There are numerous ways to evaluate the success of a rental property in your investment portfolio. But at the end of the day, it all comes down to dollars and cents. If a property is generating positive cash flow, you’re winning. If it’s losing money or barely breaking even, you’re wasting your time.
What is Cash Flow?
Cash flow is a pretty simple and straightforward concept. And while most landlords think they know what it is, they often stumble for words when asked to explain it. So sometimes, it’s helpful to have a quick review.
“Basically your cash flow is the money you have left over after you’ve deducted all of your expenses from your income,” The Educated Landlord explains. “Rental income less mortgage payments less insurance less taxes less HOA or condo fees less reserve funds less vacancy funds.”
If your cash flow is positive, it means you’re making money. (You’re said to be “in the black.”) If your cash flow is negative, you’re losing money. (You’re “in the red.”)
5 Tips for Increasing Cash Flow
The cash flow equation ultimately has two levers. You can increase your revenue, or you can decrease expenses. And if you do both simultaneously, you’ll increase cash flow at a much faster rate. Here are a few suggestions:
- Bring Rent Up to Market Rates
The first tip is to reevaluate your property in comparison to the rest of the market. If it’s been six months, a year, or even longer since you’ve adjusted your rent, the rest of the local market may have surpassed you.
You can research rates online and determine where you land on the spectrum. Another option is to work with a property management service to generate a rental property analysis.
If you’re still at a premium price point, you’re fine. If you’re on the lower end, you could probably bump it up without any negative repercussions. If you’re somewhere in the middle, you’ll have to make a judgment call on whether it’s best to keep things as-is and risk turnover, or raise the rates to generate more monthly cash flow.
- Enhance Your Property
Already leasing your property at a fair market rate? Consider whether there are any opportunities to enhance your property so that you can generate a higher monthly rental.
Something as simple as a cosmetic kitchen upgrade could help you raise rents by $100 a month. Or if you want to go all-out, you could turn a bonus room into a third bedroom. Research the top rental improvements and look for ways to make your property more appealing.
- Find Additional Revenue Drivers
Consider whether there are any additional ways to generate more income with your property (without raising rents). Options include added fees for pets, leased parking spots, leased storage units, sublet fees, etc.
- Lower Your Expenses
You can always lower your expenses, too. If your tenants aren’t already paying utilities and other non-fixed costs, consider making this a requirement. (At the very least, consider splitting them and/or capping the amount that you’re willing to pay each month.)
If you’re constantly paying for breakdowns and repairs on key systems within your home, upgrading to a newer system can prove to be a more cost-effective long-term solution.
- Reduce Turnover
Nothing kills cash flow quite like turnover. Every time a tenant leaves, you have to inspect the property, clean the property, repair normal wear and tear, take property photos, list the property, accept applications, screen tenants, and go through the process of preparing the property for a new tenant. On top of all that, you might experience a month or two of vacancy, which can significantly hurt your cash flow.
All in all, if you want to increase your rental income, you should focus on selecting better tenants and keeping them happy. (This is arguably more important than having a premium monthly rental rate.)
Up Your Real Estate Investing Game
Increasing cash flow doesn’t have to be the monumental challenge that it often seems to be. With a few simple tweaks here and there, you can increase profitability on almost any property. The key is to be smart and intentional about the process. Attacking the cash flow equation without a plan is a recipe for disaster. You could compromise your relationships with tenants, cross legal boundaries, and/or run into tax complications. Take it step-by-step and consult a professional, if needed.