No matter what type of investments you make, the end goal is always to generate the most money from them. This is true in real estate too — whether you’re comparing properties to determine which will make the best investment or analyzing your current rental properties to determine how to increase your profits. Here are three easy tips to help you better understand and enhance your real estate profit margins.
3 Tips for Increasing Your Real Estate Investment Profit Margins
1. Figure Out Your Cap Rate
When looking at real estate investment profit margins — either for the purpose of figuring out what needs to be changed with one of your current rentals or if you’re comparing a few different potential properties that are for sale — it’s essential to understand the capitalization rate, or cap rate. This will give you a concrete rate of return that will help you determine if a potential property will make a good addition to your portfolio. It can also be useful to determine if the expenses for a particular piece of property are eating into your profits.
To calculate the cap rate, you’ll first need the property’s net operating income (NOI). This is how much revenue a property generates minus its operating expenses (mortgage, taxes, maintenance, and any association fees, for example). Divide the property’s current market value or acquisition cost by the NOI to get the cap rate. If a property is valued at $500,000 and the NOI is $25,000, the cap rate would be 5 percent.
A higher cap rate doesn’t necessarily mean that one property wins out over one with a lower cap rate, however. If a property is older and has the looming threat of expensive repairs and assessments or is less desirable and subject to potential vacancy, this makes it a riskier endeavor in terms of solid real estate profit margins. Whether you own and plan to hold onto a property or are hoping to sell it, an occupied property is always more valuable than a similar unoccupied one.
2. Look Into Tax Breaks
There are specific tax advantages that you can enjoy as the owner of an investment property, but in order to take advantage of those breaks, you must have your properties structured the right way. In 2017, changes to the tax code gave owners of pass-through organizations the ability to deduct 20 percent of their business income. If your investment properties are held as an LLC, they qualify as a pass-through organization. In addition to the deductions, the 2017 changes also dropped the tax rate for pass-through organization from 37 percent to 29.6 percent. Not missing out on these tax breaks is a wonderful way to make the most of your real estate profit margins.
3. Choose the Right Property Manager
Finally, one of the best ways to maximize your real estate profit margins is by running a clean and tight rental operation. This includes keeping the property well-maintained and updated so you can command the highest rental rates, in addition to seeking out the best tenants to ensure that the property is never vacant and that rent is always paid in full and on time. Finding responsible tenants will also help ensure that you avoid many repair or maintenance problems, as they’re more likely to take care of the property like it’s their own.
Especially if you have multiple properties or out-of-state ones in your real estate investment portfolio, being a landlord can be time-consuming and stressful — not at all what you had in mind when you signed up to invest in something to generate “passive” income. To avoid becoming a full-time landlord, it’s a good idea to find an experienced property management company to handle your rentals.
A property management company will handle it all — from marketing your property, finding excellent tenants, and working to ensure that it’s always occupied and generating income. They’ll also handle all of the necessary maintenance and repairs. This does more than just keep your property looking nice and making it more valuable and attractive to renters; it also prevents small repair issues from being ignored and turning into large, more expensive issues that will further eat into your profits.
By doing your homework upfront and always being willing to review and reassess your current operations, you’ll be able to generate attractive real estate profit margins to put you on the path to long-term wealth.