Unless you are a real estate enthusiast, chances are you started real estate investing with the idea of making some money. Becoming a landlord is both an investment and a job, so it should bring you extra cash, right? And since most experts recommend remaining at your primary job, at least while you are a beginner in real estate investing, rather than just jump into it and leave your current job, rental income comes as an additional source of money, not your primary income. Since this is not your money for living, there comes an important question: What to actually do with your rental income?
To answer this question, you first have to know how much your rental income is. The answer seems obvious – the rent that you receive on your investment property – but it is not. You have to subtract all rental property-associated expenses from the rent you receive to see what you are left with.
What Expenses Do You Have as a Landlord?
- First and foremost, clearly you have to pay for the mortgage. Unless you are from the lucky few, you must have taken a bank loan in order to buy your rental home. And you will be paying this loan for a long, long time. So, a big chunk of your rental income will go to this.
- Second, you have to maintain your income property in order to keep it attractive for current and future tenants. Whether you decide to fix up things on your own or to get professional service providers (electricians, plumbers, painters, etc.) or to simply hire an estate manager, this will cost you money. That’s where another chunk of your rental income will sink in.
Related: Professional Property Management: Pros and Cons
- Then, of course, you have rental property taxes and rental income taxes. Real estate investing is a business and a job (we’ve already said that, no?), thus you will have to pay taxes on your property and on your income. Under US tax legislation, you are eligible for certain rental property tax deductions, but still, be ready to spare some money for taxes.
- Also, you need to insure your rental home, and rental property insurance is more expensive than home insurance because of the higher risks associated with tenants. So, factor this expense in as well when you calculate your remaining rental income.
Related: 11 Costs First Time Real Estate Investors Should Consider
Once you’ve calculated and subtracted all of these, you will HOPEFULLY have some rental income to spend on other things. Since this is probably not your primary source of income and you don’t rely on it for covering your daily expenses, you can use this money to make even more money.
What Do You Do with Your Net Rental Income?
- Going back to the mortgage issue, if you have a lot of money left as net rental income, you can consider rescheduling your bank loan. The idea is that you can pay more per month to the bank so that you finish a few years earlier. This should save you (potentially big) money from interest payments. Although that banks charge a fee for rescheduling loans, it is still more beneficial if you can pay your loan faster.
- Alternatively, you could spend some money on improving your income property to make it bring even more income. You don’t have to spend all your net rental income on upgrading your rental home. Maybe you can renew the bathrooms and buy a few new appliances – remember, tenants pay a lot of attention to these two! Or you could replace the old carpet with linoleum. Really, anything that will make your income property look shinier and newer.
- If you realize that being a landlord is not the right job for you as you are getting more and more tired of looking for new tenants, fixing up water leakages, etc., you can use some of the rental income to hire a property manager. Although this will cost you some money, such a professional will take down a lot of the pressure from you. Actually, since these are professionals, they should be able to find you tenants faster as well as benefit from discounts from service providers. So, think about it!
- Maybe one of the best ways to spend your rental income is to re-invest it… in real estate, of course. You can save up your rental income and once you have enough for a down payment, you can replace your current income property with a bigger/better one or buy another rental property to expand your portfolio. Although a fancier property will bring more expenses, it should also bring more income. Moreover, your first rental property will teach you many of the important lessons on managing an income property and being a landlord, so it must be easier when you decide you are ready for a better or a second one. If you opt for this choice, remember that you can always use Mashvisor to analyze real estate markets throughout the US.
- Let’s face it. You will not be young and working for the rest of your life. Sooner or later, you will need to retire. Maybe you are already enrolled in an employee’s provident fund – that’s great! But why not secure some more money for when you retire? You can use some of your rental income to enter a private retirement scheme to complement your provident fund savings. Ideally, your rental property should bring you rental income even after you retire, but it doesn’t hurt to secure yourself through a retirement scheme too.
- Last but not least, if you have chosen to become a landlord, it means that you are working two full-time jobs. This means that you will be more tired and in a direr need for rest. So, why don’t you spare some of this rental income on a nice vacation with your family or friends? This will not bring you obvious financial gains as investing in improving your income property or buying another rental home, but it will benefit you and your business if you refresh your body and mind. So, don’t rule this possibility out either!