Ask any successful business owner how you can increase your profits. One of the key methods they will tell you is to reduce your expenses. There are three hard costs that all real estate investors can decrease to reduce overall expenses. These are the mortgage rates agreed to when purchasing the property, the yearly taxes, and the insurance.
Unfortunately, the majority of property owners and their hired property managers rarely take the time to actually reduce these hard costs. This article will show you how to make the knowledge of your hard costs and turn them into an actionable plan to reduce costs and increase profit.
Generally speaking, mortgage interest rates for investment property tend to be higher than mortgage rates for a primary residence. Suppose an investor can buy a property as a primary residence and subsequently purchase another property a year or two later. In that case, they may be able to secure the lowest mortgage rates. They can take advantage of the lower rates by treating the home as their primary home.
If using this strategy, check your mortgage for residency requirements. Some agreements require you to live in the home for a certain number of years.
If the property you are buying is strictly for investment, and it wasn’t previously your primary home, you may only get approved for the investor rate. One way you can keep your costs low in this case is to request a long amortization schedule. This simply means that instead of having a mortgage for 30 years, you request a mortgage for 40 years.
This also means that it will take longer to pay off. However, suppose this is a rental where the tenant’s rent payment is paying for the mortgage, and you are consistently getting good appreciation year over year. In that case, you can earn thousands while your tenant’s rent payment pays down your mortgage.
Reducing your tax payments may be the most difficult of these three strategies to reduce your hard costs. This is because lowering your taxes means you have to deal with a government agency. These agencies aren’t the most efficient and aren’t sophisticated or savvy in the business of real estate investment.
However, there are companies out there that specialize in tax reduction. They will represent you when working with government agencies to obtain lower real estate taxes. You can focus on the management of your property and let the company deal with the agency. Since these companies perform these tasks regularly, they’re savvier at achieving positive and timely results.
The advantage of using an agency is that they only charge you a fee if they get results. This is usually 50% of your achieved savings. For example, let’s assume they save you $500 in taxes for the year. They would charge you $250 for the service.
You should check your insurance rates every year. Unfortunately, we, as human beings, tend to take the set it and forget it approach. This is even more so the case if those payments are escrowed into the mortgage payments.
Every real estate investor or property owner should have a working relationship with at least three insurance agents. These agents should review the insurance policies once a year to determine if they can reduce the payments. Insurance agents are glad to review your policy for free because of how competitive their industry is.
Reduce Your Hard Costs
Hopefully, this article motivates you to take some actionable steps to reduce your hard costs. If you have any questions or suggestions on these strategies, please reach out to me. I am always willing to talk to property owners or investors about how I can help make managing properties more profitable.
Roland JeanCharles, LCAM, RMP Candidate, CISSP
PMI JCM Realty Group