Spend just enough to make your tenant happy

In this final instalment of my four-part series on rental income, I look at the expense side of the equation.

Your rental income depends on your ability to buy an affordable home, manage your clients, and cover costs related to financing and maintenance.

In finding an affordable home, I cannot overstress the importance of understanding rental market fundamentals, selecting the right location, and investing in a unit that gives you the right balance between the cost of buying the unit and the rent you can charge.

Investing in rentals is a business, so focus like a laser on managing the topline (rental income) and the bottomline (profit or loss).

Improve your topline by purchasing the right home at the right price. Then, manage your property so that you can cover your expenses and earn a profit.

In managing expenses, there are two areas of concern: financing and maintenance.

As a rental investor, you should obsess over mortgage interest rates. The lower the interest rate, the lower your cost of investing in a rental, so shop around for the best interest rate.

If you already have a mortgage, do not hesitate to refinance when interest rates drop.

Every dollar you save on interest payments goes into your pocket as profit (after taxes).

The trick to managing maintenance expenses is to spend just enough to keep your tenants happy, but not enough to cut unnecessarily into your profits.

There are two things you can do to regulate your maintenance expenses.

First, maintain the rental according to the type of tenants you are targeting.

If you are playing in the luxury rental market, you must install kitchen appliances and other amenities that will attract the well-to-do.

You cannot cut corners, so it is important that your real estate agent knows where to find clientele who can afford high rent and cover your costs.

If you are targeting middle-of-the-road tenants, then install average appliances and fixtures.

It makes no sense to pay top dollar if your target tenants cannot pay enough rent to cover your costs.

However, I caution against buying cheap appliances and fixtures with short lifespans: It is better to pay a little more for something that will last longer.

As a general rule, the fewer times the repairman needs to make house calls, the happier the tenant.

When appliances, air-conditioning units and other household items do break down, evaluate whether to service or replace them as if they were fitted in your home.

Unscrupulous landlords drag their feet on replacing these items because they can postpone cash outlays by passing repair costs onto renters. (Most rental contracts require tenants to pay the first few hundred dollars in repairs.)

ILL WILL

This is a poor business practice as it creates ill will.

The second thing you can do to manage your expenses is to work with a trustworthy and competent handyman.

The good ones know how to get the best price for goods and services in the off chance they cannot do it themselves.

In addition, they pay for themselves by helping you maintain the rental home in good condition and prolonging its life.

Again, investing in rentals is like any business. You want to surround yourself with good people.

When it comes to purchasing rentals and bringing in clients, a knowledgeable real estate agent is worth his or her weight in gold.

And your handyman will improve your rental income by helping you keeps costs where they should be.

Sam Baker is co-founder of SRX, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property transactions.

This article was first published on June 14, 2014.
Get The New Paper for more stories.