Rental income is one of my favorite forms of passive income because it allows me to benefit from the ongoing cash flow, long term equity build up resulting from a decreasing mortgage over time, potential long term appreciation and significant tax deductions.
Real estate is where I invest a lot of the profits generated by my niche websites and other passive income endeavors. What is rental income? Simply put, it is the money generated by rents received from tenants who are living in my rental properties.
If you are in a similar situation wherein you enjoy investing in real estate and benefiting from rental income, here is one strategy you can implement to quickly increase rental income without much effort on your end.
Providing that the areas where you buy investment properties have the appetite for this approach, consider renting out your place for a shorter term (example: 6 months) instead of a year. Fully furnish the property and demand a higher monthly rent.
Some of the areas where I own rental property are perfectly conducive to this model, but other areas are not. You will have to determine if you can make this work where your rental properties are located.
This approach may lead to more vacancy, but will still put you in a better position in terms of total income from rent. How so? Let’s have a quick look.
If you own a unit that you typically would rent out for $1,200 unfurnished for a 12 month term, consider fully furnishing the unit and renting it out for $1,600 for a 6 month term instead to increase rental income.
Let’s guesstimate that your unit, if rented for $1,600 and only for 6 months, only stays occupied 70% of the year, therefore an average 30% vacancy or just under 4 months vacant during the year. Now let’s assume that at a lower $1,200 rate but unfurnished and a 12 month term, you experience a 90% occupancy, therefore a 10% vacancy or just over 1 month each year.
Let’s do the math. $1,600 per month at 70% of the year equates to $13,440 whereas $1,200 per month at 90% occupancy equates to $12,960 per year. Revealing isn’t it? The difference can be more favorable if you can reduce vacancy from 30% to 25%, 20%, 15% or even less.
I have one property that I have been renting out on these terms for years now and knock on wood, the property has yet to go vacant for even a full week! This single simple strategy alone will increase your return on investment (ROI) from rental income.
Many shy away from this approach because they prefer the security of a steady cash flow, knowing that their properties will be rented out for a full year. They’d rather lock in a lower rent at 12 months than taking a higher rental income only for 6 months and worrying about replacing the tenant. Well, it just comes down to risk reward I suppose.
Personally this strategy has worked really well for me on several properties that I know. You can streamline the tenant search and replacement process significantly over time as you gain more experience investing in rental properties. I like to start advertising well ahead in advance so that I can screen tenants, get the leases signed and transition them quickly when time comes.
This strategy comes with some other ancillary advantages as well. First of all, it is my opinion that furniture and appliances are cheaper today than ever before – whatever happened to inflation? At least you get a lot more value for your dollar today than you did in the past.
That said, not only will you hoard quality furniture at affordable prices, but you also get to depreciate your furniture over time and benefit from tax advantages. Some even go the more aggressive route and claim the IRS Section 179 deduction and deduct the FULL price of the furniture in year one instead of depreciating it over time, therefore further benefiting from tax advantages.
So not only are you benefiting from an increase in rental income, you are also benefiting from not paying as much in taxes, or potentially even getting money back from uncle Sam depending on your personal situation.
If you are not doing this or feel that this strategy will not work in your rental neighborhood, try to at least increase income from rent by adjusting the rent payments. Tenants expect rent increases over time, especially in a period of inflation.
You may be able to justify a rent increase even without inflation playing a factor. Regular maintenance, wear and tear can all lead to rent increases over time. Regardless, make sure you are charging a fair amount and taking your fair share as well.
Readers: Good way or bad way to increase rental income? I’d love to hear your thoughts. Do you have rental property? What have you done to increase rental income over time? Any additional tips on how to increase rent?Previous: How Many Credit Cards Do You Need?