engage in online investments. These are all viable ways to make money, with renting out properties being the most stable source of income.
If you spend too much time on short-term investments, you may not have the capacity to expand your rental property portfolio.
Owning rental properties may not bring immediate cash flow, but it is the only strategy in real estate that can build long-term wealth. Failing to accumulate long-term assets may result in constant hard work for your investment returns, leading to exhaustion and inability to manage properties.
While diversifying funds across various real estate sectors to find the best solution may be tempting, managing multiple rental properties simultaneously requires careful selection of investment targets.
If you want to explore other investments, you could consider hiring a property management company to handle maintenance, freeing up your time. However, investing your time in acquiring more rental properties may still be a wiser choice.
Attempting to do all repair work yourself or enlisting friends for help may ultimately turn into a disaster. If you are overwhelmed, or if your friends lack the necessary experience, accidents could happen. Eventually, you may have to hire professionals to fix the initial problems and errors, leading to high costs. Such decisions can significantly increase maintenance costs.
Hiring professionals for maintenance and repairs in the following areas is essential:
– Plumbing
– Roofing
– Heating, Ventilation, and Air Conditioning (HVAC) systems
– Electrical work
– Liquefied gas equipment
As an investor, you don’t have time for DIY maintenance. If you choose to hire a property management company, they can handle repairs and maintenance by commissioning suitable professionals on your behalf. When you sign a contract with a professional management company, they already have established relationships with local repair companies, ensuring you can access professional services at discounted rates.
Avoid being caught off guard by a hefty income tax bill. From the moment rental income is received, you should set aside taxes at an estimated rate, managing rental income tax obligations from the source.
Your income tax rate will be between 10% and 37%. Tax professionals can help you estimate the amount due. Quarterly tax payments are necessary, and by setting aside funds at the time of income receipt, you can easily ensure timely full tax payment.
The simplest way is to open a separate bank account for tax purposes. This way, you won’t misjudge available cash balances, and every cent in your tax account should remain untouched.
Have you set up a dedicated savings account for daily expenses? If not, consider establishing one as soon as possible. Even if you have reserved a portion of funds for taxes, additional funds need to be set aside to cover repair and insurance costs.
Some common repair projects can be very expensive. For example, a leaky roof that has been unattended for years. If you delay addressing it, you may eventually need to dismantle the roof, replace rotted plasterboard, and rebuild it. Leak issues must be dealt with promptly to avoid additional costs of thousands of dollars.
When a tenant reports the need for repairs, sometimes you only have ten days to address them. Emergencies such as winter roof leaks, water supply interruptions, water heater malfunctions, etc., fall under urgent repair projects. Most states require such repairs to be completed within 24 hours. As for other maintenance issues like broken windows or malfunctioning garage doors, repair deadlines are typically set at ten days.
You cannot anticipate all the repair requests made by each tenant. Some repairs may be inexpensive and easy, while others can be costly. It’s impossible to predict the next repair needed.
Set aside 30% – 50% of all rental income for expenses. If you have already set aside funds for taxes and insurance, add additional funds for repair expenses to ensure you save at least half of the rental income.
Most importantly, deposit this money into an account that generates a return, no matter how small. Every dollar will help, and as the account accumulates a sufficient amount, even a small return rate will quickly build up.
Your rental property doesn’t always need the latest and most stylish bathroom fixtures, lighting, cabinets, or appliances to generate profit.
The interior decoration of a rental property should match its style, but it doesn’t need to be overly expensive. If a renovation project does not enhance your rental income, it might be a waste of money.
Some renovations are necessary for tenants, while others are not. For example, the following renovations are worth the cost:
– Installing handicap accessible kitchen cabinets for disabled tenants
– Rearranging small bathrooms to optimize the toilet, sink, and shower layout for daily use
– Repairing concrete driveways
– Leveling and laying sod in the backyard
– Installing ceiling lights in areas without natural light
– Adding shelves in closets
– Installing storm shelters in areas prone to tornadoes or strong storms
– Upgrading air conditioning systems (HVAC) to more efficient models
On the other hand, the following renovation projects do not contribute to increased rental income:
– New kitchen cabinets
– Installing water-saving toilets
– Smart appliances such as washing machines, dryers, refrigerators
– Replacing a perfectly functional old oven
– Replacing exterior siding purely for aesthetic reasons
The basic principle is that renovation projects should directly contribute to increasing rental income.
Tax regulations are complex, and what you believe to be correct tax filing procedures can suddenly change. Incorrect reporting could result in substantial fines and penalties, severely impacting your profits.
It is advisable to consult with tax professionals to handle your state and federal income tax filings. There are many details that real estate investors need professional knowledge to understand. For example, the (deductible) losses from your rental income are subject to passive activity loss rules.
If your MAGI (Modified Adjusted Gross Income) is below $100,000, you can deduct a maximum of $25,000 in passive losses. However, if your MAGI exceeds $100,000, for every $2 over, the $25,000 deduction decreases by $1 and phases out entirely when MAGI reaches $150,000.
There are other intricate rules that tax professionals can help clarify. However, due to severe penalties for incorrect tax payments, entrusting these matters to professionals is wise to prevent unnecessary erosion of profits.
At some point, you will encounter tenants with disabilities who will make reasonable modification requests, and you may have to bear these associated costs.
While landlords have an obligation to provide convenience for disabled tenants, not all requests must be obliged. While you have a legal responsibility to make specific modifications, you also have the right to refuse a request and provide a lower-cost or less invasive alternative.
For instance, a tenant may request you convert a dirt path to a concrete sidewalk because the dirt path becomes uneven and muddy in the winter and spring. However, constructing a concrete sidewalk and pathway is expensive. If your tenant simply needs a stable ground, there are other options. For example, you could hire professionals to level the ground and lay compacted gravel.
If your tenant requires a sturdier surface than gravel, you can substitute asphalt or crushed stone asphalt for gravel. While the laying process is similar, crushed stone asphalt is much more solid than gravel—and cheaper. When compacted to a depth of 4 inches, it hardens into a surface almost equal to standard poured asphalt.
When there are no other satisfiable solutions for a tenant’s disability requirements, you may have to construct a concrete pathway for them. However, when faced with an expensive request, try negotiating—it could involve thousands of dollars in cost differences.
Late fees may not make you rich, but they can effectively deter tenants from falling into the habit of rent arrears. If you are a new landlord, do not let tenants withhold rent and evade late fees. Continually pursue late fees, and if a tenant refuses to pay, do not compromise.
Late fees will impact your income because once you allow tenants to avoid paying them, they will believe they can delay rent without consequences. Giving in once sets the expectation of forgiveness for each overdue payment. Rent arrears can disrupt your cash flow and serve as a warning sign that you may have to evict the tenant.
Do not hesitate to evict bad tenants. As soon as you can fill out the necessary documents, initiate eviction proceedings. Following the laws of your state, serve tenants with a formal “Comply or Vacate” notice, clearly stating the violations they need to correct and assigning a compliance deadline as warranted by the law.
If the tenant fails to comply, begin the eviction process immediately. Eviction proceedings involve the court and take time, so the sooner you start, the better. If the tenant eventually complies, you can change your mind and cancel the eviction hearing at any time. However, most tenants facing eviction continue to violate rules throughout the process.
Each day you allow a bad tenant to stay in your property costs you a day of income. Make sure to get them out as soon as possible and replace them with more reliable, quality tenants.
Owning rental properties is a great way to accumulate long-term wealth and secure your financial future. The key to profitability, like any industry, is reducing expenses and maximizing income.
Real estate investing is not a get-rich-quick scheme, so from the outset, you must closely monitor finances. Avoid wasting money on unnecessary expenses, such as brand-new granite countertops or luxurious lighting fixtures.
Keep expenses low, reduce renovation costs during tenant turnover, and decisively evict tenants who take advantage of you.
The original article was published on the Due blog website and translated for republishing by the English version of “Dajiyuan Times.”
This article represents the author’s views and opinions and is intended for general informational purposes only, without any recommendation or solicitation. Dajiyuan does not provide investment, tax, legal, financial planning, real estate planning, or other personal financial advice. Dajiyuan does not guarantee the accuracy or timeliness of the content.