By Gord Lemon / In Blog, Real Estate Inspection / 0 Comment
Everyone always wants to make more money on their rental properties, this is a given. The real question is: how do you make your next deal more profitable as well as potentially squeezing more cash out of the properties you have already.
Let discuss a few strategies to make you more money which will range from simple to a bit more advanced. For the purposes of this article, let’s assume you are buying (or already own) a property which is typical for the average Canadian real estate investor: the detached single family home. You can apply most of the following suggestions to small multifamily properties also.
Assess the potential to raise the rents.
It is quite common to be looking at what seems to be a good property only to find the rents are lower than market rents in the area. Before you immediately pass on the deal, take a deeper look into why the rents are low and if there is a quick fix to make the numbers work.
Every province has their own Residential Tenancies Board which dictates the annual rental increases. Surprisingly, many landlords are reluctant to enforce these allotted increases. Why would this be? Often the landlord is worried about losing good tenants and has not increased the rental amount for years, fearing even an inconsequential rental adjustment will lead to a vacancy. The answer is to enforce the rental guidelines. If the tenant moves out, then you can set a new rental amount with the next tenant.
Another common scenario for low rent is the neglectful landlord. You know; the one that hasn’t injected a lot of money (or any) into regular maintenance.. The only way for this landlord to keep tenants is keeping the rent very low…we have a name for these kinds of landlords.
In most cases you will be able to justify market value rent by injecting a surprisingly low amount of money into key areas of the property. First impression is everything and it is no different with tenants. A nice kitchen and bathroom, clean and freshly painted walls plus strategic front yard landscaping can substantiate a rental increase to market value and will aid in attracting a better overall tenant.
The following breakdown will highlight some small key items which add a huge “perceived” value in the eye of the tenant. These items can be acquired at any of the big box discount stores.
In the kitchen:
In the main bathroom:
Landscaping:
Overall repairs:
These few small, inexpensive renovations (in addition to your regular maintenance) will allow you to command a higher rent which ultimately increases your ROI. Not only that, the higher rent roll coupled with the physical improvements to the property can increase the appraised value of the property which in turn increases your net worth and helps the overall value of the neighbourhood.
Create a secondary suite
Anytime you are viewing a single family house, make it a point to look at the property with the potential of adding a secondary suite. A secondary suite can generate critical income which can turn a negative cash flow or “break even” property into positive cash flow. Also, from a vacancy perspective, if you have 2 units and one goes vacant, at least there is still some income being generated.
You must check the municipal zoning bylaws before embarking on the creation of a secondary suite. In most cases the zoning will not permit a legal secondary suite however many municipalities will endure an “unauthorized” suite. Typically if there is adequate parking and the tenants are quiet, you should have no problem. Complaints from neighbors are usually the main reason the municipality gets involved in shutting it down.
The key to a successful secondary suite is creating a safe living environment that passes fire code regulations.This will aid in acquiring insurance for the suite.
Some potential code regulations are:
These upgrades will cost very little compared to the extra income a second unit will generate.
Furnished rental
If there is no possibility of a secondary suite, a furnished rental can be an excellent solution for extra revenue. Your ideal target market is foreign/ out of town consultants for companies, temporary /seasonal workers, university professors and of course students, all requiring a furnished house, suite or room. Clearly there are varying degrees of how “deep” you can get into this strategy, but once you have created a solid niche in the local marketplace, this can be quite the cash cow. Often people charge double the market rent or more for furnished properties.
To understand the potential demand in the area, you need to test the market. To accomplish this, place ads on Kijiji or Craigslist for a furnished house or a furnished 1 or 2 bedroom suite. By the response, you will know if this is a viable option. Also, try calling larger companies directly to see if they employ out of town consultants for 6 months to a year or more who may be interested in a house rental as opposed to a hotel room. In the end this saves the company money and is often preferred by the renter as they feel more “at home” while out of town.
Once you have determined a need for the furnished rental, you can begin buying furniture. You can get a lot of excellent quality furniture and appliances on sale or used on Kijiji or Craigslist.
You will need to create simple, clean rooms decorated tastefully, making sure that you pay attention to colour schemes etc. Remember, you are creating a “home” for someone so it is important to be tasteful…don’t just throw together a bunch of cheap unmatched furniture. It’s like staging a house for re-sale except you own all the stuff. If you take your time and source out good used places, you can do this in an affordable manner and the rent you can command will pay off this expense in no time.
Additional rental ideas
You can make more money on a property simply by charging for some amenities. For instance, a coin operated washer/dryer can bring in extra income. These can be rented from a company that services them or you can buy them outright.
Another item which often is overlooked is renting out the garage. This can be rented to a tenant on the property or to a 3rd party who may need to park a classic car, a boat or even an RV. I’ve seen garages rented to people who use it as a workshop.
Depending on where your property is located in the city, there may be a demand for parking. You may have a spot which can be rented out weekly or monthly. You can be competitive by charging less than the commercial lots and still generate a reasonable income.
Given the varying property types and locations, you can rent advertising space on the lawn, cell tower on the roof or even sign space on the side of the building.
Rent to Own
This can be done using any property make- up but is typically utilized in single family homes. This strategy allows a person or family to rent the home from you for an agreed upon term and then buy it from you at the end of that term.
The rent to own creates more income for you and also drastically decrease the property management necessary on typical rental properties. There are a number of particulars and differing vernacular in the rent to own (RTO) or lease option as its also known, depending on who has taught the process, but the overall concept is as follows:
The purchase price is often determined at the beginning of the term and is calculated by “comparables” which depict the average of the historical 3 or even 5 year appreciation of the area. The future price is determined by projecting that same appreciated value by the number of years the term of the contract needs to be. The length of the term is based on the time needed for the tenant to save enough down payment, and have an adequate credit bureau to get approved for the mortgage.
The rent to own is most effective under the following circumstances:
The next time you are viewing a potential property to add to your portfolio, or just examining the ones you may already have, check and see if any of these ideas can be implemented to generate more income thereby raising the level of your net worth.
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