It’s the question on many real estate investors’ minds. Just how profitable is managing a rental property? Of course, there are real estate investors who flip properties or work with shorter-term investments, taking their profits and moving on. But a large percentage of investors become landlords, spending the majority of their time managing properties and tenants.
So, how profitable is property management? Well, it depends. Profitability depends on several, ever-changing factors, such as…
This post will take an in-depth look at each of these factors and offer suggestions to improve profitability.
Your local market heavily impacts revenue. Keeping properties occupied and rent rates profitable depends on supply and demand. Are you in a neighborhood that’s already struggling to keep tenants? Perhaps you’re lucky enough to be in a hot market where rental properties are in high demand.
No matter your situation, the local market is a major factor in your profitability, but that doesn’t mean your options are set in stone. A savvy landlord is aware of trends in the neighborhood and works with them to stay profitable.
Renters in some neighborhoods, for example, might prefer to live in places that offer various perks within the property itself. To meet that need, you’ll need to be ready to take on association management responsibilities and factor in the upkeep of various amenities as part of your job. On the flip side, your properties will likely be able to command higher rents to offset those costs.
Depending on the location, you might be working with single-family suburban rentals or with larger multifamily properties. Once you know which type of properties will make up your portfolio, explore their specific pros and cons.
If you’re unfamiliar with the market or just need additional expertise to determine what kind of property management strategies will work best, talk to local real estate agents or established property managers that know the ropes. You might find that partnering with a property manager that works with a high volume of clients and properties locally can help you spot opportunities in the area and the best ways to capitalize on them. This is especially true if you don’t live in the area you’re investing in or you want to grow your portfolio to multiple locations.
Another crucial aspect of profitability is your operating costs. How expensive is the upkeep of your property?
Remember that operating costs include both regular maintenance and unexpected repairs. A good guideline for maintenance is to expect to spend 1% of the home’s purchase price or $1 per square foot.
Unfortunately, if your property is maintenance-heavy, costs can eat away at your profits quickly. It’s always best to research thoroughly and have the property inspected by a reputable company before purchasing so you can calculate maintenance and repair costs accurately.
If you're new to property management, it will take some time to build relationships with vendors; relationships that will pay off in more competitive prices and reliable, high-quality work. You can fast-track that process by working with a property manager that already has well-established contacts.
For larger operations, an in-house repair and maintenance team cuts down on costs exponentially as your portfolio grows. The difficulty is overcoming the initial investment and overhead that comes with recruiting your team.
Whether you’re concerned about monthly costs or the properties you’re exploring seem particularly expensive to maintain, finding affordable and reliable ways to maintain your property helps your bottom line immensely.
While some investors are able to put down cash in full for a property, most will have financed the property through a bank. If you don’t plan effectively, repaying your loan can eat away at your profits.
Some investors work with the BRRRR Method to leverage their mortgage into another investment and boost profitability. The BRRRR Method—Buy, Rehab, Rent, Refinance, Repeat—is a type of real estate investment that helps you grow your investment and purchasing power over time, through a cycle of buying, improving, and renting out property to generate passive income.
Again, doing your research and recruiting the right expertise is never a bad option to ensure you stay in the black. Property management is a balancing act and the less room you have in between the mortgage and the rent you charge, the more difficult it will be to absorb the costs of managing your property day to day. That’s why it’s important to have a solid strategy in place before taking the plunge and purchasing a property.
Read More: 11 Rules Every Real Estate Investor Should Know
Beyond your loan, property managers have to consider taxes and fees. Those include annual local and state taxes and may be both property and/or commercial depending on your property.
A tenant’s rent must cover not only your monthly mortgage payment and operating expenses, but also local and state taxes. This can be tricky to predict, as they can change year after year, but it’s safe to assume that taxes won’t decrease. Make sure you’re not in the hole when it’s time to pay Uncle Sam by setting aside money throughout the year or perhaps paying quarterly.
In the end, profitability depends heavily on an individual landlord’s business acumen. This plays a crucial role in all the other considerations we covered above. Did you research the market thoroughly before investing or setting your rent? Have you determined your monthly expenses and planned for the unexpected? Are you getting a fair price on maintenance and repairs by building long-term relationships with reliable professionals, or do you have your in-house maintenance in place??
A profitable landlord must know when to invest in both large and small projects. Is it the right time to buy into a hot neighborhood? Should you push that non-essential repair to next month? The good news is that this isn’t all instinct. It’s a skill one can acquire. After all, profitable landlords aren’t born. They’re made.
The first step is to do the math, not sit back and hope for profitability. Crunch the numbers with our real estate investment calculator to see where your investment can improve and put profitability on an upward swing.
One of the easiest and quickest ways to improve profitability is to partner with a property management company. When working with a property manager, you have a relationship with someone who’s an expert in all the areas where you may lack experience. Plus, many PM companies charge a percentage of your profits, incentivizing everyone to earn more!