Conventional wisdom says buy as many rental units as possible. After all it’s good for your financial future and great for your ego.
Collecting rentals is a well-worn path to financial freedom, but more needs to be said about profitability. Placing an emphasis on profitability is a must. Try to double the profitability of your current holdings. The very attempt might set your investment career ablaze.
I like to ask seasoned investors this question: “If all market conditions were equal, would you rather have a 16-unit building yielding $1,600 per month or a fourplex yielding $1,600 per month?” Each and every respondent said they’d prefer a highly profitable fourplex.
They list the following reasons:
- Less scheduled maintenance and expenses
- Less staff and human resource variables
- Fewer tenants, toilets and pets
- Less exposure to increasing government regulations and arbitrary tax increases
- Less potential loss and overall risk
Without fail, the highly profitable rental units are most preferred. With that being the case, we should study what such a rental looks like. It most certainly brings in more income than market rents. And that leads to the next question: Is your pursuit of market rate rents limiting your imagination and profitability? Should you aim higher?
Are Market Rents The Right Goal?
We all try to keep our apartments filled with good tenants that pay on time. This has been a pillar for success for centuries and will likely continue to be so. Obviously, tenant rents are crucial.
Rents are important indicators when you’re shopping for properties. You compare the current rent roll to market rate rents. Rents are important during loan approval; lenders use them to predict your fundability. And from an ownership position, you want to raise rents as much and as frequently as the market allows.
However, when it comes to profitability, we can do much better. Rents should not be your sole focus when choosing a profitability target. In fact, they are somewhat of a distraction.
Tenant rents are one of hundreds of potential revenue sources available to property owners.
Once you take ownership, it’s time to switch from underwriting-like thinking and to look beyond rents. You can more than double your net income if you strive to diversify your income.
However a different type of thinking is required to grow minor revenue streams to the point where they, once aggregated, surpass tenant rents. This requires an intense focus on ancillary income. It also requires guts to risk being dismissed as naïve. Are you willing to take the risk?
Be assured that the odds of achieving super profitability are now in your favor. With so many networking tools, it is easier than ever to connect with whomever you’d like. And since you can connect with the client of our choosing, you can craft an offering that solves a problem they feel is worth solving. And big rewards are attached to solving big problems.
What Is Super Profitability?
I define a super-profitable rental as one that yields four times what a classically operated rental does. Meaning a fourplex would net the same cash flow as a classically operated 16-unit complex. To make this happen, and I believe it is very possible; you need to add other income streams to your property.
Why Super Profitability Should Be Our Goal
Not focusing on side income limits the wealth you can create through forced appreciation. This would be a huge waste of potential. If you could do so much social good and create so much more wealth – why wouldn’t you?
For example, applying our collective creativity to ancillary income could have a major benefit to:
The affordable housing industry – a significant amount of ancillary income would reduce the need for subsides.
Owners limited by rent control ordnances – cultivating side income will help these owners compensate for the unfavorable investment landscape.
Normal private owners – these owners can deploy their natural resources in a way that provides better housing services to their residents and resources to their neighbors.
But with a narrow focus on rents, you may never get around to monetizing the resources within your property’s endowment.
Moving Beyond Market Rents
Moving beyond market rents is easier said than done. The focus on rent is so ingrained into our industry, that there is little reference material to learn from.
As someone who pays his eight unit apartment’s mortgage entirely with ancillary income (which exceeds my tenants’ rents), I can tell you this accomplishment wasn’t easy. But now, with the help of the Internet and a little guidance, you can double your profitability without spinning your wheels.
I use a mixture of corporate and short-stay housing, administrative charges, housekeeping, laundry, financing and transportation measures to generate twice the amount of income a typical owner would. But how about you? Do you want to double your net income? Here are some suggestions to get you going:
3 Steps to Achieve Super Profitability
You need not start flat footed. Follow these steps to jump start your super profitability pursuit:
Step 1: You must become thoroughly dissatisfied operating as a classic landlord. In fact, you should cultivate a healthy hatred for the status quo. This is needed to fuel the awareness needed to spot opportunities that lead to super-profitability.
Step 2: Familiarize yourself with the 12 categories for ancillary income. My research shows side income ideas self-organize into 12 categories:
- Energy
- Transportation
- Commerce
- Land Use
- Storage
- Hospitality
- Place-making
- Health & Fitness
- Energy
- Advertisement
- Fees & Commissions
- Financing
Brainstorm within these categories to stretch your imagination beyond vending machine ideas.
Step 3: Test your ideas on a small scale, recalibrate, then expand on them. Be sure to test your marketing and operational plans before making major capital investments.
Take Aways
Owning a large number of rentals and becoming super profitable are not mutually exclusive. In fact, acquisition and optimization work together like the pedals on a bicycle.
If you make a serious and thorough review of your side income opportunities you might discover a world of new opportunities. And, as a consequence, you might double your profitability.
Al Williamson is the author of 40 Ways to Increase the Net Income of Your Rental Property. He is the thought leader behind the Leading Landlord Blog which helps rental owners increase their income and equity. Follow his landlord experiments at http://LeadingLandlord.com