DON’T MISS MY $1,500 CASH GIVEAWAY AS WELL AS AN APPLE IPAD 2
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?
In the case of furnishing the rental suite, do you have to buy some kind of additional insurance to cover the furnishings from loss or damage? I know that when I rent, my tenant insurance covers my property in the home, but what about the furnishings supplied by the owner?
I personally insure these under “personal property”. tenants may sometimes also carry coverage, but sometimes not enough to cover your belongings too as a landlord. makes sense?
I used to own several apartment buildings and I developed a a great way to increase the value of the property. I would reduce ($300) the amount of money required to move in and raise the rent $25. I broke even in a year, but increase the value of the property because of the higher rent. It worked very well for me. To some extent, you did the same thing.
effectively yes. given prices are typically multiples of rental income (for investments) these strategies can pay off in multiples when selling
I once met a guy who was in the rental business in Hawaii. He told me that if they could have 33% occupancy (on their rentals), they paid the bills. Anything beyond was profit. Not a bad deal.
you can certainly make that work for some properties, particularly seasonal vacation types (lakefronts etc). are you in rental properties as well?
I’ve had GREAT experiences with rental properties…and some real NIGHTMARES, too!
I miss it.
Buying an investment property is one of my goals to reach within the next three years.
Dave, is your experience based on you as a tenant? Would love to hear more about the great stuff as well as the nightmares
I think the problem would be taking taking that first step to figure out the vacancy rates…that could be a VERY costly mistake.
sure, the vacancy factor, among several others are part of the risk profile involved with this type of an investment. in years of doing this, adequate research really helps make it more of a science (knock on wood)
Do you buy good furniture or decent stuff? Also, what do you include as furnishings? It sounds interesting!
depends on the objective. I have a couple condos in “posh” areas and they are furnished with good stuff. average however would do just fine (think closeouts). furniture would entail coffee tables, side tables, sofa sets, rugs, curtains, lamps, dinning table/chairs, etc.
What about the bed and linens? Do you provide those as well? For a single family home, what is the expense you are looking at to get the additional income?
no linens, but if the location calls for it (i.e. vacation rental) I don’t see why not. there is no gross threshold per se. it depends on the market. what’s more important is ROI. I typically strive to recoup costs within a year. the right tenant pays well for the convenience
i rent everything on month to month rather than fixed 1 year lease because i get more people that dont like being tied to lease and i dont experience any shorter term tenancy. the main reason(laws vary on your state) is that if i have a problem tenant I can give a no cause 30day notice rather than a for cause notice which when you give exact reason then you have to prove it in court. Also it’s hard to get big lease break fees up front so I dont really see a benefit of yearly leases(property managers usually require them because it means they don’t have to rerent them again for 1 year so less work).
Many times trying to enforce a lease break fee, the tenant doesnt pay their last months rent so you are left with little for potential damages and courts dont really like seeing big lease break fees.
that’s a very interesting approach. conventionally one would feel “less secure” with that type of a lease but apparently it’s working well for you. what are the key factors you’d say that this arrangement is working well for you? say a tenant tells you they don’t want a year’s lease, what do you tell them? how do you adjust the numbers (rent/deposit, etc)?
I just use a monthly rental agreement which is same as lease agreement but no lease break fee. They just give me 30day notice and I start showing it to prospective tenants while its occupied. I rarely have more than a couple weeks vacancy in between tenants because im showing it during the last month of the existing tenant.
I charge about 1.5x month rent as a security depsosit but depends on rent price. I don’t have different deposits for pets or cleaning because then you have to apply those specific to those categories. I would rather have 1 large security deposit that can be applied to anything.
Lease break fees just make people mad when moving out and I want people leaving on a happy basis with the incentive to really have it clean so they get their large security deposit back. I have a very detailed cleaning list they sign at move in that I go thru at move out so everyone is clear on what clean is. I also don’t use credit reports but that’s another topic.
Thanks for the clarification Brian. how many properties are we talking? I’d imagine frequent move ins and outs across multiple properties can present some challenges? All homes I assume? Condos typically have a minimum term rule.
Increasing rental income must be of many considerations. You need to look at first if the place are really well furnish, constantly clean and accommodating with complete amenities. Then, I can say that, Increase it ‘coz its worth it.
true James, the venue has to be appealing. that said, some markets / property types just don’t lend themselves to this concept by default given the target client/tenant
We have a 4-plex. The square footage ranges from 450 sq ft in the smallest to 3,000 in the largest. The large unit one is the most beautiful but is the most difficult to rent out. We know it’s ‘worth’ more but over the last few years we’ve lowered the rent to keep the vacancy down which also has kept the ‘drama’ down!
We make sure each unit has a washer/dryer. It’s inexpensive and it’s the first thing people ask about!
So what’s your experience been like with a 4-plex? Would you recommend it? What are the top few things to look out for / keep in mind? Do you get appliance insurance such as American Home Shield or just repair / buy them as they break?
I like the 4-plex because we set it up with the tenants to watch out for each other. If there’s a problem with a neighbor we want to know. The other side of that is if one tenant is noisy it bothers all the units.
We do all the repairs and maintenance ourselves. It’s one building so it simplifies some repairs. If we had 4 small houses we figure we’d have more maintenance spread out.
When we first purchased the building (about 8 years ago) we had no issue getting renters and we could charge top dollar. When the economy collapsed in 2008 we started feeling it. Vacancy went up and we had to lower the rent. We didn’t let ourselves get stuck thinking ‘oh, we always charged that and now we can’t..WHAAA!’ We looked at the upside which was we made a large profit the first four years and now we would make less, but we still make a profit in our investment. We adjust rents when needed.
We don’t carry appliance insurance and replace as needed. Being a landlord has it’s good days and it’s bad. We’ve been relatively lucky with our tenants. We don’t write about it on our website mainly because at least one of our tenants reads the blog and I want to protect their privacy.
very insightful. are you planning on building a real estate empire or focusing mainly on online business?
Our online business is our main focus for the next year. There are two factors keeping us from purchasing more real estate 1) We don’t want to put our savings into a down payment during a time we can’t build our savings back up 2) Since Mike is the maintenance man (I jump in to help to) for the rentals adding to that list sounds boring (just downright sucky, really).
do you have other sites outside of M&M’s House?
We have our original two blogs (Molly On Money and Stuff I Made This Year) that we have kept up but don’t add content to anymore. We spent last month looking for a niche (I pronounce it ‘neesh’…it just sounds prettier) site but in the end could not find something of actual monetizing value to sell on the site. We did a bog series on it (it’s not your typical series on a niche site- I think you might get a giggle from it). When we started our research we found you- your advice balanced the other guys we were following quite nicely.
For now we our optimizing our site and finding affiliate’s to sell so we can begin making some $!
great to see you are taking action. keep me posted on your progress, and let me know if you have any questions along the way. the process takes time, but it very rewarding in the end.
Thanks so much Sunil- both Mike and I total appreciate it!
If you really want to make money on the internet without start up capital, reseller panel webhost reseller opportunity is an opportunity you should explore.
that is a very good way indeed, but the opportunity today is much thinner given the early mover advantage. Lisa from 2create a website makes most of her money from reselling. certainly worth looking into, especially if you have a strong following in a non make money online niche
Hey I really like this idea. I never ran the number as you did. I’ve looked into short term rentals and have done furnished rentals, but I haven’t gotten serious about comparing the income streams.
I own apartments and think about building a small community for long term cash flow reasons. However I don’t see a reason why I shouldn’t play with your concept in at least one of my units.
Thanks for your idea. I’m going to add it to my list of tactis landlords can use to increase income.
you can always try and revert back to what works. you’d never know if you didn’t try in your local market