There are approximately 28.1 million real estate investors in the United States. More than that, real estate income is one of the top three sources of income for individuals who have a net worth of more than $25 million. Making the decision to become a landlord may be one of the best decisions you can make to increase your financial wealth and security. Ideally, you will grow your rental income so that you are a full-time landlord with your lifestyle supported entirely by your rental properties. With this in mind, you may want to know how landlords make money off of their properties.
A Monthly Income Stream
A rental property produces income through the tenants’ monthly rental payments. Ideally, the gross rental payments for the entire property will pay for the full mortgage payment each month as well as for taxes, insurance, utilities, repairs and more. In the best case, there will also be a net profit that the landlord can benefit from. However, in order to accomplish this goal, a few things need to fall into place. First, you need to structure your real estate financing so that the payment is low enough to generate a net profit. Second, you need to keep the property occupancy high. Vacancy can erode away your profitability. Third, property repairs and maintenance should be affordable. Buying a property that is already in great condition is a smart idea. You will need to properly maintain the building to protect your investment and to build equity. This is also important for keeping occupancy high. Some landlords keep maintenance costs under control by doing some of the work themselves. Investing in a single home may not generate enough money for you to quit your day job. However, investing in multiple single family homes or in an apartment complex may yield a significant financial return for you to live on. Keep in mind that there are tax benefits associated with real estate investing that allows you to keep more of your net profit in your pocket.
Real Estate Sales Income
Another way you can benefit financially from a rental property is when you sell the property. Many real estate investment loans require you to place 25 to 30 percent or more of the sales price as a down payment. With each passing month, equity will grow through the mortgage payments paid for by your tenants’ rental payments as well as through property appreciation. Keep in mind that real estate values can decline, so there is some risk associated with this. However, while there are ups and downs in most markets, most properties will appreciate if you hold onto them long enough. This source of real estate income will not be realized until you apply for a cash out refinance loan or until you sell the property.
Create an All Bills Paid Environment
Another idea is to create an all bills paid environment for your tenants. This requires you to have the property master-metered instead of using a water or electric sub meter for every unit. However, a master meter doesn’t let you single out the tenants that use more utilities than others. With a master meter all utility bills will come to you, and you will be responsible for paying them for your tenants. Generally, you can charge your tenants higher monthly rent because utilities are included in the rent. However, in order to make a true profit from this, the property should be water and energy efficient. You may consider making some upgrades to the property in these areas to enhance your ability to generate a profit.
Your profits as a landlord will be higher when you manage your properties and tenants on your own. This is because hiring a property manager can erode away your profits. However, if you invest in a large enough property, you may have to commit full-time hours to this task. If your goal is to enjoy the financial benefits associated with being a real estate investor without the time and stress associated with daily property management, you may consider adjusting your investment and operating figures to account for hiring a full-time property manager to assist with your properties and tenants.