How to Improve Cash Flow on Your Investment Properties
Your rental property cash flow is an essential part of your real estate investment. Rentals can be valuable tools for building wealth, but without deliberate attention to the property's cash flow, many owners lose money.
If you're a rental property owner looking to increase the profits you reap from your investments, the best move you can make is to revisit your revenue streams and expenses to ensure that you aren't leaving money on the table or overpaying for something you don't need.
Disclaimer: This article is for informational purposes and is not intended as legal or financial advice. We recommend that all property owners check their local laws, ordinances, and regulations regarding investment properties, as these may be unique to your properties and individual circumstances.
What is Cash Flow?
In the context of rental properties, cash flow is a measurement of the spendable money your property produces. Once you’ve paid your mortgage and any other operating expenses, the net profit left over can be referred to as your investment property’s cash flow.
Why Does Cash Flow Matter for Investment Properties?
The health of your cash flow directly impacts your ability to cover necessary expenses as well as your net cash left over. First and foremost, investment properties are precisely that: investments. The whole point of owning them is to turn a profit. However, as any property owner knows, keeping the property running smoothly costs money. From utilities and maintenance to taxes and insurance, it takes a lot to continue making money with rentals.
Improving your rental property cash flow will not only allow you to meet each of those ongoing expenses, but it can also impact your financial returns. An improved cash flow at the same purchase price translates to higher cap rates, potentially contributing to higher overall property valuations. Additionally, by combining multiple cash streams, you'll put yourself in a better place to fund new deals without having to pull money out of your property's equity. That means you can expand without selling property or taking out an expensive equity loan.
How Can You Improve the Cash Flow of Your Investment Properties?
Sure, it's easy to give the advice to make more money from your investment properties, but it's also necessary to immediately follow it up with the next tip: how to increase cash flow.
Address Your Sources of Revenue
To begin, take a detailed look at your property's revenue stream. Once you have a good idea of how much money is coming in and where it's coming from, you can decide where you need to make adjustments or add additional income sources.
This one may sound obvious, but many property owners don't take the opportunity to adjust rents with market rates consistently. We recommended reevaluating rents yearly before lease renewal and considering comparable property rents, inflation, and increased costs.
As economies shift and prices change, you'll naturally spend more just to stay in business, and that will eat into your profit margins if the rent you charge doesn't scale up with it. Be sure to look around at similar properties in your location to determine what you can reasonably and ethically charge for your offering.
Supply and demand will play a role in what you can and should charge. If you charge too little, you won't break even on your investment. Charge too much, and your target market will either be unwilling or unable to afford it. It will take time, effort, and research to determine what strikes that balance that's fair to all parties involved.
Additional Monthly Fees
For minimal effort on your part, you can add valuable services, amenities, and allowances to the properties you manage. This not only improves the living situation for your tenants but can act as an additional monthly revenue stream from the property. By charging a reasonable monthly fee for various value adds (from the upkeep of amenities like pools and gyms to special allowances like pet rents), you can bolster your income while adding benefits to the property.
You might even think outside the box and offer a service like credit reporting. A growing number of property managers are offering their tenants the opportunity to build their credit, even while renting, by using services like Creditcare. A common complaint among tenants is that renting doesn't allow tenants to build a credit history as quickly as mortgages do. But it doesn't have to be that way. For a small monthly fee — an additional revenue stream for you as the owner — you can report your tenants' on-time payments to credit bureaus, allowing them to nourish their credit score without owning the home.
Additional One-Time Fees
There are plenty of one-off opportunities that you can use to supplement rental property cash flow as well. Application fees and non-refundable deposits are popular ways of doing this but don't overlook the possibility of small pay-to-use amenities (coin or card-operated laundry machines, vending machines in common areas, and others). These additions provide convenience and value for tenants and maximize your cash flow in one action.
Keep in mind the needs and wants of your target market. Is the property in a college town? A busy city? The suburbs? Location and demographics will dictate the amenities you should offer and how much to charge for their use.
Address Your Expenses
When you've determined how to maximize the cash coming in, shift your attention to the cash going out. Where are you overspending? Are there deals or opportunities you're sleeping on that might open up your budget and widen your property's profit margin?
Management fees are property owners' largest and most controllable expense. Property owners have many choices regarding property management companies, so exploring low-cost providers or professional management alternatives that still fit your operational needs can be helpful. Be thorough in researching prospective property management companies to ensure that they fit your budget and provide the particular services you need for your properties.
While there isn't much you can do to change what taxes you pay, it is highly recommended that you work with a qualified tax professional regarding property and income taxes generated from your rental properties. In particular, most rental property owners would be well-served to ask their tax service about cost segregation, as the deductions offered by this rental property investment strategy can greatly reduce the tax burden.
It might not seem like much can be done to address property maintenance. Sometimes the timing is unfortunate, and some things are essential for your tenant's quality of life. However, your maintenance spending is more flexible than you might think. While you can't necessarily control when things break, you can explore protection clauses in your lease and designate who is responsible for certain damages. Additionally, preventative maintenance will go a long way towards preventing new issues from popping up and mitigating the total expenses when something breaks.
Insurance is an essential part of your real estate investment strategy. Though you never want to be caught without coverage in an emergency, there are ways of reducing your spending on insurance while still getting what you need from your provider. Ensure you review your rental property's insurance policy annually to explore cost savings with your provider. It's also smart to regularly look into other insurance providers. Often, the simple act of shopping around can incentivize your current provider to give you better rates.
Reducing your spending on utilities can be tricky to address since you can't exactly dictate the utility usage of your residents. Every household has its wants and needs regarding power, water, natural gas, internet, and other expenses.
However, you can consider a few options to cut your personal costs:
- You can make utilities the responsibility of your residents. Each tenant would be accountable for paying their own utility costs. While not always a crowd-pleasing option, this is an equitable decision, as each tenant only pays according to what they personally used.
- You can set a predetermined amount of utilities you cover, and the resident covers any overages. This is a "best of both worlds" approach, as it pleases the majority of your tenants by allocating them with a reasonable, average supply of utilities each month but keeps you covered for those tenants who may require more than the average.
- You can even state that utilities are covered in the lease but have your total rent amount increased by more than the average month's utility costs for this unit. This allows your tenants peace of mind that they don't have an extra bill to remember while also ensuring that you have what you need to cover your whole property's utility consumption.
Again, before implementing any of these policies, we recommend that you confirm what is and is not allowed by your local laws.
Cost of Debt
If your properties are leveraged, be rigorous in exploring your debt solutions. If you plan to hold the property for several years, refinancing could be a good option if rates have improved since you opened your initial loan.
Once you understand all the factors affecting your cash flow, maximizing it is simply a matter of optimizing your revenue and expenses.
Make sure you’re charging as much as the market allows for your primary revenue stream — rent — and look for ways to diversify with additional revenue streams. Remember, a handful of small add-ons can quickly tack on an extra few hundred dollars a month if you’re smart about it.
At the same time, do everything you can to keep your expenses low and manageable. Work with tax, legal, and financial experts to limit your tax liability and take advantage of favorable real estate laws in your area. And, instead of forking over +10% in monthly fees to a full-service property manager or 1-2 months of rent for lease assistance, consider more affordable hybrid management solutions like Flcrm that bridge the gap between costly property management and time-consuming self-management.