As a rental property owner, you have several goals – professional and personal. If you have not established a set of investment goals, you’ll want to do that before getting too far into your investing career.
Financial goals are good to have, too, and your ultimate goal is likely to generate a steady stream of income that can sustain you well into the future. Building wealth in real estate requires a combination of financial management, savvy investment decisions, and the ability to adapt to a constantly evolving market.
You want to set yourself up for short-term gains as well as long-term wealth. And, while there is certainly no one-size-fits-all approach, a local property management expert can guide you through some of the key financial management strategies that are essential when you’re looking to establish wealth and grow your profits.
Wealth Requires a Disciplined Budget
One of the most important financial management strategies you’ll want to create and implement is a budget. Making a budget and sticking to it is something that every successful real estate investor manages to do.
Establishing and sticking to a budget means taking an in-depth look at all of your monthly expenses. You need to know what you can afford when you begin investing in properties. Consider your:
- Mortgage payments
- Property taxes
- Property insurance
- Repairs and maintenance costs
- Projected vacancy and turnover costs
These are recurring and variable expenses that will impact what you earn and spend on your rental property. Think about each property individually and the entire portfolio you hope to grow.
Understanding your cash flow is critical to making informed decisions about how much to charge for rent, how much to save for future expenses, and how much to reinvest back into your property as you continue to make improvements, attract residents, and increase rental values.
Prepare for the Long Term
Building wealth through rental property ownership is not a get-rich-quick scheme.
To really earn some money on real estate, you need to adopt a long-term mindset, especially in this market, and especially in California. Planning for the future will help you see that success can be measured by more than cash flow.
How can you settle in for the long term? You can set aside reserves for unexpected expenses, such as repairs and maintenance, and you can plan for upcoming large expenses, such as renovations or upgrades.
Additionally, factor in your future goals and how your investments in real estate will help you achieve them. Take the time to create a plan that aligns with your long-term vision. Those investment goals are likely to shift over time, just like the market itself. It’s important to be committed to what you want and what you expect, but to remain flexible and adaptable so that you’re not thrown off by unexpected shifts and trends.
Look for Ways to Maximize What You Earn in Rent
One of the most direct ways to increase the value of your rental property and establish wealth for the long term is to maximize your rental income. This can be achieved by:
- Raising your rent from year to year (within the restrictions of California’s rent control laws).
- Adding amenities that can attract higher rental values and better-qualified tenants.
- Avoiding turnover and vacancy.
- Offering additional services to your residents.
Understanding the local rental market and how it influences your rental value and property value can be an important way to establish your financial footing and grow the strength and value of your portfolio.
Look for Ways to Reduce Expenses
Increasing what you earn is necessary, and so is reducing what you pay to buy and hold rental properties. Reducing expenses is a key financial management strategy that can help rental property owners build wealth. Look for ways to cut unnecessary costs. Perhaps you can re-negotiate service contracts, research more affordable vendors to manage maintenance and repair costs and reconsider unnecessary expenditures. By reducing expenses, you can increase profits without raising rent or sacrificing quality.
Know how to identify where you’re losing money. Are your turnovers taking several months to complete? That’s a large vacancy loss. Are your tenants leaving damage behind that exceeds their security deposits? Maybe you need better screening or more frequent property walk-throughs.
Careful financial tracking will ensure you keep your spending under control. Generate reports for yourself that show you exactly where you’re spending the most money and whether it’s truly necessary. Then, look for solutions.
Diversify Your Real Estate Portfolio to Build Wealth
Finally, diversification is key to building wealth in any investment strategy, including real estate. By diversifying your real estate investment portfolio, you can spread your risk across multiple types of properties, locations, and investment strategies.
This is most commonly achieved through purchasing properties in different markets, investing in different property types, such as multifamily or commercial properties, and using different investment vehicles, such as a Real Estate Investment Trust (REIT) or investing in private real estate deals.
There’s also the 1031 exchange, which is still underutilized by many real estate investors. When one property isn’t working for you the way you want it to, sell it. Instead of pocketing the proceeds (and paying capital gains taxes on them), re-invest those dollars into another property.
Building wealth through rental property ownership requires a combination of financial management strategies, savvy investment decisions, and a long-term mindset for financial success. By creating a budget, planning for the long-term, maximizing rental income, reducing expenses, and diversifying your real estate investment portfolio, rental property owners can increase their cash flow, reduce risk, and ultimately build wealth over time. These strategies should be reviewed periodically and adapted as needed to keep your rental property investment portfolio and financial goals on track.
We love working with new and experienced investors to increase wealth and establish success. Let us know what you want to achieve next, and how we can help.
Please contact us at South County Property Management. We serve Santa Clara County, including San Jose, Campbell, Saratoga, Cupertino, Sunnyvale, Los Gatos, Milpitas, Morgan Hill, Gilroy, and neighboring areas.
