Rental properties have been one of the largest real estate industry sectors to be hit by the increase in interest rates. With these higher increases, demand for properties have seen a drop by roughly 14% nationally as reported by TD Economics.
However, for those who can buy with cash or hold their nerve (and pay the mortgage) during the current cycle, now is an ideal time to strike a deal with sellers stranded by high rates. When rates eventually fall, investors will come back to the market and prices will increase, allowing intrepid investors to refinance, looking like financial geniuses.
So if you’re planning to venture into the current market with these higher interest rates, here are a few tips to help weather the storm.
1. Consider Switching to Short- or Medium-Term Rentals
Although some cities have strict short-term rental (STR) laws, you’re likely to have far more leeway with a medium-term rental (renting for a month or more). Your chances of maximizing your income increase if you snag a high-paying corporate client. Relocating executives, insurance companies, business executives, or athletes on short-term contracts or temporary assignments are some of the more lucrative clients.
Single-family homes or upscale condos have a distinct advantage over hotels in this department, allowing room for families in a self-contained, relaxed environment. Investor-owners will have to incur the initial expense of furnishing the home, but a high-paying client should replenish that expense within a few months.
If you do intend to rent to short-term visitors, buying a home in a year-round tourist destination or frequently visited area with lax STR rules will ensure a consistently high yield.
2. Add Additional Room in Attics and Basements
Extra rooms equal extra income. While some cities do not allow basement rentals or occupancy, others do.
Research your city’s rules for adding a kitchen and what permits you need. Often, gas lines are not allowed, but air fryers and portable induction cooktops are. You will also have to weigh the renovation cost versus the extra income you can generate.
3. Charge for Parking Spaces
Charging for garages or dedicated outdoor parking is becoming more prevalent, especially in large rental developments. Additionally, providing EV charging is increasingly in demand.
There can be some strict government guidelines regarding this. Charging your tenant extra to use a charger is a gray area if it is not directly billed to their unit. It’s an often contentious topic of discussion. This means a rock-solid lease agreement stipulating the rules regarding EV charging and the additional costs involved is essential.
4. Consider Splitting Utilities
If you plan to own a multiunit rental for a long time and are responsible for the utilities, consider splitting them. Costs to do so differ massively by home. Running separate water lines can be extremely expensive, and you’ll likely need to make more money back on rent to justify the investment.
However, cost-effective mini-split HVAC systems are relatively affordable to install, providing you have sufficient electrical wiring. Expect to pay between $1,000 and $4,200 for one outdoor and one indoor unit.
5. Self-Manage Your Properties
Self-managing your investment properties can be a gift or curse, depending on many factors, such as how many units you have, where they are located, what condition they are in, and the caliber of tenants you have living in them.
However, assuming you have one to four units (or more, depending on your available time and number of paid helpers) in good condition, in a good neighborhood, with upstanding tenants, self-managing could be a reasonably easy way to save spending 8% to 10% of your rental income on hiring a third-party management company.
6. Rent by the Room/Workforce Housing
With the rising cost of rents, room-by-room renting has become more popular. Similarly, workforce housing has become popular in major cities where essential and city employees such as emergency services workers, teachers, or government employees can no longer afford to live.
For an investor, a big draw for workforce housing concerns zoning. Essentially, you can have a single-family dwelling acting as a multiunit dwelling. To ensure maximum comfort for your tenants, fitting each room with its own bathroom means an upfront investment, but higher rents in the long term.
As with all rental properties, meticulous tenant screening is essential. Also, regular cleanings and robust security (such as cameras and biometric entrance systems) help prevent unwanted guests from entering the premises.
7. Consider Cost-Effective Improvements
Nothing turns off renters more than a down-on-its-heels home with a scrubby garden, moldy siding, and hanging gutters. First impressions count, so adding curb appeal with new (artificial) grass, trimmed vegetation, a newly painted exterior, vibrant planters, and a fresh hardscape go a long way toward making renters want to dig deeper in their pockets to secure a place in your property.
Kitchen upgrades don’t need to be gut jobs. They can include simply refinishing cabinets, adding hardware, upgrading appliances, and installing new counters. In addition, the bathroom should be presented as repainted and spotless, with a newly glazed tub. Upgrading a vanity and lighting are also relatively fast and easy tasks.
If you’ve got carpets in your rental, it’s time to get with the vinyl plank program. This type of flooring looks good, is easy to maintain, and creates a seamless, uniform look around the home.
Consider adding these amenities to simplify your tenant’s life, allowing you to charge extra for the privilege while claiming a tax deduction:
- A dishwasher
- Storage space
- Central AC
- Outdoor living areas (a simple patio, balcony, or deck goes a long way in the hot summer months)
- A fenced-in yard for pets
- In-unit washer and dryer
- Basement pay-to-use washer and dryer
8. Ratio Utility Building Systems (RUBS)
RUBS allows a landlord to regulate utility bills amongst tenants in a multiunit building based on certain criteria. It keeps a landlord’s utility expenses down in un-submetered buildings.
9. Appeal Property Taxes
The squeaky wheel gets the oil. Appealing your property taxes is a relatively inexpensive way to lower your expenses, especially if you choose to do it yourself.
The process tends to differ, however, depending on where you live. In some areas, it’s better to hire an attorney who specializes in doing just this, whereas elsewhere, contacting the tax assessor’s office should provide you with the forms you need.
Final Thoughts
There is no silver bullet for investors to get around high interest rates. However, depending on your resources, implementing some of these suggestions could enable you to continue to invest, taking advantage of the lull in buying activity until you can refinance once rates drop.
