- Personal Finance
How to Take the Hassle Out of Making Money in Real Estate
There are several ways to take the hassle out of making money in real estate. The first method is to invest in turnkey properties. We’ll discuss in detail the two common meanings of this term and the differing demographics they attract. The second method is to use a qualified property management firm. The third method is to minimize your vacancy expenses.
Let's look at each of these approaches to making money in real estate in detail.
Invest in Turnkey Properties
There are two types of turnkey properties. The first definition of turnkey properties is a property that requires no repairs, renovations or rehabilitation. Upon purchase, someone can move in their furniture and belongings and live there.
A second definition of turnkey properties is a property that is entirely furnished. If the new renter or buyer turns the key, they could theoretically walk in with the clothes on their back, order pizza and live in the property.
For investors, there is a third definition for turnkey properties - those properties that are already fixed up and already have a renter in it, generating cash flow via regular rent payments.
Turnkey properties that require no work to live in attract a majority of home buyers. Given the high cost in terms of money and repairs of fixer-upper properties, true turnkey properties fill quickly if comparable homes require work such as foundation repairs or termite extermination. Those people looking to move into a new home do not want to make repairs; they simply want to move in.
Fully furnished turnkey properties attract a smaller subset of home shoppers but command a premium. These turnkey properties are typically rented or sold to individuals on an extended work assignment and need to settle in quickly to get to work. Relocating military families, oil rig workers and seasonal employees often fit this demographic. Other tenants want a convenient option to home occupancy without the long term costs of upkeep or furniture.
Empty nesters moving closer to their children may move into turnkey properties to avoid the need to move or buy furniture. Immigrants may buy a turnkey property to provide an instant home to family about to arrive with only their suitcases. College students rent turnkey properties to provide the amenities of home without the hassles or relocating at the end of every semester.
The ability to move into the home without the cost and hassle of furniture and household fixtures attracts a smaller subset of buyers who will pay for that privilege. The highest rental rates go to fully furnished turnkey properties that are a short distance to major employers, colleges or transit stations.
Use a Property Management Firm
A qualified property management firm has experience managing properties. They have licensed and bonded maintenance people on staff or on call to handle issues from plumbing leaks to pest control. A property management firm acts as an intermediary with the tenants, collecting rent while forwarding the funds to the real estate owner. Some property management firms will perform routine maintenance on the property such as cutting the lawn or servicing the pool.
While property management firm fees are equal to about 10% of the rental rate, the property owner eliminates the hassles of maintaining the property and receiving calls at all hours to solve problems. When someone owns multiple rental properties, a qualified property management firm is necessary to properly service tenants and prevent the real estate investor from constantly working as a handyman or manager of the many contractors required to keep tenants happy.
Minimize Vacancy Expenses
Vacancy expenses are the costs you incur when there is no tenant in the property. Vacancy expenses include mortgage payments, property taxes, property maintenance costs, security and property management costs.
You can minimize vacancy expenses by keeping the property occupancy as high as possible. However, there is a delicate balance between keeping a property full and avoiding bad tenants. Bad tenants may fill a property, but they may not pay rent on time or damage the property. A qualified property management firm will thoroughly screen tenants while staying within the boundaries of the Fair Housing Act.
Solid tenants will occupy the property and pay rent on time. Careful screening of tenants will also prevent the expense of evicting them for non-payment of rent or violating the rental agreement. Good property management firms also keep the tenant pipeline full, searching for new tenants as soon as the existing one gives notice that they will be vacating the property.