It’s doubtful that anyone becomes a real estate investor or rental property manager just for fun. You don’t take on considerable financial risk and spend a lot of time and effort to secure real estate, draw up contracts, and prepare a house to rent just because you don’t have something better to do.
No … you do it because it offers an opportunity to earn a robust and steady return on your investment. The question is: Are you spending enough time thinking about cash flow? And are you maximizing it for optimal long-term profitability?
Do You Understand Cash Flow?
For some this is elementary, but let’s go ahead and review the concept of cash flow, so you have a better grasp of what we’re talking about. (You’d be surprised how many people spend years in real estate investing and still don’t have a proper understanding of how cash flow is calculated.)
“Basically your cash flow is the money you have left over after you’ve deducted all of your expenses from your income,” landlord Bill Biko explains. “Rental income less mortgage payments less insurance less taxes less HOA or condo fees less reserve funds less vacancy funds.”
The key components in that equation — at least the ones many landlords often forget — are reserve funds and vacancy funds. If all your profits goes into your pocket and you don’t tuck away any funds for a rainy day (and it will rain!), then you can’t necessarily assume you’re cash-flow positive.
Bill talks more about how to determine actual cash flow in this article, but that’s the basic gist. If your cash flow is a positive number after all the expenses, fees, and savings are subtracted, then you’re what accountants call “in the black.”
That means you’re officially cash-flow positive. If your cash flow is a negative number, then you’re “in the red.” That’s a fancy way of saying your cash flow is horrendous because you’re losing money.
But even if you’re cash-flow positive, you could still be hanging by a financial thread. It should be the goal of every landlord and/or real estate investor to expand cash flow over time so there’s less stress, fewer risks, and meatier margins.
Six Ways to Boost Your Cash Flow
The good news for you is that there are plenty of ways to boost cash flow and grow more profitable. Here are a few of the top options and techniques you have available to you:
- Lower Your Expenses
When you’re pursuing a better cash flow, the most obvious move you can make is to lower your expenses. This is easier said than done, of course but there’s always some fat in your budget that can be trimmed. Among the options are: switching service providers, passing certain expenses on to tenants, and installing more energy efficient appliances and materials.
- Reduce Tenant Turnover
One of the single biggest cash-flow killers you can experience is high tenant turnover. With turnover comes extra fees, added expenses, the energy required to find new tenants, the risk of accepting poor tenants, and a likely vacancy period.
Reducing tenant turnover starts with choosing the right tenants in the first place. You need people who have a track record of consistency and no red flags. For your part, you have to be responsive, flexible, and accommodating (to a reasonable degree).
- Refinance Your Mortgage
What do homeowners do when they suddenly feel under strain due to their mortgage? They refinance in order to lower their monthly payment and free up cash. As a landlord, you can do the same.
Refinancing your rental properties will extend the repayment term, and will simultaneously lower the payments and leave more money in your pocket. Depending on when you locked in your last mortgage, you may still be able to lower your interest rate.
- Increase Rent
One of the more practical things you can do is raise the rent. But many landlords are afraid to raise rents on their tenants for fear of forcing them to move out.
Often, the fear is overblown. Most tenants understand that you’re running a business and you have to follow the trajectory of the market. What you have to be careful about is not to raise your rents too dramatically.
Not only will a dramatic spike in rental fees make it more likely a tenant will move out, but there’s a possibility you could also violate rent control and other laws in your area. If you can stay to increases of less than 10 percent (if that’s still in line with the local market rate), you should be all right.
- Don’t Skimp on Repairs
Maintenance and repairs are a thorn in the side of most landlords. There’s nothing more frustrating than having to pour money into issues you didn’t anticipate … even when they’re small.
In fact, ignoring small problems or skimping on repairs could come back to haunt you in the form of much larger expenses down the road. “Commonly ignored problems we see that have the potential to escalate include plumbing, guttering and drainage issues, which are usually minor initially but can often end up costing a small fortune,” Property24 explains.
- Offer Lease Options
One outside-of-the-box idea is to offer your tenants lease options. Most may not be interested, but there might possibly be some who are intrigued by the idea of being able to own the home they’re renting someday.
From your perspective, the best part about a lease option is that these tenants tend to take better care of the property (which means fewer expenses on your part) and they pay an additional monthly fee (and that’s more money in your pocket).
Let Green Residential Help You Get on Track
At Green Residential, property management is what we do. We help our clients lower risk and increase profitability, and we do away with the stress that comes with trying to manage every little detail of your rentals.
If you’re interested in spending less time worrying about things like backed-up toilets and late rent payments, and more time maximizing cash flow, we can help you get back on track. Contact us today for more information!