Investing in real estate is a numbers game. The profitability of any given investment often comes down to a very simple equation. Though you can analyze the numbers in different ways, such as the profitability index ( Profitability Index = Present Value of Future Cash Flows ÷ Initial Investment ) and ROI ( ROI = Net Return on Investment ÷ Cost of Investment x 100% ), the point is that it all comes down to numbers.
However, those numbers aren’t necessarily set in stone. As a real estate investor, there are many things you can do to maximize the returns on your investment. If your profit margins aren’t where you want them to be, be sure you aren’t neglecting these essential strategies.
3 Essential Strategies for Maximizing Investment Profit Margins
While these strategies — these priorities — are different in their own ways, it all comes down to the quality of your property management and your turnkey partner. For real estate investors, who you choose to work with is of utmost importance. It can mean decades of success or a quick crash-and-burn.
Select Markets Well
No real estate market is the same as another. Part of maximizing your profits as an investor is choosing these markets wisely. Some markets may simply be too expensive to make good investment sense. Just as markets vary, so do your circumstances as an investor. You might make good money in your home market, based on its cost of living, but your dollar may be squeezed in another market. It also might go further.
Pay attention to your specific context — your cost of living — and how the value of your money stacks up against the markets you want to invest in. In the long-term, some markets, due to their high cost, can stunt the growth potential of your portfolio.
When selecting real estate markets to invest in, prioritize those with a strong, diversified local economy (including its job market) as well as a history of demand for rental properties. How a market performs in good times only tells you so much. Go back in time and see how the market has weathered an adapted in times of crisis, too.
Minimize Resident Turnover
For the real estate investor, the most expensive time is when there is a property vacancy. Vacancies can be a short period of transition between residents or it can be prolonged due to a lack of demand (this is why the market is so important!). It’s only natural that investors experience turnover in their properties, but minimizing these occurrences keeps your cash flow strong.
This starts with your property management team. They’re the ones who identify and vet residents. Not only do they do this to weed out unreliable or destructive residents, but they do so with the long-term in mind. You should want your residents to be those with a long-term investment in where they are versus a transitional mindset. It means that their lease is more likely to be renewed!
Only experienced property managers know exactly what kind of residents to look for when filling a vacancy. As an owner and investor, choosing the right partner is critical.
Be sure to check out: Investment Success Happens With a Proven Strategy
Stop Hiccups Before They Happen
For real estate investors, preserving and maximizing your passive income means predicting the future. Perhaps anticipating the future is more accurate. Your profits hinge on your ability to manage risk — and managing risk well means seeing problems before they’re even there so you and your team can cut them off at the pass.
An attentive maintenance and management team that can discern issues before they become big problems. They err on the side of caution to maximize the long-term value of your property. They replace appliances and structures before they “need” to be replaced to ensure there’s not more damage done in the long-term. They aren’t about quick-fixes but doing the job right the first time.
While it’s true that this kind of attentive management will often come at a higher cost, they save you in the long-term. Because they’re truly on top of your investments, big problems rarely slip through the cracks while proactive solutions stay on deck.
Rely on a turnkey partner with a proven record of investor success: REI Nation!