Buying multiple real estate properties is the best path to making money in real estate and being wealthy. It can be hard to achieve financial freedom from only a single investment property. However, many property investors fail to go beyond acquiring their first investment property. This is usually because most real estate investors don’t know how to make money from a rental property to buy another one.
To have enough money to acquire another rental property, you will need to increase your cash flow. Your rental property needs to provide you enough income to cover your expenses and not be a drain. There are many different strategies you can use to increase your cash flow, but here are the best tips on how to make money from a rental property to buy another property.
1. Choose the right rental strategy
The choice of rental strategy can play a huge role in the success of a real estate investor. It will determine whether the investor will be making money or losing it. So, make sure you choose the optimal rental strategy. Mashvisor’s rental property calculator can help you with this (Learn more here). You can also consult with other experienced and successful real estate investors. For instance, owning a rental property using the long-term rental strategy in a tourist destination may not be the best choice. Instead (if Airbnb is legal there), you might consider renting out the property as an Airbnb rental to take advantage of the tourism and enjoy a high Airbnb occupancy rate and positive cash flow.
2. Know your market rental value
The first tip on how to make money from a rental property to buy another property is knowing your market rental value. You ought to research your real estate market by looking at comparable rentals (rental comps) in the neighborhood. To stay competitive, you need to set a fair price for your rental rate. If you price your rental property below the market value, you could potentially lose a lot of money each month that could have increased your cash flow. On the other hand, overpricing your rental property could lead to a higher vacancy rate until you drop the price.
Learn how to determine the right rental rate for your investment property by reading: How Much Should I Charge for Rent?
3. Find the right tenant
Another strategy for how to make money from a rental property is selecting the right tenant. Choosing the wrong tenant will often do more damage than good. Your investment property will only have a positive cash flow if the rent payments are made in full and on time. A tenant who defaults or pays rent late could potentially cost you a lot of money each month. Apart from your rental income drying up, you could also be subject to costly eviction fees. This could eat up your profits.
Tenant turnover and vacancy costs are two of the costs that are often overlooked by landlords. To avoid losing money in this way, seek out long term tenants and also work to retain them. Ensure that you perform thorough tenant screening to find quality tenants who will pay their rent on time. Take your time in running background checks to find tenants that have a good history and a stable source of income.
Related: 8 Things That Make a Good Tenant
4. Improve the rental property
Increasing the value of your investment property can increase your rental income by a few hundred dollars monthly, thereby improving your cash flow. The best way to do this is to make any necessary repairs and improvements that will make the rental property more appealing to potential tenants. This will allow you to charge more and therefore make more rental income and positive cash flow.
5. Monitor rental expenses
Another tip on how to make money from a rental property is to monitor and reduce rental expenses. One common mistake beginner real estate investors commit that often leads to negative cash flow is underestimating the operating expenses of a rental property and failing to monitor them. There are fixed operating expenses like taxes, mortgage, and property insurance which are easily calculated. However, there will also be unexpected costs of owning a rental property like repair and maintenance which can be tough to accurately gauge.
When investing in rental properties, ensure that the total operating expenses fall below the total gross rental income that you receive. You cannot expect your rental property to have a positive cash flow if you are spending too much on operating expenses. Consider saving money by cutting down on unnecessary costs. If you are providing services and utilities like trash service, gardening or water to your tenants, they can eat into your monthly cash flow. If the utilities are too expensive to provide, consider dropping them or passing them to tenants.
Also, if you can do some repair and maintenance work yourself instead of employing a professional contractor, you can save a lot of money. You also don’t have to hire rental property management if you can manage the property yourself. If you have only one or two rental properties, it might be wise to manage them yourself if you have the time and are willing to learn/have the proper skillset.
6. Offer additional services
Income from a rental property does not just come from the monthly rents. Upselling is also another way for how to make money from a rental property. A rental property owner can choose to offer additional services that can also generate income. This may include laundry services, gym memberships, cable and internet services, and even parking spaces. You can make more money from such services and use it for the purpose of buying another property.
The Bottom Line
Starting a rental property business with one property is usually not very hard. The challenge comes when you want to raise money to buy another rental property. As a beginner real estate investor, you ought to know how to make enough money from one property to use it for buying another. Making more money from your current investment property will provide the necessary cash flow to pay off your mortgage and increase your equity in the property. You can then tap into your rental property’s equity by refinancing to buy another property. You will be able to borrow money from lenders against the equity you have in your current property and use it as a down payment for a second rental property.
Once you follow these tips and are ready for buying a second investment property, start your search here to ensure you find another one that provides positive cash flow!