How to Best Leverage Your Rental Income

Owning rental property can make you a nice monthly nest egg.

Owning rental property can make you a nice monthly nest egg.

If you're in the market to purchase properties and make extra cash, or perhaps you're thinking about renting properties as your sole income, it's safe to bet you want to make the most of your investment. Leveraging your property is a smart way to achieve this. Leveraging basically means capitalizing on the efforts of others to earn money. In this case, capitalizing on the money you earn from renting properties out can earn you more money.

Research the Area

Buying a property and then sitting back while you collect rent checks sounds easy in theory, right? But there is more work that goes into successfully managing a property and getting the best bang for your buck than what one might think. Researching the neighborhood and city you're thinking about purchasing a rental property in is the first step. Look at different rental properties and their monthly rent to see what the local demand is as well as an idea for how much house you should purchase.

Crunch the Numbers

After you know what similar properties are renting for, you'll have an idea of an appropriate rent-to-home value ratio. For example, if you buy a property for $200,000 and rent it for $1,700 per month or $20,400 per year, you would be getting 10 percent of the home value in cash flow if you spread the mortgage out over 30 years. On a home loan with a 4.5 percent interest rate, your principal would be around $1,013 per month. Adding estimated taxes and insurance would bring your mortgage payment up to around $1,300. Therefore, you would have an extra $400 a month or $4,800 per year in liquid income.

Maximize Your Earnings

Assuming you have positive cash flow every month, you can then begin to think about leveraging that income to pay off the mortgage more quickly. Using the same theoretical example, if you put that extra $4,800 toward your principal every year, you would have your mortgage paid off 13 years sooner and save a whopping $76,698 in interest. This is because the more you pay on your principal, the less tax you have to pay over time.

Reinvest

When your mortgage is paid off on your income property, you will start reaping the monthly income along with the benefit of owning your property outright. At this point, if you want to continue down the road of real estate investment, you can look into purchasing a second income property and repeating the cycle. The major benefit here is that you can put both your first and second property rental payments toward the second mortgage, which will make the second payoff even quicker. And, suddenly, you'll be well on your way to financial independence, if not modest wealth.

Upgrading Your Properties

Another effective way to leverage your rental income is to put that cash into equity on the property. Reinvesting your earnings can be a great way to add value to your property and then sell it at a premium down the road. The two rooms that recoup the best profits on remodels are kitchens and bathrooms.

Investing in Other Ventures

If you're looking to expand your portfolio of investments, taking the rental earnings and investing those into a different venture or investment is also another good route to go. Just make sure that you talk with a financial advisor before making any investment decisions, so that you know the return on investment, or ROI, and feel comfortable with the risk level you're taking.

About the Author

Lisa Carlson works as an associate director of recruitment and graduate programs at a public university, and has experience in management, marketing, personal finance and nonprofit organizations. She is a peer-reviewed author on publications for higher education recruiting and holds a B.S. in marketing and a M.B.A.

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