You lose some, and you win some in the real estate business. One thing you don’t want to lose, however, is rental income. When owning an investment property, you want to avoid losing the cash under any circumstances.
The last thing you want is to find yourself investing in a negative cash flow rental property, all because you didn’t avoid miscellaneous expenses.
This is why we have set up a small list of simple costs you can avoid in order to find yourself being the owner of a positive cash flow investment property. Rental income is there for you to be made, so let’s avoid losing it from within our bare hands. Or bare pockets, in this case. Here are the worst ways you will lose rental income!
Farewell Rental Income – Poor Price to Rent Ratio
In the real estate world, the price to rent ratio is the ratio of the investment property price to the rental income. As one of our experts describes it, the price to rent ratio is specifically the “average property price in an area divided by the average annual rental income of the area.” We can express this by the formula:
Price to Rent Ratio = Average Property Price/Average Annual Rental Income
Real estate investors go by the three criteria when deciding on whether the investment property is a good or bad investment based on price to rent ratios. In specific:
- With a price to rent ratio between 1-15, it is better to buy your own home than to rent a property to live in. For a real estate investor this means that rental demand will be low, so this location is not a good idea for buying a rental property.
- Between 16-20, it is generally more affordable to rent property rather than to purchase one. From the point of view of a real estate investor, this means potential for high rental demand.
- A housing market with a price to rent ration above 21 means it is definitely better to rent a property rather than to buy a home, which translates into very high rental demand for real estate investors.
As you see, the price to rent ratio does not affect you directly as a real estate investor. Indeed, it impacts the decisions of renters and homebuyers in the market, which then translates into this market being a good location for real estate investments due to high rental demand or a bad place to invest in real estate due to low rental demand.
To learn how Mashvisor can give you the price to rent ratio and more real estate analytics, gaining you rental income, click here!
If you don’t have your price to rent ratios in order, you will likely lose more and more money every month. Less rental income means a sad real estate investor, and we don’t like it when you’re sad.
Adios, Rental Income – You Got Some Sour Apples
Bad tenants, we’re talking about bad tenants. Picking out the tenants you are keeping on your investment property is one of the most crucial aspects of owning a rental property. Think about it: Realistically, these are the individuals that will be giving you the main source of income from your investment property – your rental income.
Pick out good tenants. This doesn’t mean they need a perfectly squeaky clean slate, but they should be suitable. This means they should be capable of paying rent on time, have a stable job, have no major criminal record… you get the idea. We know this can be time-consuming and may cause your rental property to be vacant for a little longer.
However, it is worth it. The way we see it, having a bad tenant who doesn’t pay rent, causes damages to the space they live in, and has poor character is not worth whatever you get out of them. Don’t forget the eviction costs you may have to pay to get them out of the space in the first place. Having quality, good tenants is the much better choice, and will not cause you to have to say goodbye to your rental income.
“Hasta La Vista”, Rental Income – Holding off Maintenance
You know more than we do that you need to care for your investment property. To keep it fully functional and suitable for your good tenants to live in, you need to make sure everything is in order. We talked before about being handy and taking care of some of the minor issues yourself, but leaving off more general maintenance will cost you.
Things like roofs, HVAC systems, wiring, appliances, flooring, and so on all need to be maintained and kept up with. Whatever you are confident in doing yourself, do it. However, anything that you know needs a professional should be taken care of right away.
Putting off the damage will only cause more and more damage. More damage means more costs to fix, which translates into less rental income. Don’t neglect what needs care. Address the issue from the get-go, and everyone will be happy.
Goodbye, Rental Income – Not Taking Advantage of Your Tax Benefits
You can agree with us when we say one of the biggest financial advantages to owning a rental property is the tax benefits. This is a big one because you will instantly lose money if you don’t do them right. We know this doesn’t directly affect your rental income at the moment, but once Uncle Sam wants to give back to you, you’ll be thankful.
If you do your taxes correctly, you’re going to set up your work ethic so that the rental income you earn on the properties ends up being (almost) tax-free. Who knows, you may even get more money in tax benefits in addition to that. Do your taxes right, because they are bound to bring in some extra coin.
Related: The Right Way to Do Taxes as a Real Estate Investor
It’s Been Nice, But It’s Time to Go
We love talking to you about all things real estate, especially how to avoid losing your precious rental income. However, we love seeing you make rental income even more! That’s why you need to go out there and make the adjustments you need to avoid the costs that lead to less rental income. No more “farewells” or “sayonaras” to rental income. Instead, we want to say “hello” to rental income.
To learn more about how to say “hello” to rental income, click here.