Updated September 3, 2021
The best part of owning a rental property is the rental income. Being a real estate investor and a landlord is not only a business endeavor but also a job, so it is only natural to expect some good return. However, this poses an important question: What should I do with my rental income?
Of course, you can just spend it on your hobbies and on traveling the world, but there are a few other – smarter – ways to use the money you make with your rental property to make even more money in the future. Let’s have a look at them:
Cover Your Mortgage Payments
Unless you are one of those lucky people who were just born rich, you have probably taken a mortgage loan in order to finance your rental property. Now you are left with the monthly payments for the next 20 or 30 years before you can call your investment property actually “yours.”
One of the great things about investing in real estate to rent out indeed is that your tenants are the ones making your mortgage payments. The first thing for which you should use your rental income is to pay your mortgage.
Pay the Other Recurring Costs
Owning a rental property unfortunately is not only about receiving a rental income; it is also about running and maintaining your property. And this costs money. Some of the recurring expenses associated with owning a rental property include property tax, property insurance, utilities, etc.
So, the second item on which you should spend your rental income is these costs. Even before buying a property, make sure to conduct careful investment property analysis to make sure that your rental income will exceed your rental expenses and leave you with positive cash flow. Negative cash flow is something which no real estate investor ever wants because it means you are losing money instead of making money from real estate.
Maintain Your Property
After you’ve covered your mortgage payments and other rental costs, you should set aside a part of your rental income to perform regular maintenance on your house or apartment. It is crucially important to fix all problems with the property as soon as they occur to prevent bigger problems and expenses.
Just imagine a water pipe leaking for a few months just because you, the landlord, are too lazy to fix it. It could lead to damages to the walls, the floor, the ceiling, and so on and so forth. So, a repair which was supposed to cost a few bucks will now add up to thousands of dollars.
Improve Your Property
All landlords know that it’s really hard to raise the rent without running into problems with your tenants. They are not only protected by the rental agreement but also very likely to decide to just leave if you announce a rent raise… unless you do it the smart way.
You should use your rental income to make improvements on your property. Make sure to think of low-cost changes which will improve significantly the way your house or apartment looks and appeals to renters. Paint the walls, change the old moquettes, add a few new appliances in the kitchen… In this way, you can easily justify the rent increase to your current tenants or rent out your property for more to new ones in case these decide to leave.
Reinvesting in your business is one of the best ways to spend your rental income.
Hire Professional Property Management
Many real estate experts and investors argue against using professional property management because it is too expensive and because no one would take better care of your property than you. While there is some reason in these arguments, the truth of the matter is that property management is a must as long as you can afford it.
Property managers are professionals who will be able to save you tons of money by doing everything related to your rental property more efficiently and by addressing every issue as soon as it arises. Not to mention the headaches they will save you from as you will not have to worry about your property not being occupied or deal with tenants not paying rent. Meanwhile, you will be able to use your time and energy to grow your real estate investment business.
In addition to investing in your rental, invest in yourself too. Use some of your income as a landlord to become a better real estate investor. Take real estate classes. Just be careful – with the myriad of online and in-class real estate courses out there, you want to choose one that will add real value to your knowledge and experience.
Pay Off Your Mortgage Early
If after spending rental income on all items above, you still have some cash left over, it is best to start saving it up. Once you have saved up a chunk, use the money to repay your mortgage and become the proud owner of a new piece of real estate.
Alternatively, if you don’t have the patience to do that, you can reschedule your mortgage to increase the monthly payments to pay the loan faster in that way. You will save a lot of money by paying interest over a shorter period of time.
Grow Your Investment Portfolio
As soon as you have paid your first rental property, start saving most of your rental income for a down payment on a new property. That’s one of the best aspects of investing in rental properties: they help you buy more rentals and make more money with real estate. Expanding your real estate investment portfolio should be a priority.
While you might feel the urge to start using your rental income for fun as soon as you receive the first check, you should be a smart – and patient – real estate investor. If you manage to hold on to that for a few years and spend the money on expanding your real estate business instead, you will soon have much more income to spend. Then you will be able to enjoy the financial freedom which real estate investing gives.
Author Bio: Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.
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