Cash flow is the most important consideration when buying a rental property. Appreciation is nice but far from a guarantee. A rental property with strong monthly cash flow will positively impact your overall real estate portfolio. It is important to stay on top of your rental market, expenses and any changes in rent at all times. Overlooking or ignoring just a few items can turn positive cash flow into one that is treading water. Fortunately there are some things you can do that will give your monthly cash flow a boost.
In the simplest terms cash flow is money that is left over after all expenses are paid. The most common expenses are for the mortgage, insurance, taxes, utilities, property management, maintenance, vacancy and more. The only source of income you have on the property is the rents received. It is important to assign a monthly figure on all expenses even if you do not pay them every month. You probably don’t need to do repairs on the property every month but you will at some point. If the funds are not available when you need them you end up taking money from an alternate source. Cash flow is not static month in and month out. If your expenses increase your cash flow will decline. Here are five things you can do to increase your monthly cash flow.
- Check All Expenses. Most property owners can quickly rattle off what they pay every month for the large expenses. The mortgage, insurance and even property tax payments are almost engrained in your head. It is the seemingly minor expenses that quickly add up that can become a problem with rental property cash flow. It is important that you take a day every month or so to do a full review of all your expenses. Make a spreadsheet that lists every single expense you make on the property. Be sure to include hidden items such as snow removal, lawn maintenance and quarterly water bills. Dive into each account to see if there are ways you can reduce your payment. This can mean switching companies or finding ways to improve efficiency. A $100 savings on a $1,200 monthly rental is a savings of roughly 8%. You can probably find $100 a month of savings without digging too deep.
- Improvements. Making the right improvements to your rental serves a number of positive purposes. It adds appeal which increases demand which improves your bottom line. The right improvements allow you to maximize your rental price. Regardless of the market if you can supply a superior product tenants will pay a premium for it. This doesn’t mean you can name your rent but you can charge more than other properties in your area. The key is doing work that combines quality and affordability. The work needs to be practical for the area and provide something that tenants really want. If you make the right improvements you will see the impact in your monthly cash flow.
- Refinance. The largest monthly rental expense you have is with your mortgage payment. Depending on when you took your loan out there may be a benefit in refinancing. Interest rates are still hovering near all-time lows. To take advantage of these you need to look at what your current rate is, your principal balance and an estimation on the current value. If your loan balance is near 70% of the value you may be in business. Actual monthly savings is based on the size of the loan and the change in interest rate. Lowering your rate by one full point on a $100,000 loan does not have the same impact as lowering it a half a point on a $400,000 loan. In some cases a refinance can save you a few hundred dollars or more depending on your current situation.
- Deferred Maintenance. All properties will need maintenance at some point. You may think you are saving money by avoiding annual checkups but all you are really doing is making the problem worse. Avoiding these smaller bills will lead to bigger ones down the road. These have a huge impact on your monthly cash flow. Never avoid seasonal checkups on the furnace, oil tank, fireplace and water heater. Every owner wants to squeeze every day they can out of these items but most go about it the wrong way. Don’t let them run until they stop working. Protect your investment, and improve your cash flow, but taking care of these items every year.
- Increase Rent. It stands to reason that one of the ways to increase cash flow is by increasing the rent. The timing of your increase is critical. You can’t just decide you want to increase the rent without some justification. There needs to be a positive shift in the market, improvements to the property or some other factor that makes your property appealing. How you increase is also important. Typically you need to make any increases incremental. Take a look at what is in your market and how your property stacks up. If you increase too much it may have a negative impact. Instead of getting more rent you may end up with a vacancy. Before you decide to change your rent you need to do your homework.
Rental property cash flow can be a moving target at times. There are ways you can improve your cash flow but you need to stay on top of it with every expense every month.
