As a property manager, you make money if your rental properties are making money. That’s because typically a property manager is paid a percentage of the rental income. So whether you are managing income-generating assets such as condos, multi-family homes, apartments or single-family homes, your #1 goal should be to maximize the return on investment (ROI). Good real estate management is all about working with rental property owners to maximize ROI on rental property. The higher the ROI of the rental property, the happier property management clients will be, and the more money a real estate manager or property management company will make. This will inevitably result in the growth of your business.
What Is Return on Investment in Real Estate?
You probably understand what return on investment means in the general business world, but you should also be clear on how it works for rental properties.
Return on investment is the ratio between the net operating income and the cost of investment. The ROI formula looks like this:
ROI = Net Operating Income/Cost of Investment x 100
The cost of investment is basically the amount that the rental property owner paid for acquiring the investment property. Net operating income (NOI) is usually calculated on a yearly basis. The formula is as follows:
NOI = Gross Income – Operating Expenses
The gross income generated by the rental property includes:
- Rental income – This is simply the sum of what all the tenants pay
- Other income – This is income generated from charges like laundry services, vending machines, and parking
Operating expenses consist of all the costs involved in real estate management. Rental property expenses include:
- Property taxes – Taxes on rental property vary depending on size, value, and location.
- Vacancy – This refers to rent not collected because tenants did not pay or moved out.
- Insurance – Protects rental property from loss of income, as well as threats and damages like fire or floods.
- Repairs and maintenance – This refers to activities like fixing broken heating systems, lawn care, landscaping, and painting.
- Property management fees – As a real estate property manager or real estate management company, you will charge a percentage of the monthly rental income as real estate management fees. As you can see from the formula above, the higher your fees, the lower the ROI of the rental property. This is partially why it is in your best interest to raise the ROI in other ways. That way the rental property owner will know your fees are worth it.
- Other expenses – This includes marketing and advertising costs, legal fees, etc.
Now that you understand the basic elements of ROI, let’s take a look at your role in maximizing it. Here are 7 real estate property management tips for maximizing ROI on rental property:
How a Property Manager Can Increase the ROI on Rental Property: 6 Tips
1. Optimize your rental listing
From the formula above, you can see that a high vacancy rate will incur costs and lower the ROI. So what can you do as the rental property management company? Get listed on sites such as Zillow, Trulia, Realtor.com, RealtyTrac, and Apartments.com- it is a must.
The listing should have a detailed description of the rental property, accompanied by quality photos showcasing it. You can optimize your rental listing further by including a description of the neighborhood. Is it near malls, markets, schools or hospitals? Is it safe? Is it near the bus/railway station or airport? Don’t forget to mention something about the lifestyle of the community. A well-optimized rental listing is a must for good real estate management as it will boost the search engine ranking of the online listing, attract more tenants, and increase the rental occupancy rate. These are naturally all good things for your property management business and the ROI of the rental.
2. Market the rental property effectively
Continuing with the idea of keeping that vacancy rate low, effective marketing is one of the most crucial steps for managing a rental property and maximizing the return on investment. There are many different tactics you could use to market a rental property. Since most renters go online when looking for a property for rent, your property management website and social media platforms such as Facebook, Twitter, and YouTube should be part of your real estate marketing strategy. Offline tactics such as paid ads on radio or newspapers can also come in very handy.
If you’re an Airbnb property manager, consider listing the short-term rental property on different vacation rental websites rather than just one. While this will require a bit of juggling, having a property system in place will ensure smooth bookings and a higher Airbnb occupancy rate.
3. Carefully and routinely inspect the rental investment property
If your rental properties are dilapidated, unsafe or dirty, no one will want to live in them. Being a property manager, part of your property management responsibilities and duties is to ensure that your rental property is always in good condition. This will help the ROI of the rental property in two ways:
- Good real estate property management will help to attract and retain tenants, raising the rental occupancy rate
- It will also help to lower renovation and maintenance costs in the long run, which can eat into the ROI
Check for drafts and leaks, investigate smells, check for mold, and make sure garbage bins are provided. Don’t forget to inspect the plumbing, circuits, drains, and the roof. For security, install safety features such as cameras, deadbolts, intercom buzzers, locks, and gates. To make sure the job is done well, a real estate property manager should hire professional contractors for cleaning, building, and repairing.
4. Screen tenants carefully
Selecting qualified tenants for your rental properties is crucial for residential property management. Having the wrong tenant will not only cause you headaches but will also result in financial losses and a lower ROI. The screening process by a real estate property manager should involve checking for details such as:
- Previous and current employer
- Current income level
- Criminal records
- Eviction history
- Credit history
Don’t forget to ask for references from previous landlords. Talking to former landlords will give you an idea of what kind of tenant you are dealing with.
Once you have checked all the records, have a face-to-face interview to get familiar with the potential tenant. Finding the right tenant for your rental property will lower your vacancy rates, keep a steady rental income, and help you make money as a property manager.
5. Collect rent on time
When tenants move into your rental properties, they should sign a real estate management lease document that outlines the terms and conditions for residency. The document should mention when rent is due, the method of payment, and the penalty for late rent. Timely rent payment will make your work easier and ensure you generate a good return on investment for your clients.
6. Establish a rapport with your tenants
Establishing good relationships with your tenants will lower your turnover rates and boost ROI. To keep the channels of communication open between real estate management and tenants, provide a dedicated email address and phone number which renters can use to contact you. Be sure to respond quickly to any complaints or inquiries. Offer rewards for things such as caring for the rental property and paying rent on time. Send your tenants a gift during holidays and special celebrations like weddings, birthdays, and graduations. After all, an important part of real estate management is building lasting relationships to aid in resident retention and generate positive cash flow for property owners.
As a general rule in real estate management, however, draw boundaries with your tenants. If you get too friendly, you will find it difficult to enforce lease terms and collect rent on time.
Bonus Tip: Use Real Estate Investment Tools to Keep an Eye on ROI
Is the ROI you’re generating good enough for the location of the rental property? Are you charging a high enough rental rate? Are you looking at the right rental comps? Having the right answers to these questions can ensure you are making the most money for your property management clients- and for yourself and your company. You can use a real estate investment calculator for all of this and more!
To ensure a profitable rental property as a real estate property manager, you must actively work to boost the ROI by cutting costs and ensuring a steady occupancy rate. Whenever possible, consider increasing rental income as another strategy for maximizing your real estate management profits! Read this to learn more: Raising Rent Without Losing Tenants: 6 Tips for New Landlords.