Get Better Yield For Your Rental Property

The four core principles in getting good rental yield;

  1. Increase rental fees
  2. Decrease vacant period
  3. Increase tax-deductible expenses
  4. Manage proper accounts

1. Increase rental fees (monthly rental rates)

This will obviously help to improve your rental returns. Stay updated on the market rental rates, so that you will know how much to increase for the next renewal or new tenant. Do remember to keep your rental competitive because over-pricing will result in longer tenant-searching period, and result in longer vacancy period. You can provide incentive monetary schemes (on top of the commission) to attract more agents to bring tenants to your rental property. Many corporate tenants (especially for budgets above $5000) are exclusively handled by specialist agents. Getting them to like you and your property should result in your property getting better rental. A good rental property specialist who has a close network with the corporate specialist agents will be highly beneficial to you.

2. Leave your rental property vacant for as short a time as possible.

Expect realistic market rental rates instead of pricing yourself above the market range and subsequently having to reduce down to the market level after 2 months of vacant period. 2 months of vacancy already equates to at least 15% decline in gross rental revenue. During a downturn, the time taken to source for a tenant will naturally take longer because of the economy and job market situation. There is no solution for the market’s cyclical nature, however, you can work to mitigate the situation by capitalising on the depressed rental market to do improvement works to your property. Depending on your budget and range of work to be done, you can time the renovation to finish at the time your new tenant decides to commence the lease. Once the rental market starts to improve again, at the next rental revision, you can then get to re-rent your property faster (being renovated) and at a better rental value than others. A good property manager will be able to advice you properly on how and where to do the improvement works – doing a complete overhaul may not be the best solution.

3. Increase tax-deductible expenses (and reduce other unnecessary expenses)

A few deductible expenses to note (which may sometimes be neglected) include

  • Repairs done to restore the property to its original state
  • Cost of maintaining the property (e.g. painting, pest control, monthly maintenance charges to management corporations)
  • Agent’s commission, advertising, legal expenses for getting subsequent tenants
  • Costs of supervision and rent collection if you rent out a number of properties and incur costs in engaging a third party (e.g. property agent / company) to supervise the properties and to collect rent on your behalf, a sum not exceeding 5% of the gross rent or the actual amount spent, whichever is less, may be considered. Each case will be considered on its own merits.

NOT-DEDUCTIBLE

  • Penalty imposedon property tax (or late-payment)
  • Cost of renovation, additions, alterations to the property or repairs done resulting in improvement
  • Agent’s commission, advertising and legal expenses for getting the first tenant
  • Depreciation of furnishings (e.g furniture, fixtures, electrical appliances)

4. Keep proper accounts for your rental property

Manage your rental property like how you would operate a business. The contracts and accounts should all be kept properly and in a systematic manner. This will help you to get a good overall picture of your “business” and substantiate appeals if tax expense claims are rejected by the authorities. Download for free – Rental Income Statement (excel spreadsheet) for reporting to IRAS.

Rental Property Tax Benefits

People who own residential rental properties are afforded numerous tax benefits. You are allowed to offset your rental income with rental expenses. If you own rental property it is critical that you understand the tax advantages afforded to you that will enable you to protect your income and lower your tax burden.

Here are a few of the deductions the IRS grants you on your tax return if you own rental property:

Mortgage Interest – You can deduct the mortgage interest you pay on your rental property’s mortgage payment.

Depreciation – You can depreciate your rental property by deducting some of the cost on your tax return each year. For residential property, the IRS states that you must depreciate the property over 27.5 years. You must EXCLUDE the value of the land from the value of your home prior to calculating depreciation.

Repairs – You can deduct the cost of repairs. Examples of repairs include repainting your property, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

Travel Expenses – If you own a rental property the IRS allows a tax deduction when you drive anywhere for your rental activity. For example, when you drive to your rental property to deal with a tenant complaint or go to Home Depot to purchase an item for a repair, you can deduct your travel expenses.

Generally, if you use your personal vehicle for rental activities you can deduct the expenses using one of two methods; actual expenses or the standard mileage rate. For 2006, the standard mileage rate is 44.5 cents a mile for all business miles.

Home office – You may deduct expenses related to your personal residence as home office deductions. These include utilities, insurance, depreciation, and repairs allocated to the business use of your home.

Employees and Independent Contractors – Whenever you hire anyone to perform services for your rental activity, you can deduct their wages or services as a rental business expense. This is the case whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

Insurance – You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for the rental property, as well as landlord liability insurance. If you pay the insurance premium for more than one year in advance, each year you can deduct the part of the premium that will apply to that year. You cannot deduct the total premium in the year you pay it.

Legal and professional services – You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Rules For Buying Rental Properties

According to experienced landlords, the difference between a rental property being a profitable investment and being a disaster is how much work an investor is willing to do. Anyone buying rental properties must choose properties that generate a positive cash flow, and this involves more than the rent covering the mortgage payment. It is a mistake for someone buying rental properties to think they can deal with negative cash flow by waiting a while for the property to go up in value and then “flipping” the property for profit. Just ask the people who bought property in 2007 and tried to flip it in 2008 or 2009. The three big mistakes people buying rental properties make are underestimating expenses, expecting to put no money down and get instant riches, and not screening prospective tenants.

Big Mistake Number 1 is underestimating the expense. To be safe you should estimate that on a monthly basis, 40 to 60% (depending on whether you hire someone to manage the property) of the rental income will be spent on things like insurance, taxes, vacancies, and damages. Why such a high percentage? A major repair such as a roof or new furnace can really set you back. One way to figure out how much you should pay for a rental property is to find out what rents go for near your property, and divide that by 0.01. That would mean that for a house that rents for $1,000, you should spend no more than $100,000 on the purchase of the property.

Big Mistake Number 2 is believing those infomercials about “no money down and instant riches.” Those people on the commercials who live on a yacht within months of buying rental properties for no money down have nothing to do with the real world. Owning and operating rental property is more of a business than it is an investment that you sit back and watch grow. If you plan to manage the property yourself, be prepared for your phone to ring at any time, and be prepared to take care of the burst pipe or broken window that your tenants report. If you hire someone to manage the property for you, expect this to cost around 10% of the gross monthly rent.

Big Mistake Number 3 is failing to screen new tenants. If you’re in a hurry to rent a place out, or if you feel sorry for someone, prepare to pay big for it. Credit checks can be done for as little as $10 to $20. Verifying references may seem like a pain, but you should do it anyway. Contacting previous landlords to ask about their rent payment history, cleanliness, and damage to rental units is time well spent. Even if you hire someone to manage the property for you, take the time to learn the landlord-tenant laws where you live. You can bet that the “professional bad tenants” know the law forwards and backwards. Just remember that legal forms may cost a few dollars and getting them signed will take some time, but the time and money spent on an eviction is far more expensive and time consuming.

Buying rental properties can be a good or bad investment just like anything else. There are a number of rules of thumb for calculating expenses and cash flow. You also need to know how to analyze rents in the area you have in mind beyond just what the rents are at a given address. You will need to learn how to consider capital investments and determine whether a big repair on a property you are considering buying is a dealbreaker or not. Buying rental properties can be a satisfying way to make a side income or even a primary income as long as you go into it with your eyes open and don’t believe the infomercial hype about no money down and instant wealth.

Learn the details of how to analyze a rental property purchase and what to expect when you own it at