There are six key strategies for maximizing returns from real property investments:
- Property Selection
- Active Property Management
- Secondary Income Streams
- Property Maintenance
- Tax Implications
- Maximum Cash Flow
Let’s look at how each strategy, when employed correctly, could improve your bottom line.
Property Selection. You never want to own all your properties in one geographic location or in a location that is linked to the success of one industry.
- Diversification is key. Consider Silicon Valley. Right now, technology is booming, but at some point, the bubble will burst. This part of the San-Francisco Bay Area also sits atop the earthquake-prone San Andreas Fault. If there are substantial changes in that area, whether geographic or economic, a home purchased for $2 million at the height of the bubble could lose $1 million in value fairly quickly. Talk about a seismic shift!
- That’s why it’s safer to diversify your investment properties across the country. Choose cities in safe and economically diversified areas with above-average income and population growth.
- Active Property Management. This is another key to maximizing your returns. While some people love managing property, many others find the job a chore. If you fall into the latter category, it’s a smart idea to hire professional property managers to maintain your properties while keeping costs down. Most professional managers serve several multi-unit properties at once, and their ultimate goal is to find every penny of possible income. They monitor trends in rent prices and rein in expenses.
- Secondary Income Streams. Real estate is not the only potential source of revenue. Other lucrative sources of income are frequently overlooked. Unfortunately, most property owners aren’t even aware that such opportunities exist. Additional income streams include rental washers and dryers, refrigerators, and other household appliances. A professional property manager can assist you in identifying secondary income streams.
- Property Maintenance. Well-preserved property keeps tenants happy, and encourages new tenants to sign a lease. It’s also much easier to take care of little issues throughout the year than have a tenant complain about substantial property issues all at once.
- Tax Implications. It’s tempting to leave taxes to the accountants, but most accountants aren’t capable of handling syndicated real-property tax issues, and as a result owners overpay the government. Tax implications of selling an investment can be financially devastating, and that fear keeps many property owners from ever selling. This is where understanding the 1031 Exchange is crucial: it allows property owners to avoid taxes upon the sale of one property by immediately purchasing another. (I explain this strategy in my book, Cashing In Tax Free™.)
- Maximize Cash Flow. If you find ways to maximize cash flow, you bring in valuable cash now instead of simply counting on real estate appreciation slowly over time.
These strategies taken together are all ways to increase the amount of money coming in. These are proven strategies to maximize returns. Employing all six strategies requires considerable time and expertise, but are valuable when moving from individual real-property investing to institutional-grade investing.