Nobody owns a rental property for fun. It can be time-consuming and tedious (if not properly managed), but can also provide a healthy return on investment. But if you’re currently making slim margins on your rental property investments, it may be time to revisit your cash flow.
Calculating Your Rental Property Cash Flow
Any rental property investor’s goal is to maximize cash flow to maximize ROI. If you’ve never taken the time to calculate your cash flow, well, now’s the time to get acquainted. The basic numbers you need are:
- Gross income of the property
- Expenses related to the property
- Debt service relating to the property
You take the Gross Income, subtract Expenses + Debt Service, and the difference is the cash flow. How much cash flow you want/need will depend on several individual factors.
“Every investor has different financial goals. Some are happy with an 8% return on investment (ROI) while others seek an ROI of 15% or more,” Fool.com mentions. “There is no magic number that is the perfect or right amount of cash flow to earn.”
However, regardless of your threshold, we can all agree that more cash flow is better. So you should always be looking for ways to ethically increase the numbers and pad your cash.
4 Ways to Improve Your Cash Flow
Increasing cash flow requires you to analyze each property from multiple angles – including both the income and expense side of the equation. Having said that, here are a few options worth considering:
1.Refinance the Mortgage
With interest rates as low as they currently are, refinancing is always an option. If you can knock your rate down half a percentage point or more (and plan to hold past the break-even point), it probably makes sense to do so.
If you do choose to refinance, speak with a broker to get multiple rates. In addition to securing the lowest possible rate, you want to ensure you’re not getting slammed with outrageous closing costs.
2 . Streamline Your Processes
The more you can streamline your rental process and remove points of friction that cost you time and/or money, the more profitable you’ll be.
The best suggestion is to hire a rental property management service. At first, you might be thinking this hurts cash flow. But in reality, a good property manager will save you far more than they cost you. Do your due diligence and search for a company that has a good reputation in your local market.
3.Increase the Rent
An obvious choice is to increase the rent. Here are some options:
- If you’re currently below the standard rental rate in your industry, notify your tenants that you’ll be increasing the rate to come in alignment with the area’s “going rate.”
- If you’re already at the top end of the rental range, you can consider ways to increase value so that you can increase the rate. A simple $2,000 cosmetic renovation, for example, could net you $200 more per month. Within 10 months, you’ll recoup your money and it’s all profit from there on out.
Small increases in rent are a good way to gradually elevate your cash flow without choking out tenants and making them leave. Anything at 10 percent or below is reasonable. Once you get in the 12 to 15 percent range, tenants will get squeamish.
4.Add New Sources of Income
Rent may not be your one and only rent source. There are other options for bringing in revenue each month. Explore as many of these as apply to your situation:
- Accept pets and require a deposit
- Rent out parking space
- Rent out storage space
- Install solar panels
If you own multiple doors, multiplying these little increases across each property can make a big difference! Remember, you don’t have to do anything massive. It’s about making incremental improvements across the board.
Adding it All Up:
There’s no one-size-fits-all solution. If you have room to increase rents, increase rents. If you need to streamline your expense sheet, take that route. Do whatever you can to maximize your cash flow and your investment will become even more profitable in the years to come. Rental properties are not a get-rich-quick scheme. You must cast a long-term vision to win at this game!
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