Return on Investment for a rental property is calculated with several different variables—acquisition price, yearly taxes, insurance, and expected monthly rental rate. These variables are all objective, so the representing numbers can always be adjusted. They can be increased or decreased, depending on market conditions and due diligence.
Besides the previously stated, there is a variable that ROI hinges upon. This is a variable that can boost profits, and is expected to normally keep an investment property moving forward. It also has the ability to completely squander all possible profits, if not approached with delicacy.
The tenant living in your rental property can arguably stand as the single most important variable in your investment formula.
Your tenant-landlord relationship is essentially a business partnership, where you’re making the money, and the tenant receives a stable, low-maintenance living arrangement. Ensuring that the tenant has respect for your investment, and the ability to afford the cost of living is crucial to your ROI. As an investor, you understand that every percentage of return is valuable, and a single missed rental payment will affect the overall yearly return.
Evictions hurt more than just income
A single missed rental payment can snowball into a mess of tenant debt, distrust, and wasted income potential. If a rental home has the following stats:
Expected Monthly Rent— $800/month
Taxes/Insurance/Management Fees— $250/month
Yearly Return on Investment—12%/$6,600
The above numbers are real, and taken from a home in our inventory. After all fees, the investor is making 12% profits off $55,000 in a year. If the tenant falls behind on a single payment, that cuts the ROI down to about 10%. Two more missed payments, and ROI has been essentially slashed in half. Nobody signs up for 6% returns on a $55,000 property!
In the worst-case scenario of tenant non-payment, evictions are filed, which may take up to 90 days to legally process. 90 days of possible abuse to the property by a disgruntled tenant, and 90 days of non-collectable rent. The entire eviction process has costs—court fees, lawyer fees, cleanup, and sheriff fees.
As a rental property investor, you should know that any type of tenant issue should be dealt with in a judicious manner. The first contact made with a tenant who is late on rent can dictate the difficulty or ease that the resolution of the issue will require. An eviction can truly eat up every penny of profit you expected to make this year on your investment property.
Increase ROI, Without a New Tenant
If handled correctly, a smart investor can use a lease renewal to increase their ROI, and the tenant will often times be more than happy to fund this increase! There are many different ways to entice a favorable tenant to remain in your home following the conclusion of their lease. Low cost improvements and tokens of appreciation will help to greatly enhance a tenant’s attitude towards the property.
As the final months of a tenant’s lease period approach, a landlord should make contact with, and visit the tenant to see how to make their stay more convenient should they elect to extend their lease. It is important to ensure this meeting is at the rental property, to assess the condition of the home. In the discussion should be the possibility of extension incentives for the tenant, along with any changes in monthly rental price.
If you are hoping to increase long term ROI, introducing furniture to a rental property can help in doing so. A couple of bargain couches, window blinds and a television set can be bought for $700 or less. Every appliance or piece of furniture introduced to a home can add $50 to your monthly income, and essentially pay itself off within a few months.
If the home you have invested in has pre-existing landscaping, maintaining this look for tenants will help in keeping the home desirable. A desirable home will attract attention, and keep your tenants interested in staying. High end tenants are attracted by a great first impression.
The Journal of Arboriculture recently published a study that confirms our suggestion— landscaping can add 7% to the monthly rental rate of a property.
Assuming that there was a security deposit taken at the start of a tenants lease, a tenant move out should never cut into a landlord’s profit. Incentivizing a tenant (to resign a lease) with appliances, furniture, or a television will often prove more advantageous over making home repairs and finding a new tenant.
Bottom Line—tenant turnover repairs often exceed the costs of incentives discussed in this article
Tenant turnover repairs often prove to be more costly than incentives, so it is always a good idea to try to keep a good tenant close. A positive relationship between landlord and tenant is advantageous for many reasons, most importantly; returns on investment. The main purpose of a rental home is to collect an attractive, passive profit, not chase tenants around for rental payments or repair costs! The end of a tenant lease cycle can serve to dwindle or boost profits, and it is up to the intelligent investor to ensure that no significant losses will sway their profits.