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Investing in rental properties is a great way to make consistent monthly returns and grow your wealth on a long-term basis. Rental properties are very lucrative because they not only provide owners with rental income, but they also have the potential to grow in value from appreciation, and they provide great tax benefits. The real key to building wealth with rental properties, however, lies in cash flow. Cash flow can be defined as the amount of money a property brings in each month minus all the associated costs and expenses of owning it. Continue reading to learn more about building positive cash flow and why it’s so important to maintain it with a rental property investment.
What is cash flow?
Cash flow is the difference between the money a rental property provides you and the money you pay out to cover the expenses associated with the property. It’s important because it determines your ability to pay the property’s mortgage and cover said expenses. Cash flow is arguably the most accurate indicator of success with an investment property. The higher your cash flow is the better, while a negative cash flow means you are effectively losing money on the property every month.
How to calculate it
Before you consider purchasing a particular rental property, it’s vital that you calculate the cash flow for it. The first step to doing this is accurately determining how much rental income it can generate. If the property is already rented out, you can simply reach out to ask for proof of existing leases. If that isn’t an option, you’re going to have to do some research. You can start by looking online at rental listings for similar properties. You can also work with an appraisal company to get a Market Rent Appraisal, which tells you the projected rent of a property based on comparables in your market.
After you’ve determined a property’s rental income, you need to gather info about all the costs and expenses associated with the property. There isn’t just the mortgage and utilities to worry about, but also taxes, HOA fees (if applicable), and maintenance costs as well. Once you’ve added up all of the property’s monthly expenses, simply deduct them from the rental income you determined in the first step to get your cash flow. It’s important to be accurate with your calculations, since cash flow will often be less than $300 for each rental unit, and one wrong estimate can greatly affect this number.
Boosting your cash flow
There are really only two ways to boost the cash flow of a given property: charging more for rent or cutting your expenses. It can be somewhat difficult to do either of these things, which is another reasons why it’s so important to accurately determine these numbers before making a purchase.
Charging more for rent is always a possibility, but you run the risk of losing tenants if you overcharge. Landlords often choose to increase rents every 1-2 years as the market changes, so that may be a more appropriate time to raise the rent of your units. It’s recommended that you do research before upping the rent of a property, since it can vary greatly from market-to-market. Recent data suggests a 3.3% increase year-over-year as a national average, but it can be a good idea to order a proper appraisal to view comparable properties and ensure you aren’t getting priced out of your market.
Eliminating expenses is more of a mixed bag. Taxes and HOA fees are effectively non-negotiable, and maintenance costs vary from month-to-month as well as property-to-property. You may be able to cut monthly utilities by investing in more efficient lighting and appliances, but you’ll have to weigh the cost of these upgrades against their potential savings. The most effective way to lower expenses on a property you already own is by refinancing it. If you’re able to negotiate a lower interest rate on a loan, you can easily boost your cash flow without having to raise rents.
RCN Capital
The easiest way to save on a rental property purchase is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance a long-term rental property?Connect with us today.