Investing in real estate is one of the best ways to inflate your income, and Chicago has one of the nation’s best, most promising markets. Whether you’re just starting out or deep into investing with a robust portfolio, there’s always more to learn. The most important thing to focus on to push your investing to the next level is making the most of your investments and maximizing your profit margin. In this article, I’ll go through three of the more advanced strategies that I’ve found can help give you that extra push. Let’s get started.
MAXIMIZING CASH FLOW WITH SHORT–TERM RENTALS
When it comes to increasing you profit margin, short-term rentals can be a real game-changer. With short-term rentals, you can earn quite a bit more than you would with long-term leases by targeting specific groups of renters.
A big reason for this increased profit is that you can charge significantly higher rates, especially during peak season. People are much more willing to pay a premium for a few days of vacation or on a business trip than they would be in the long term, while you get those increased rates consistently. Using online platforms like Airbnb, HomeAway, and Vrbo is also a great idea, since it lets you tap right into the growing market of travelers who are seeking more authentic, personalized experiences than a traditional hotel.
To maximize cash flow with short-term rentals, here are a few key factors to focus on:
1. Property: Not every property is suitable for short-term rentals. Whether it’s a condo in a popular location, a vacation home in a resort area, or a trendy loft in a hip neighborhood, make sure the property will actually work. Consider local demand and competition, as well as everything already present that you can leverage to set your property apart from others.
2. Optimization: Once you have a good property, you need to optimize it for short-term rentals specifically. Focus on things that will make it more attractive to potential renters, like modern appliances, high-speed internet, and cleaning services. I always recommend leaving a personal touch, too, whether it’s a local artist’s work or bikes that guests can use to explore the neighborhood — anything unique like that does wonders to set your property apart from others in the area. It’s also important to set clear rules and procedures for guests, including check-in and check-out procedures, house rules, and emergency contacts.
3. Marketing: To maximize your cash flow, it’s important to effectively market your property. Create a strong online presence that shows potential guests why they should pick your property: high-quality photos, detailed descriptions and positive guest reviews will all improve this. I also suggest you use social media and email marketing to reach potential guests and offer incentives to book with you, like discounts, promotions, and personalized experiences.
IDENTIFYING STRATEGIC RENOVATIONS
Renovations are a great way to increase the value of your real estate investment, but not all renovations will give back to your property value equally. To maximize your profit margin, it’s essential to identify the specific renovations that will give you the most bang for your buck, while avoiding the ones that aren’t worth it. Here are some of the most effective renovations:
1. Kitchen and Bathroom Remodeling: These two areas generally have the most significant impact on a property’s value. You can easily make your property more attractive by upgrading them. Focus on specifics, like new countertops, cabinets, and lighting. Even inexpensive updates can be quite effective — a small change like new paint or up-to-date hardware can make a big difference.
2. Energy Efficiency Upgrades: Upgrades focused on the energy efficiency of your property don’t just increase your property’s value; they also save you money on utility bills. Adding insulation, upgrading to energy-efficient windows, and installing a new HVAC system are all great options. These upgrades are great for attracting tenants, since they can pay less on monthly expenses, too.
3. Curb Appeal: First impressions matter, especially in real estate, so investing in curb appeal can pay off tremendously. Landscaping, exterior lighting and outdoor paint are all highly effective in terms of your property’s overall perceived value. Small details, like a new mailbox and house numbers, can also be quite effective.
4. Open Floor Plans: Modern homebuyers and renters are typically looking for open, airy spaces. Consider removing some walls to create a more open layout if your property has a more closed-off feel — it’s not as scary as it sounds! It works great at making your property feel more spacious and modern.
To avoid wasting money, steer clear from anything that’s too personal or trendy. Stick with upgrades that are timeless and have more broad appeal. A great example is a pool: it sounds like a great idea, but it’s often rather expensive and can actually deter potential buyers or renters who don’t want to deal with the maintenance and increased insurance costs. Similarly, ultra-specific features like a home theater or wine cellar are often not worth the investment.
Keep in mind, as well, that not all renovations increase property value at all. Adding a new roof and upgrading plumbing might be necessary for a property, but they won’t likely increase the value by any significant amount. Before investing in a property, always calculate the potential return on investment, and consider consulting with a professional contractor or real estate agent.
Ultimately, the key to identifying strategic renovations is to really think about your target audience. If you’re investing in a rental property, focus on things that make the property more comfortable for tenants. If you’re planning to flip the property, consider the changes that will appeal to potential buyers. By taking the time to choose the right renovations, you can eliminate unnecessary spending and maximize your profit margin.
LEVERAGING TAX INCENTIVES 1031 EXCHANGES
Taxes are a huge limit to the amount of income you can make as a real estate investor, but there are steps you can take to reduce taxes and increase profit. By effectively utilizing tax incentives and 1031 exchanges, it’s possible to save upwards of tens of thousands of dollars every year.
First, let’s talk tax incentives. They’re government-sponsored programs built to encourage real estate investment in certain scenarios. A big one is the Federal Low-Income Housing Tax Credit, which credits investors who build or rehabilitate affordable properties. Another one is the Historic Rehabilitation Tax Credit, which provides credits for restoring historic properties. If you use these incentives successfully, you can reduce how much income you lose to taxes while also helping your community grow.
1031 exchanges are another great tool for real estate investors. In short, if you use the profit you made from selling one property to purchase another property, you can defer some taxes into your purchase. This lets you keep more of your money moving in real estate, which really helps your profit margin grow. 1031 exchanges do involve pretty strict rules and timelines, so make sure you know what you’re dealing with before jumping in.
My biggest piece of advice to make the most out of these strategies is to always be proactive in seeking out new incentives that may apply to you. New programs are added all the time, and existing ones are often altered. I’d also recommend consulting with a qualified tax professional to make sure you’re maximizing savings while still following all regulations. It can also be a great idea to partner with other investors to further leverage tax benefits.