The 1% rule of real estate stopped working for investor Atif Afzal a couple of years ago.
The rule of thumb suggests that a property’s monthly rent should equal at least 1% of its purchase price to have a good shot at generating positive cash flow. For example, if a property costs $200,000, Afzal wants the rent to be close to $2,000 a month, giving him a rent-to-purchase price ratio of 1%.
If the numbers don’t work, he keeps looking.
Afzal has been looking for a while. As home prices have climbed in his upstate New York market and borrowing costs have surged, it has become harder to find deals that meet his investing criteria.
That doesn’t mean he’s been idle. Instead of buying, Afzal has spent the past few years investing in the four rentals he already owns.
Optimizing what you already have
Afzal, a freelance film composer and singer-songwriter who began buying property in 2019 to create an additional revenue stream, said his property improvements have ranged from practical upgrades to cosmetic refreshes: new electrical work, additional outlets, updated lighting, fresh paint, new carpets, added cabinets, and new appliances.
“All these things eventually add quite a significant amount of value to the property, besides the appreciation that’s already happened,” he told Business Insider.
The upgrades also help his rentals stand out in a competitive market.
“I have to give the potential tenants an edge over the other units that they’re seeing,” he said. When a tenant moves out, and his unit hits the market, “I’m getting multiple offers day one because I keep it so well, which draws people in. They’re like, ‘Wow, this looks neat. I’m happy to pay $300 extra.'”
Afzal added that he has a system for presenting vacant units: “Everything is set up, staged. I treat it like Expedia: When you’re booking a hotel, and you see something that’s not pleasing to your eyes, you’re not going to book that hotel room.”
The improvements can also support rent increases, which in turn can improve cash flow.
Afzal said rents across his portfolio have increased steadily, typically by around 5% a year, which adds up over time. One of his properties, which currently rents for $3,200 a month, rented for closer to $2,200 five years ago.
He’s not the only investor focused on maximizing what he already owns. Massachusetts-based real estate investor and agent Dana Bull said optimizing an existing portfolio can be a smart strategy during difficult market conditions, when acquiring new properties is less appealing.
Bull, who’s been investing for more than a decade and has built a portfolio of more than 20 units, focuses on three areas to improve returns: insurance, taxes, and renovation costs.
“I feel like it’s the wild, wild west,” Bull said of navigating the insurance world. “Many times, a program that we have a property covered by will just be dropped, or they’ll no longer cover that property for reason X, Y, or Z, so it’s like this revolving door of making sure that the properties all have coverage — and the right coverage.”
Keeping track of policy changes and premium increases can be time-consuming, especially for investors with larger portfolios, but shopping around and doing due diligence can make a meaningful difference.
Her property taxes have also gone up. If you think your property is overvalued, you can appeal your property assessment, she explained: “If I can make a case and bring in comps and show them this is an overvaluation and now I’m being taxed higher than I probably should, I have found in the past that if you’re just a squeaky wheel, they’ll work with you.”
Finally, Bull has seen the cost and availability of contractors vary dramatically over the course of her investing career.
It pays to shop around, she said, as the spread in quotes can be surprisingly wide. She recalled needing to replace the roof on one of her multi-family properties: “One quote came in at $30,000, another came in at $21,000, and then another came in at $12,000. And I’m reviewing the quotes, and pretty much everything is the same. The product is the same.”
Meeting with multiple contractors can be “a pain in the butt,” Bull said, but it can also save investors tens of thousands of dollars.