No matter your financial circumstances, inflation is taking a toll on all of us. If you’re investing in real estate, you’re off to a good start in protecting your wealth from shrinking. After all, real estate is a hedge against inflation! However, it’s not enough to grow your wealth through equity and appreciation.
No, for real estate investors, passive rental income is an essential part of the equation. And that passive income is much more vulnerable to the effects of inflation! With the cost of goods and services on the rise, too, it’s more important now than ever to protect your passive income.
6 Strategies for Growing & Preserving Rental Income in Spite of Inflation
#1. Minimize rental vacancies
The number one way to kill your ROI is to have a prolonged rental vacancy. Vacancies mean you lose a stream of income, albeit temporarily, but not the expenses associated with the property. Resident retention is essential. You increase lease renewals and minimize vacancy time by:
- Having excellent marketing & outreach strategies
- Providing an incomparable rental experience
- Hiring diligent & agile management
- Maintaining effective systems & procedures
#2. Upgrade for durability
When making property renovations, it’s all about durability. The longevity of your materials impacts three things: the effort required to maintain them, the timeline for needing to replace them, and the difficulty of cleaning and repairing them between residents. For example, carpet is notoriously difficult to deal with because it shows wear and tear quickly and can be expensive to clean professionally. A laminate floor, on the other hand, stands up better against foot traffic, messes, and grime.
Some investors make the mistake of considering aesthetics before functionality. Don’t be one of them.
#3. Defer capital gains
Mitigating tax liability is one way to save on your overall expenses. That, in turn, boosts your ROI. There are two primary ways that real estate investors defer capital gains taxes: investing through a self-directed IRA (SDIRA) and utilizing the 1031 Exchange.
Investing through an SDIRA allows you to acquire rental properties and other investment assets contained in the SDIRA funding. Because it stays within the IRA account, you aren’t making taxable income until you choose to withdraw those funds.
Similarly, the 1031 Exchange allows investors to trade one like-kind investment property for another (and even more than one) without having money change hands. Instead, it goes through a qualified intermediary (QI). This allows you to grow and revise your portfolio tax deferred.
#4. Seize opportunities for favorable refinancing
While many real estate investors are passive and uninvolved in the day-to-day operations of their rental properties, it’s not an excuse to check out. Your job is to set goals, plan acquisitions, evaluate performance, and seize prime opportunities.
One such opportunity is that of refinancing. Keep an eye on your various mortgage interest rates and, as your equity and credit score increase, take advantage of the opportunities to refinance. A more favorable interest rate means less money goes to interest. The principal is where you increase equity. It’s also possible to do a cash-out refinance but beware of the debt burden it incurs. That’s the trade-off for tapping into your equity for cash.
#5. Target advantageous real estate markets
Where you invest makes all the difference in the world. One of the ways your market impacts your bottom line is in the cost of owning and operating a rental property. Some markets will have more favorable property tax and income tax laws. Again, reducing your tax liability is key! Even marginal percentage differences add up over the years.
Similarly, markets can vary in terms of cost for properties, materials, and labor. Target markets where your dollar goes further!
#6. Invest in quality, consistency, & experience
Finally, the number one way to preserve your passive income simply comes down to how you run your business. Don’t cut important corners. It’s far more important to invest in quality partners, providers, and managers than to save a short-term buck.
When you invest in people with the know-how to get the job done and exceed industry expectations, you’ll create an ironclad portfolio. Turnover will decrease, maintenance issues will be well-managed, and you’ll avoid the costly errors that inexperienced investors make.
Partner with the company that prioritize and protect your passive income!