The kind of passive income you earn from rental properties can be your nest egg for future retirement or even complete financial independence. But you can’t just start buying properties and renting them out. Balancing expenses and income to achieve a positive cash flow takes careful thought and expert advice. To build your rental income on property investment, consider these four important steps:
Choose Properties Wisely
What you’re looking for is areas with high rents and plenty of capital growth potential. Your end goal is that the properties all pay for themselves plus contribute passive income to your bank account or investment portfolio.
Listen to expert real estate investment podcasts to find out where you can best invest your money. Right now, suburban neighborhoods with good schools and transportation links to thriving urban areas are some of the smartest places to invest, but real estate is hyper-local. Expert advice is crucial.
Minimize Expense and Maximize Opportunity
Your major expense is paying the mortgage on properties you buy. In other home-buying situations, an interest-free loan might not be advisable, but as you work to build your rental income on property investment, choosing this type of loan can minimize your monthly payments, giving you time to let your stream of rental income improve.
At the same time, maximize value by investing in growth opportunities that efficiently add value. Even fairly simple changes, like new paint, better flooring, and pretty landscaping, can dramatically increase rental income. Once that’s done, you can pay off loan principals more quickly and start pulling in positive cash flow you can save or reinvest.
Grow Rental Rates the Smart Way
Tenants generally expect rents to increase over time. This will be especially true if you’ve chosen your property wisely: it will be in a place where property values are rising steadily and economic health is good. But you can’t leave a property to stagnate and expect renters to just keep forking over ever-higher payments for a place that’s slowly degrading. That’s the way to lose good tenants and invite troublemakers.
Listen to tenant feedback so you can make smart, incremental improvements that will continue to make your property well worth local market value: and even more. Consider air conditioning as an example. If you pay $700 to install one, and tenants are willing to pay you $25 more a week if they have it, it will pay for itself in just over half a year. After that, you’re clearing an extra $100 a month.
It’s almost impossible to become completely financially free with just one or two properties. You need to grow your portfolio with multiple properties, and that means using early cash flow and equity to reinvest. For example, if you bought property at $200,000, and it’s now worth $350,000, you’ve got $150,000 in equity you can borrow against without triggering mortgage insurance.
Consider borrowing a part of that to put with your cash flow and invest in your next property. If you’re making smart choices about where you invest and steadily improving your property values, you’ll be growing your portfolio safely. Just remember not to overextend yourself and take on too much risk. If property values in one area fall unexpectedly, you could tumble the entire house of cards. Professional financial advice is key here.
The Key to Building Rental Income on Property: Patience
A lot of the advice you get about rental properties investment can be summed up in a simple way: be patient. Only buy when you’ve found the right place. Be smart and deliberate about growing rents steadily. Be patient about paying off debt while you let rents naturally rise. For expert advice on how to grow your portfolio and make more income, subscribe to the Jason Hartman real estate podcast today.