Investment real estate is a great investment. It’s one of the best available to small, medium and institutional investors alike. It provides solid income opportunity, capital appreciation and potentially strong tax benefits. Merely purchasing a property and displaying a “For Rent” sign won’t get you what you want. To succeed, you must take a professional approach to managing your investment.

No matter if you have years of experience as a landlord or have just purchased your first real estate investment, the goal should be the same. You must minimize losses and maximize the return on investment (ROI) for the property. When you focus on the amount of income the property generates rather than solely on the monthly rent, you will increase total profit.

These five tips explain how:

1. Don’t Leave Money on the Table

Many landlords don’t understand the tax laws regarding rental properties, and as a result don’t make all the deductions that they can, losing out on valuable savings. What can you deduct? Landlords can claim all the maintenance and repair costs on their properties, insurance fees, business-related travel expenses, contractor fees and even home office space if they have one. Mortgage interest and the costs incurred when buying your properties are also valid deductions. These are called “current expenses” and the entire amount can be deducted in the same year the expense was incurred.

Money spent to increase the value of the property or extend its life is called “capital expenses” or “improvements” and can’t be deducted all in one year like current expenses can. Instead, they must be capitalized and depreciated over multiple years through annual depreciation. Here is a great article that lists the 15 top tax deductions for landlords as well as additional links to learn more.

2. Find a Great Tenant

With great tenants, you avoid the high cost of vacancies and tenant turnover. Rather than focusing on getting top dollar rent, focus on getting a top tenant instead. We mentioned the value of having great tenants in our previous article, and it’s worth a recap. According to Money Real Estate, every month of vacancy costs you 8.3% of your potential yearly revenue and readying the property between tenants (cleaning, painting, repair fees, etc.) can eat away at your profit for the year.

When looking for new tenants, do your due diligence. This means pre-screening all candidates by obtaining credit reports, employment verification, criminal checks (for all the states the applicant lived in for the last 7 years) and past rental history for all potential tenants under consideration.

When you do find a great tenant, make sure that you treat them respectfully by taking care of any issues promptly and professionally. A good tenant/landlord relationship keeps tenants from thinking about moving.

Not to be self-serving, but this is an area where third-party management companies really separate themselves from each other or from managing properties yourself. If you’re considering a third-party manager be sure you interview them on their process for finding tenants.

3. Charge Fees and Penalties

While maintaining a good tenant/landlord relationship is important, that doesn’t mean being a pushover. This is where many landlords, especially first time landlords, struggle. Everybody wants to be liked and it’s no different for landlords, but it should be. You must remember that your relationship is landlord/tenant and not landlord/friend. When you cross the line from landlord to friend, it makes it harder to enforce fees and penalties stated in the lease agreement. It also makes it a lot easier for your new “best friend” to ask for favors and leniencies when it comes to late rent payments or waiving any applicable penalty fees. Some fees and penalties that many landlords put into their lease agreement include application fees, lease termination fees, holding fees, extra occupant fees and pet fees.  

While collections are certainly not much fun, as a landlord it is part of the job. Why not make it easy and convenient for tenants to pay their rent online? Besides convenience, when tenants set up recurring payments, the excuse of “Oops! I forgot” no longer applies. It is also a convenient way for landlords to receive payment with multiple payment options, up-to-the-minute payment status (no more excuses like, “I sent it in the mail” or “I don’t know why you haven’t received it yet”). In addition, any late fees can be automatically added when due dates have passed. The more tasks you can put on autopilot, the better.

4. Crunch the Numbers

In the Penny Hoarder blog, a landlord of two one-bedroom condos says that “Since a rental property is an investment, it should be analyzed as such. It is more important to maximize return than to maximize income.” He suggests taking out a loan to pay for most of the rental property even if you have enough cash to purchase it outright. He explains why using his own rental properties as an example:

The total monthly cost of taxes, maintenance fees and insurance is about $525, and monthly rent is $1,250. That's monthly net income of about $725, or $8,700 per year. The property costs about $110,000. If I had put out the full $110,000 to buy it outright, I'd only be making about 8.3% per year on my investment, i.e. $8,700 of net income divided by an initial investment of $110,000. Instead, I only put $27,500 of my own money in (25% down payment) and borrowed the rest with a 30-year loan. The loan is about $400 per month. So adding that to the taxes, maintenance and insurance means my total monthly expenses are $925. With a monthly rent of $1,250, this means my monthly net income is only $325 a month, or $3,900 per year. However, that equates to a 14.2% return per year, i.e. $3,900 of net income divided by an initial investment of $27,500. So by taking out a loan instead of buying it outright, my income is reduced but my investment return is increased.

Of course, the downside is that borrowing money increases risk because any time the unit is unrented and not producing income, the loan still needs to be paid. A good accountant or institutional property management company can help crunch the numbers to determine what makes the best financial sense.

5. Avoid Costly Mistakes

A wrong decision or mistake can quickly turn a profitable rental business into a financial ruin. Not having insurance coverage is a mistake you want to avoid. Require tenants to purchase renters insurance so you don’t have to pay for damages that you shouldn’t have to. 

Renters insurance is fairly cheap (running about ten dollars a month) and covers most damages caused by flooding, faulty wiring, fires, theft, vandalism, falling objects and more. Renters with insurance will turn to their personal insurance plans for compensation while renters without insurance will turn to their landlord for reimbursement. Eliminate that risk by requiring tenants to purchase a renter’s insurance policy as a condition of the lease. Institutional property management companies not only require renters to have insurance but insist on proof of coverage within a few days of the tenant moving in, and so should you.

As a landlord, you need insurance coverage, too. The two most common insurance coverage options for landlords include:

• Property damage for both buildings and personal property related to fire, storms, theft, vandalism and tenant damage. Make sure the policy covers replacement cost and not actual cash value or market value which deducts for depreciation.
• Liability insurance protects the landlord if a tenant, visitor or trespasser gets injured while on their rental property. Depending on the policy and terms, liability insurance may cover medical payments, funeral costs, legal fees and judgment or settlement costs. Liability insurance also covers you if you neglected your landlord duties and as a result, the tenant suffered damages to personal property. A good example of this is if a tenant informs a landlord of a leaky pipe and the landlord doesn’t get it repaired. If the pipe bursts and damages the tenant’s personal property, damages would be covered by the landlord’s liability insurance. An article by FreeAdvice Legal does a great job explaining this scenario.

Other insurance policies available for landlords include loss of income or rental reimbursement, rent guarantee insurance, natural disaster insurance, employer liability insurance and landlord contents insurance to name a few. This unbiased article by FitSmallBusiness.com covers the different types of insurance policies available for landlords, the pros and cons and why they are important. We suggest you read it for a better understanding and a more thorough explanation.

You invested in real estate to make a profit. If your investment isn’t generating a 6-8% return, consider the five tips outlined in this article to improve your management skills. Done right, a rental property can be a very profitable way to generate monthly cash flow while building equity.

As with any complicated business or new endeavor, if you feel overwhelmed or are questioning your decisions, it’s always best to consult with a professional.