Successful Real Estate Investors achieve higher rents than others. Some of the investors in our research group followed the 1 percent rule of thumb for rents, getting 1 percent of the property’s market value as the monthly rent (i.e., a $100,000 house would rent for $1,000 per month). When we looked at rents and values in a large number of markets, that rule of thumb seemed too optimistic, particularly for single-family homes. We determined that 0.8 percent for single-family properties was probably more realistic as a rule of thumb. But that rule of thumb didn’t hold up: Many of the successful real estate investors consistently achieved higher-than-average rents. How do they do that?

First, they used rent escalators in their contracts so that the rent would increase year by year without question, negotiation, or notice. It would happen automatically, and the renters would know that they had preagreed to it; thus, it didn’t feel arbitrary. While this preset rent increase might not keep up with the actual rental trends, it at least meant that there was some increase even when the same renters were in place for a long time.

Second, they made the kinds of improvements that were attractive to local renters and made their properties stand out. What they discovered was that within reason people will pay more if they believe they are getting more. Cosmetic improvements and certain amenities can make your rentals uniquely better than the competition’s and bring more gross income. Remember that raising rents even a few tenths of a percent can have a big positive impact on your net cash flow and returns.

“I put automatic 10% rent increases in the contract. Then at the first of the year, when I say the increase won’t actually be that high, the tenants are ecstatic because they think I’ve saved them some money”                                                                                                                  

Ameda Houn, Real Estate Investor, Sacramento, CA

Third, some of the RE investors specialized in government-subsidized housing called Section 8 subsidies. They knew which houses in which areas would qualify for the subsidies, and that allowed them to market this advantage and achieves premium rents. Their net positive cash flow became virtually automatic.

Some of the investors we interviewed were very good at targeting their tenants. They would work with local real estate agents or apartment locators to attract the right renters: those willing to pay a premium for the right place. They would highlight the quality, features, and amenities of their units. In a sense they would work to lead generate their tenants in the same way they lead generated for their investment opportunities. They would get testimonials from current renters and would ask those good renters for additional rental leads. In some cases they would target people with short-term needs (those new to the area or those waiting for a custom home to be built) and give them flexibility in the length of the lease in order to maximize the rental income.

The fourth method for increasing revenue was to gain other income from the tenants. Coin-operated laundry and fees for pets, storage, parking, and lawn care would all be additional sources of income. It was highly recommended to have the tenants take care of all their own utilities, with direct, personal responsibility for payment to the utility providers.

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