When you get into real estate investing, your goal is to make money from your investment and maximize your cash flow. The route most real estate investors take is to look for real estate investing tips on how to boost rental income. While a strong income strategy is important to maintain positive cash flow, it’s not the only way.
You need to be paying close attention to your expenses too. Naturally, there will be many expenses that you can’t avoid, but you may be able to identify some that can be significantly reduced. Below is a list of real estate investing tips that you can follow to reduce expenses on your investment property and maximize your cash flow.
Reducing Your Taxes
As a real estate investor, one of the best real estate investing tips you can follow is to reduce expenses through your taxes. With an investment property, you qualify for many tax deductions. In order to get the most out of these real estate investing tips, consult a good accountant with knowledge of real estate investments.
Depreciation
An investment property qualifies for the depreciation deduction, which takes into consideration the fact that the real estate property will be used over time, experience wear and tear, and maybe even become less useful. Depreciation of residential real estate properties, as well as any structural improvements, can be claimed for 27.5 years.
Avoid Capital Gains
When a real estate investor sells an investment property, the gain from the deal must be claimed on their taxes. However, there are a few ways in which you can avoid these taxes such as the 1031 exchange. While there are many stipulations that your situation has to meet in order to qualify, the 1031 exchange basically refers to selling one investment property and using the gains to purchase another property/properties of the same or greater value. One of the conditions is that the exchange has to occur in a specific period of time.
Other Tax Deductions
While many of the following tax deductions are subject to limitations, they are worth looking into to see if your investment property qualifies. Keep in mind that depending on your rental strategy (Airbnb rental or Traditional rentals), you may be able to benefit from different tax deductions.
- Interest: Most likely, you’re financing your investment property with some kind of loan. The interest you pay on the loan every year is a write-off.
- Repairs: Costs that go into repairs for the investment property are a tax write-off.
- Local and Long-Distance Travel: Both are considered business expenses. Keep records of your mileage and any receipts from renting vehicles.
- Home Office: As long as your home office meets the qualifications (having a door, used only as an office, etc.), it can be claimed as a business expense.
- Employees: Because you are taking part in creating jobs by starting investment projects, anyone you hire like contractors or staff is considered a write-off.
- Insurance: Insurance costs can be written-off as a business expense.
- Professional or Legal Services: If you’re using a professional property management company or consulting real estate lawyers and other professionals for guidance, the fees you pay count as business expenses.
Smart Financing
Most real estate investing tips about financing should be considered when you are first applying for loans for your investment property. A comparison of monthly payments for different mortgage periods to see the difference in interest rates is a start to find reduced interest rates. If you already have a loan, try getting it reviewed by talking to a licensed mortgage broker. He/she may be able to help restructure your loans and find you a better payment plan and rate. Look at all of your options to avoid paying thousands of extra dollars.
Related: Financing a Rental Property: What’s the Best Way?
Inspecting the Potential Investment Property Well
One of the major real estate investing tips you should follow is to know what kind of property you are investing in. This means having a deeper understanding of the condition of the investment property. Is it going to require major renovations and remodeling to bring it up to code? An investment property analysis, starting with the figures that Mashvisor can provide you with such as price and rental income, will help you determine if the rental property will still be worth the investment or if repairs will eat into your budget.
You should also try to get the information on materials that have been used to construct the property. While a repair may seem simple at first based on your experience or research, the cost of unique construction materials may raise your expenses significantly.
Related: 6 Rental Renovation Tips to Know Before Spending Any Money
Frequent Maintenance Checks and Upkeep
Some repairs occur because of simple wear and tear of a rental property. You can’t avoid them but what you can avoid is small repairs turning into huge renovation projects. If caught and fixed early, problems like leaky roofs, faucets, or toilets won’t turn into badly damaged floors and ceilings.
You can save money by doing these repairs yourself. If you can’t keep up with these maintenance checks, hire a handyman. You might assume this to be counterintuitive to real estate investing tips to reduce expenses, as it will cost you money. In the long run, however, a handyman making small repairs will save you money on huge repairs later. Shop around for a handyman with a rate that suits your expenses.
Knowing Your Potential Tenants
Screening tenants is one of the real estate investing tips that will cut down on future expenses. A good tenant will save you from having to pay for damage to the rental property and repairs. You can’t always predict whether or not a tenant is going to take care of the rental property, but there are things you can do to try and find someone who will:
- Background Checks: You should perform background checks on your long-term tenants for traditional rentals to make sure they have no criminal history. Any other minor problems you see will help you determine if they will only raise your expenses in the future.
- Eviction Histories: Take a look at eviction histories. While some may be exceptions, most will point to the fact that you don’t want this kind of costly tenant.
- Proof of Income: Expenses occur when a tenant is behind on the rent, and you’re still forced to pay your regular payments and fees. Make sure your potential tenants have a steady income to ensure such expenses don’t come up.
- Airbnb Rentals: With this rental strategy, you can always use reviews to screen tenants.
If all else fails, you could always put strict repair clauses in the rental agreement. This will make the tenant financially liable for any damage and repair costs. You’ll want to be careful when implementing these as you don’t want to chase away potentially good tenants. Look at what other landlords in the area or at your REIC are using as clauses to determine the best course of action.
Related: How to Deal with Bad Income Property Tenants
Minimizing Turnover Expenses
When you have a traditional rental, you’re aiming at long-term tenants. A downside is that you can’t always control the factors that lead to turnover and the expenses that come along with it. Aiming for great property management is one of the real estate investing tips that you can do to minimize turnover. As mentioned before, keeping up with maintenance is a great way to ensure happy tenants. Listening to any complaints and getting regular feedback will help you tackle any major issues tenants are having to ensure you avoid vacancy and boost rental income.
Reviewing the Finances of the Investment Property
On a final note, you should always keep a close eye on all of your investment property finances. Just because you’re not losing money and having a positive cash flow property doesn’t mean you couldn’t be making more. Always review your expenses and use this guide of real estate investing tips to see if there are ways to cut down your expenses.
Meanwhile, keep reading on Mashvisor for the best real estate investing tips related to all aspects of buying, owning, managing, and renting out an investment property.