Despite challenging market conditions and persistent recession fears, rental properties still present promising investment opportunities for willing buyers.
Over the past decade, higher-income households accounted for an increasing proportion of renters, leading to a corresponding increase in rent prices and income for landlords.
However, these trends do not guarantee that all assets in a rental property portfolio will make money.
Numerous factors determine if a property will be profitable — and there are also a few things landlords can do to ensure consistent profitability across rental properties.
Being a successful landlord is easy when you follow time-tested advice.
How to Improve Rental Property Profitability
Know the local laws
It seems unnecessary to explain that investors need to conduct research before investing, especially for high-value assets such as real estate, but landlords can sometimes be swayed by factors that might not be in their best interest.
Some landlords wish to be more hands-on with property management or own rental property close to their homes.
This can lead them to look at purchasing a rental property in the same light as purchasing a property for themselves to live in — meaning they may overlook essential regulations in the area, such as eviction rules, rent control legislation, and more.
When buying a rental property, landlords must view their purchase as an investment, not a home purchase.
It is one of the essential factors for owning a profitable rental property.
Streamline Processes Across Properties
Each rental property is unique — its location, neighborhood, maintenance needs, and more will differ from others in the same portfolio.
Landlords who treat all their rental properties as identical assets can fail to use state-specific benefits or prepare for natural disasters in areas more prone to them.
However, standard processes — such as rent collection, tenant applications and screening, and income and expense tracking — can still be optimized and standardized across a portfolio.
Modern software makes it easy to consolidate administrative processes while still giving the investor clear insight into property-level financial performance.
Adjust Rent Prices as Needed
A “set it and forget it” approach can be a large part of the appeal of becoming a landlord for some investors. These landlords tend to be more susceptible to losses resulting from changing market conditions and may respond only when there is a significant impact on their bottom line.
As inflation and fears of a recession cause costs to increase, landlords must continually study prevailing market conditions and adjust rent where they can to maximize profit.
During the post-pandemic recovery in the first half of 2022, 75% of new and 50% of existing tenants saw an increase in the frequency of changes in the cost of the rent.
When tenant laws allow it, landlords must be willing to ask for higher rent in response to increasing property costs, particularly in high-cost-of-living locales.
What to Look for in a Rental Property
Following are a few key considerations to keep in mind when purchasing a rental property — whether you’re a first-time landlord or a seasoned investor.
The first step in finding a profitable rental property is choosing the appropriate location for your needs. The cost of living differs significantly from market to market.
Investors should review the vacancy rate in a particular city to get a good idea of demand in that location and the likelihood of finding good tenants.
Choosing the best location also depends on the kind of tenant you’re looking to rent to. Landlords that prefer to rent to families might want to consider crime statistics, schools, and parks in the neighborhood — while landlords looking to rent to young adults might look at college towns and properties with amenities.
Knowing What You’re Buying
Many things can impact the value of a home. Everything from the size, location, age, and amenities can factor into fair market value.
The number of bedrooms and baths for rental properties is vital in what you can collect for rent.
For example, Real Estate investors need to know the bedroom requirements for where they are purchasing.
You cannot legally advertise a higher bedroom count when the room does not meet minimum standards.
There are many initial expenses when purchasing a rental property. The most obvious cost is the price of the building itself — including the down payment and mortgage interest rate.
But landlords must also consider the maintenance or renovation a property needs before it can be considered ready to rent.
While simple tasks like repainting or carpet cleaning are relatively inexpensive, significant updates such as replacing the heating, air conditioning, or electric wiring will delay a rental property’s profitability.
Looking over a property comprehensively becomes more crucial when it’s being sold as-is.
In addition to setting the right rent price, effectively managing rental property expenses will make or break a landlord’s profits.
Investors must calculate the recurring costs they’re responsible for when purchasing a property — from property taxes and landlord insurance to maintenance and utilities.
Landlords must also be prepared for unexpected expenses such as repairs and loss of rental income during vacancies. A good rule of thumb for landlords is to have three months of expenses ready for emergency use when needed.
Why More Investors Are Purchasing Rental Properties
Rental property allows investors to build passive income while maintaining the value of their most important assets.
However, building and maintaining a profitable income stream from rental properties requires good decision-making from the beginning.
Rental property buyers must understand market conditions, common expenses, local real estate laws, and much more before pulling the trigger on a property purchase. Each factor directly impacts rental income and profitability and must be weighed in the balance for long-term success.
About the author: The above article on the most important factors when buying a rental property was written by Mike Bang. Mike is Head of Growth at Azibo, the one-stop-shop financial services platform for rental properties, providing a world-class platform for rent collection, banking, lending, insurance, and more.