As the name suggests, an income property is a property that generates profits for its owner. When you invest in a rental property (usually synonymous with income property), you expect to draw an income from it regularly. Such properties can still be long-term investments that grow in value as the real estate market grows, but they are primarily things that generate passive income for their owners.
But how does an income property actually generate income? Is it a foolproof process? What should you do to make sure that your income property remains as profitable as possible? Let’s explore the things that makes this whole scheme work.
Rent and gross income
One part of the equation is obvious — a rental property gets its income from rent. A paying tenant provides the raw cash that is the gross income generated by rental properties. From that, we have to subtract expenses (which we’ll do in a moment).
You’ll find that you’ll face risks here, however. This is the most important part of the equation, but it’s also a place where things can go wrong. If you’re not careful to vet your tenants and perform the property background and credit checks, you could end up renting to a tenant who refuses to pay the rent. When your income property stops generating income, you’re in real trouble.
Use landlord software to handle your tenant search and perform important background checks. This doesn’t have to cut into your profits — free landlord software will do the trick, and will help you keep your income property profitable.
Subtracting costs: maintenance and more
As with any other kind of business, profits on an income property are equal to gross income minus expenses. And the expenses on a rental property can be significant — both in the sense of being large and in the sense of being important.
Properties require repairs and maintenance. These can be expensive, but staying on top of them is vital. Problems with your real estate property will not get better on their own — they will only get worse. When you do eventually have to fix a problem that you’ve neglected, you’ll often find that you have to pay more than you would have shelled out if you had simply tackled it from the start. Just as deferred maintenance can cost governments and other large institutions big bucks, it can ruin your small operation’s profits, too.
So invest in regular and preventative maintenance, and make necessary repairs right away. You can reduce costs by working with a contractor or property management firm to set up an ongoing deal.
Maintenance is not your only source of costs, of course. You’ll also have expenses such as legal fees, insurance premiums, and property taxes.
Tricks of the trade
Profits are income minus costs, but landlords have a lot of ways to keep costs down. Real estate laws and taxes are complex, but savvy landlords can use them to their advantage to maximize profits.
You don’t have to know all about the many real estate-related tax strategies yourself to use them. You can and should outsource your tax needs to a trained and qualified professional who specializes in real estate clients. It is well worth investing in the work of a professional, because a landlord has so many ways to save money on taxes.
Smart outsourcing and the proper use of tools such as landlord software will help you maximize the profits that follow from the simple concept and surprisingly complex reality of income property ownership.