Are you a real estate investor and a landlord owning one or more investment properties? Have your rental properties suffered from stagnant rental income? Are you dissatisfied with the return on investment (whether cash on cash return and/or cap rate) from your rental properties? Are you looking for a way to boost your rental income to make extra money from investing in real estate? If yes, then you’ve come to the right place. Here we will look at the main reasons for stagnant rental income from investment properties and alternatively how you can boost your rental income to maximize your return on investment in real estate.
What is rental income and why is it so important?
Rental income is the money which you receive from your tenants in the form of rent for renting out your investment properties to them. This is basically the money that you make from your real estate investments.
While rental income on its own is just a number, it is actually very important when looked at in the right context. Together with expenses, rental income is the main determinant of the return on investment from your real estate investments. Cash flow in real estate investing is the difference between what you make from your rental properties (rental income) and what you spend on them (rental expenses). Whether your cash flow is positive or negative determines whether you make money from real estate investing or lose money from it. Moreover, the higher your positive cash flow, the more money you make from your real estate investments.
Rental income is also a factor in calculating the cash on cash return and the cap rate of investment properties, which are the two most important metrics of return on investment in real estate. So, to sum up, rental income is pretty important, that is, if you want to make money as a real estate investor.
Related: Real Estate Analytics: What’s the Difference Between Cap Rate and Cash on Cash Return?
How much rental income should you be making from your investment properties?
There are various techniques to calculate how much rental income you should be making from your income properties. The general rule is that your monthly rental rate should be between 0.8% and 1.1% of the fair market value of your rental properties. For income properties that are relatively cheaper, you can charge up to 1.1% of the fair market value per month, while the rent should go down to about 0.8% of the fair market value when dealing with more luxury and expensive investment properties. Of course, the rental strategy is the main determinant of your rental income as traditional rentals (long-term rentals) and Airbnb rentals (short-term rentals) yield very different monthly rental income, as demonstrated by Mashvisor’s investment property calculator and as well recognized by real estate experts.
Related: How Much Rent to Charge for My Rental Property?
What is keeping your rental income stagnant?
If you are a real estate investor with income properties, you should keep a close eye on your rental income. Since it is determined by the fair market value of your investment property, and since appreciation is a strong force in real estate investing, it is only logical that your rental income should be going up all the time. If you figure out that that your rental income has been stagnant for some time, this means there is some serious problem with your income properties. Don’t worry too much though. A “serious problem” means that your investment property is not making as much money for you as it potentially could; it doesn’t necessarily have to mean that it is something hard to fix.
So, let’s take a look at the main reasons for stagnant rental income and how you can easily fix them:
- Bad calculations
As we said previously, there is a relatively simple formula to get a general idea of how much rent you should charge your tenants. However, this simple formula is based on the fair market value of your income properties, which might not be so easy to calculate. So, it might be that you are just charging your tenants too little rent for renting out your investment property to them.
How to fix this problem?
You should conduct investment property analysis to see how much your rental properties are actually worth in terms of fair market value. You will also need to do real estate market analysis to see how much similar properties in your location are worth, to make a better estimate of the fair market value of your own investment properties. Sounds intimidating? No worries, just use Mashvisor’s investment property calculator which will save you a lot of time and efforts, something which any real estate investor needs. Once you arrive at a new rental rate, though, you should be careful how to raise the rent because of the conditions of your rental agreement.
- Bad investment property conditions
Maybe your calculations of how much rent you can charge are right, but the problem is that the fair market value of your rental properties it too low because of the state in which they are. You should always make sure to keep your income properties in a top shape in order to be able to maximize your rental income.
How to fix this problem?
Easy – just make some renovations and repairs and you will be able to increase your rent and boost your rental income. Be smart to implement renovations and repairs which cost little but will lead to major improvements in the quality of your investment property. In this way you will easily be able to ask for a higher rental rate as you will actually offer your tenants a better rental property.
- Wrong rental strategy
The rental strategy is the main determinant of your rental income. In the same location, traditional rentals and Airbnb rentals yield drastically different rental income and thus return on investment (cash on cash return and cap rate). Maybe your location is just not the right one for Airbnb rentals because of the lack of tourist and business attractions. Or maybe your location is not as good for traditional rentals because few people move in to live there, but a lot of people visit for various reasons.
How to fix this problem?
Again, easily – conduct real estate market analysis and investment property analysis to see which is the better rental strategy in your location. Once again, you can rely on Mashvisor’s investment property calculator as it computes all crucial metrics of return on investment in real estate (rental income, cash on cash return, and cap rate) for each rental strategy: traditional rentals and Airbnb rentals.
- Lack of tax deductions
Rental income is tax deductible, but maybe you are failing to make use of the available tax deductions as a real estate investor. That could easily be the reason for your stagnant rental income.
How to fix this problem?
Study the local legislation relevant to real estate investments and rental properties carefully and make sure to make proper use of any available and applicable rental income tax deductions.
- Poor housing market
Last but not least, there is the possibility that your investment property is simply located in a poor housing market. Maybe the local rental market is just going through a bad phase or is not as attractive and booming as when you bought your income properties. This could very much be why you are dealing with stagnant rental income. Tenants are just not so interested in living in your local housing market.
How to fix this problem?
In this case, the possible solution to this problem is a bit more complicated as you will need to relocate your investment property. You will need to sell your rental property and buy a new one in a booming housing market. Once again, there will be the need for real estate market analysis to choose the best housing market at the moment, and for investment property calculator to choose the best rental property. No worries – as usual, Mashvisor’s investment property calculator is here to help.
Related: The Top 6 Strategies to Boost Your Rental Income as a Real Estate Investor
While stagnant rental income can be a real bummer to your ability to generate good return on investment in real estate, most reasons for low rental income are fixable. Just follow our advice above, and you should soon be on the path of becoming an even more successful real estate investor.