The best investment is one that doesn’t devalue. You can save up money and put it in a locker, but that isn’t smart. Currency devalues. $5000 today is worth way more than what it will be a few years down the road. On the other hand, property values go up. This makes land ownership a lucrative business.
Another reason why investing in buildings and land is smart is leverage. When you’re purchasing an asset, the bank will cover more than half the cost. This is because you can put the property down as collateral. If you default on a payment, the bank can claim it and get its money back.
Moreover, owning an apartment building has its benefits for you too. While working in a corporate setting has its perks, there are definite downsides. For example, you always answer to a superior. Even if you’re the CEO, you answer to a board of directors.
As an apartment building owner, you are your own boss. You unilaterally decide if you want to focus on long-term or short-term returns. You control when you invest in a property. And you control withdrawing that support.
The independent nature of this business means that the answer to how much do landlords make changes from person to person. A smart investor will earn more than someone who doesn’t have a lot of business sense.
Now that we’ve gone over the general explanation for why owning an apartment building is smart, it’s time to talk about the question on everyone’s mind: how do rental properties make money?
How apartment owners make money
How much do landowners make? The answer depends on the following seven factors.
1. Cash flow
When you rent a property, you are giving someone shelter in exchange for money. You have to make sure that the price tag you put on a house is giving you profits. The bigger the margin, the richer you’ll be.
If you can successfully manage a rental property, you’ll have a stable source of income. Many financial advisors believe that cash flows from real estate are the most stable source of wealth. Not only is it money going into your pocket, but it gives you the chance to invest in other projects.
A positive cash flow is the easiest way apartment owners can make money. It’s also the most important. A negative cash flow can be fatal for your business. Try your best to avoid properties that won’t give you returns.
Property appreciation is when the value of real estate goes up because a lot of people want it. And this concept should be an apartment owner’s best friend.
How much do landowners make with it? They can increase profits by up to 40% easily. Let’s talk about how it works.
Investors purchase underperforming properties, for example, a building with poor management or low-quality assets. Then they increase its Net Operating Income (NOI). This can be done through renovation or operation.
Both are straightforward choices. Add higher class assets, increase the value of your property, and raise rents. The last step requires an uncomfortable conversation with tenants; however, it’s part of the job.
By offering a better product and superior customer service, you can change your customer base. Moving up the food chain means people with more money and increasing profit margins.
3. Refi & roll
The third way to increase how much you make off rental properties is by refinancing them. Replace the debt on a property and add a supplemental loan. This increases the NOI of the apartment building and, subsequently, its value.
We like this money-making strategy a lot and have used it several times. Once we make money by refinancing, we invest it in another project. That’s why it’s called refi and roll. The capital is rolled into something else.
Earning as an apartment owner is all about being smart is where you put your capital and what you do with your returns. Refi and roll is just about the best thing you can do for yourself and your wallet.
4. Tax benefits
Multifamily investments come with several tax benefits. This makes it a great industry to put your money into. When paired with the 1031 exchange, you’ll find that multifamily valuations soar sky-high.
But what is the 1031 exchange? Successful apartment owners face a common enemy: tax bills upon sales. They’re big, scary, and detested by investors nationally. Your capital gain – the difference between your property’s cost basis and sale price – can be taxed between 15 and 28%. If that sounds like a lot, it’s because it adds up to a lot of money.
Section 1031 of the Internal Revenue Code lets you defer these taxes if you reinvest the profits into another “like property.” A big loophole in this law is that you can make these reinvestments numerous times. As long as you follow the requirements listed in the Code, you can have a tax-free income over a long period of time.
5. Inflation hedge
Owning apartments is an inflation hedge because it protects you from it. In fact, in some situations, it can even help you make more money.
We’ve already talked about how a dollar today will not buy the same value of goods in 10 years. And we’ve told you that land values increase as time goes on. But did you that the first fact causes the second?
The value of a property rises in times of inflation. And since the international community is constantly printing money and depreciating the global economy, it’s the best time to be an apartment owner.
When an economy weakens, salaries increase. This allows landowners to charge higher rents and make more money. We’ve increased the rents in our buildings several times over the last few years – inflation is good news for landowners.
6. Economies of scale
Being an apartment owner, your answer to how much do landlords make will be very different from someone investing in a single-family unit. This is because of the concept behind economies of scale.
You save money on construction etc. when you make your production process efficient. And the best way to do that as an investor in real estate is through apartment buildings. First and foremost, managing this kind of project is easier. Compare running around the city asking for rent to having all your tenants in one building.
Additionally, you save costs for security, maintenance, upkeep, and repairs. You only have to set up one security system. Vendors are likely to give you discounts if their work is limited to one space. And you get to purchase kitchen and bathroom fixes in bulk since all the rooms have one color and design scheme.
Buying a six-pack is cheaper than purchasing individual drinks. The same principle applies to housing. Multifamily units are cheaper than single-family homes to maintain. And if you’re spending less, you’re automatically making more. And that is how much profit rental property owners have the potential to get.
7. Cycle resiliency
Now, cycle resiliency isn’t a direct source of income for apartment owners. However, it does help maintain business operations and ensures we stay competitive. If there’s one thing investors have learned from the pandemic is that businesses are unpredictable.
The market became super challenging at the height of COVID 19. But people always need food, clothes, and housing. As an apartment building owner, your product is always in demand. It is up to you to make sure you’re bigger and better than your competitors. As long as you can do that, you’ll continue growing.
Factors that Determine How Much You Can Make From Real Estate Investments
Real estate investments have the potential to make you a lot of money. But not everyone can realize this potential. There are four very important factors that determine how many zeroes you can put on your monthly check.
#1: Cap Rates
The capitalization rate indicates the rate of return on a real estate asset. It estimates an investor’s potential return on an investment in the market. And it is easy to calculate.
You take your net income from the property and divide the net operating income by the property asset value. Then express it as a percentage. And you have your potential return.
After doing the math of paper, you have to convert it to cold hard cash. But this will take time. Real estate isn’t a very liquid asset. So you can’t speed up the process. An established market requires space to grow.
Choosing the right location for your multifamily housing unit is the most important decision you’ll make when starting your business. It will significantly impact your profit margins. The best locations are close to amenities like shopping malls, green and scenic spaces like parks, and transport hubs.
When you’re purchasing an apartment building, it’s key to take the long-term development of an area into consideration. If it’s the ideal location today, will it stay the same five years from now? What about in a decade?
If a peaceful location turns into a noisy industrial neighborhood in a few years, its residential value will sink into the ground. Customers won’t want to stay there, and you’ll lose most of your investment.
Therefore, do your homework before choosing a plot of land. It can make or break your real estate returns. Look into who owns nearby areas and what their long-term plans are. Does their history show a tendency to convert parks into office spaces? Or do they like the greenery?
#3: Cash Flow
Cash flow is basically what money you have left after meeting all expenses. We’ve talked about why a positive flow is important. It keeps you and your business afloat. Now let’s discuss what to look for to make sure that happens.
The only way to accurately determine your cash flow from real estate investments is by sitting down, crunching the numbers, and developing projections. The first calculation you need to do is for the expected rental income. Look into inflation and how that will affect your rent. Draw out calculations for a few years.
Second, figure out how much your value will appreciate. Long-term increases in property values can be a substantial revenue source.
Third, explore the benefits of depreciation and the tax benefits you’re eligible for. The most obvious one is the 1031 exchange. However, you should also find out if your state has some specific multifamily housing unit laws. And if you qualify for any other type of tax exemption. If so, you’ll make more money.
Fourth, do two very important cost-benefits analyses: renovation before a sale and mortgaged loans vs. value appreciation.
#4: Quantity of Real Estate Property / Units Owned
If you have more properties, you’ll make more money. An apartment building with 50 rooms will have more tenants and than one with 25 rooms. More tenants mean more rent and more money to invest back into the business.
The real estate market sees geometric progression. Once you start growing, there’s no stopping you. However, someone with more units gets a leg up in the race and is in a better position to finish strong.
With more units, you also have more experience in the market and more connections in the business. The bigger your brand is, the more likely you are to turn a profit. Banks are more likely to give you loans since you have better credit. You’ll probably get more customers because of your reputation.
And since you’ll have more money, you get to purchase property in better neighborhoods. These locations have better residential value, as discussed before, so you’ll make more money.
Final Thoughts On Income Potential of a Landlord
So, how much do landlords make? They have the potential to make a lot. Buy property in the right location, get a bank to back you, appraise your building, make the most of whatever tax benefits are available for you, and take the real estate business by storm.
The secret to making the most bank as an apartment building owner is taking the right steps at the right time for you. Don’t think about the short-term development of a location – look at where it’ll be in five years from now.
Make flow charts, sit with financial advisors, do your homework for every investment, and you’ll be on your way to conquering this industry and setting yourself up for life.