6 INSIDER TIPS ON HOW TO INCREASE YOUR REAL ESTATE CASH FLOW
As an investor in any business, one of your top goals will be to maximize your real estate cash flow. When you invest in real estate properties, the goal remains the same.
WHAT IS REAL ESTATE CASH FLOW?
Real estate cash flow refers to the money your property generates each month after expenses are paid. Another way to think about it is the income you receive from your real estate investments.
Having a healthy cash flow is the primary objective for your investment properties. This puts more money in your pocket, and allows you to further compound your investment returns.
However, there are various factors you must consider when analyzing cash flow potentials of an investment property. The six tips we’re sharing today will help you to maximize the potential of your real estate investments by creating a positive cash flow property.
Before signing the deal on a new investment property, due diligence is key. You want to make sure the property fits all of your criteria for a real estate investment. If you have a required cash flow, or limited financing, or any other restriction on your expenses, conduct the research to determine if the property fits the bill.
Lower Your Expenses
Since your monthly cash flow is determined after all expenses are accounted for, one good way to increase cash flow is to minimize your various expenses on your property.
Expenses to consider: insurance, property tax, utilities, water, trash and sewer, tenant improvements, property management, etc. If you can reasonably pass any of these costs onto the tenants (i.e. the utility bill), you can add to your monthly cash flow.
One of your biggest costs will be the financing expense. While mortgages and interest rates are low, you might consider refinancing and lowering your costs with a fresh loan. Bringing that debt service cost down can make a huge impact to your cash flow.
Look for financing deals with lower interest rates and longer amortization periods to maximize cash flow.
Good Tenant Relationships
A great way to increase your cash flow is to keep it from disappearing altogether. By that, we mean reducing vacancies.
Vacancy and tenant turnover are two costs you don’t want to ignore. Having empty space for a month each year as tenants turnover will put a dent in your cash flow. Aside from the months of missed cash flow, you will probably spend extra money improving and marketing the property each time a tenant moves on.
Instead, maintain good relationships with your tenants. When your tenants are happy and successful, you get tenant longevity. Encourage long-term leases. This turns into stable and increased cash flow over the entire investment period.
Larger Down Payment
You can raise your cash flow over the investment period by increasing the amount of your down payment.
The goal is to reduce financing costs that occur each month. There are a lot of additional fees associated with high ratio mortgages. By bringing your financing costs down, you can start saving money from the get go.
Making a larger down payment isn’t always an option for all real estate investors. Consider real estate syndication deals that allow you to get into bigger property investments without needed to finance the deal all alone. Look for sponsors who specialize in commercial deals with long-term leases. This type of property investment can help maintain a strong monthly cash flow.
Analyze the Deal
In other words, take the time and crunch the numbers. When you’re analyzing a real estate deal, you want to make sure the rental income is going to safely be higher than the financing and interest expenses.
Your number and ratio could be different, but let’s look at a simple example:
In this example, our goal is an income to financing ratio of 60 percent — this means our financing costs shouldn’t exceed 60 percent of the income generated by the property each month.
If we’re expecting a conservative rental rate starting at $5,000 per month, what is our maximum allowed financing costs?
$5,000 X 0.6 = $3,000
In this example, the investment is only beneficial if we can secure financing costs of less than $3,000.
On top of the financing costs, there will be other expenses to account for. Ideally, you have a monthly cash flow in mind (i.e. $500 per month) and can estimate the rest of the expenses to see if you reach that benchmark.
Purchase More Investment Properties
When your property is making money, you come faced with the dilemma of paying down the mortgage or buying more real estate. One last tip to increasing cash flow is to purchase additional cash flowing properties.
If cash flow is the objective, then owning more properties gives the potential for more cash flow. Many investors opt to pay off mortgages instead, but buying more real estate can bring a huge boost to the income from your investment properties.
If you go down the path of adding more properties to your portfolio, consider leveraging a 1031 exchange for the added tax benefits.
For real estate investors, when it comes to increasing cash flow, many run to the obvious answer of raising rents. While rent hikes can be appropriate in an appreciating market, they can cause tenants to start looking elsewhere and create a vacancy issue.
Fortunately, there are several other ways you can increase the cash flow of your investment properties. Explore the various tips above and boost your returns while maintaining good relations and longevity with your tenants.