By Laurence Jankelow, cofounder at Avail
Whether you’ve owned your two-flat duplex for years or you’re trying to decide whether real estate is the right addition to your portfolio, it’s important to think of rental property as an investment. Like any investment, your goal should be to maximize returns.
You don’t need to predict which neighborhood in town is about to see skyrocketing home values. Instead you should buy a property that has a lot to offer tenants over time, sustained revenue from rentals is a savvy way to earn money.
Once you have the property, you’ll need to know how to manage it successfully, from repairs to tax payments. In this post, I’ll outline four strategies to help you maximize your ROI.
1. Take the Time to Invest Wisely
When looking for an investment property, it’s important to consider its location, amenities, and construction quality. You should also look for a property that’s already fully rented. It’s wise to figure out the terms of current leases and get the current landlord to do renewals before the sale closes. Avoid inheriting open units where you won’t be earning money from day one.
Next, figure out what expenses you’re likely to face based on the property’s condition. For full due diligence, create a capital asset inventory that takes into account the age, remaining life, and replacement cost of each major appliance onsite. Then divide the replacement cost by the remaining life to figure out how much you’ll need to accrue each month to cover these replacements over time.
You’ve captured most of the ROI value at the moment of purchase. There are some things you can’t change and other things you’ll be inheriting (like deferred maintenance).
As a shortcut to figure out if the property makes sense from the moment of purchase, you can estimate that somewhere between 35 percent and 55 percent of the gross rents will need to go towards expenses each month, including real estate taxes, insurance, and maintenance. You can assume closer to 35 percent if the property is newer and well maintained, and 55 percent if the property has a lot of deferred maintenance.