Positive Cash Flow
Positive cash flow is as important to your success as a property investor as oxygen is to the life of your body.
When it comes to your private residence the emphasis is on equity but for rental properties, positive cash flow is far more important.
The purpose of this article is to show you how to properly calculate the cash flow on an investment property and to share some ideas of how to increase the cash flow on an investment property.
The main source of your cash flow is the rental income that your property generates.
The main demands on your cash flow are the operational expenses of the property and the mortgage expenses or debt expenses.
Net Operating Income
Net Operating Income (NOI) is determined by taking the gross rental income and subtracting the operational expenses.
What are the operational expenses?
These are regular expenses associated with running the property such as:-
Insurance, Real Estate Taxes, Maintenance, Electrical, Water/Sewer, Property Management, Garbage, Supplies, Reserves, Accounting.
Rental Income – Operational Expenses = NOI
Calculating Cash Flow
Keep in mind that the calculation to determine your net operating income (NOI) is not the same as the calculation to arrive at your cash flow figures.
To calculate the cash flow you must also subtract the debt expenses.
The basic calculation to determine if a certain property that you are considering will provide you with positive cash flow is as follows:-
Rental Income – Operational Expenses – Debt Expenses = Cash Flow
There are also other factors to take into consideration.
Other factors to consider are major expenses in addition to the regular operating expenses such as replacing the roof for example.
These major expenses that crop up occasionally must be factored into your calculations.
Increasing Cash Flow
If you feel that a prospective investment property’s positive cash flow is on the low side, is there room to improve the situation so that the cash flow forecast can be healthier?
Take a look at the following possibilities:-
One obvious way to increase positive cash flow is to raise the rents of your apartment complex.
If you are providing decent quality accommodation in line with the market standard or above then your tenants will likely cooperate, especially if you are planning to make some upgrades.
It cannot be said with certainty that you are always within your rights to raise the rent whenever you feel like it, this depends on the type of building, local laws, and the type of lease agreements you have in place.
However, in many cases you can raise the rents providing that you send a notice of adjustment. Do your due diligence to be certain of the legality of your actions.
Research Financing Options
Refinancing your mortgage could provide you with a number of benefits, including the ability to increase your cash flow.
This can be particularly true when interest rates are low and if you have built up a reasonable amount of equity in your investment property.
You could arrange a cash-out refinance where you remortgage for a larger amount and obtain the difference in cash.
Or you can choose to refinance at a lower rate or even extend the term of your mortgage loan.
This will mean lower monthly payments which will further increase your cash flow.
Be Your Own Property Manager
If you do not yet have a large property portfolio and your investment property is not a large apartment complex, it might not be necessary to use a property manager. Having a property manager is, of course, necessary for an investor with a large portfolio.
Although having a property manager is a really nice luxury, freeing up cash and having a positive cash flow is a necessity, so it’s a question of priorities.
If you live in relatively close proximity to your rental property managing the property yourself is much more feasible.
In this case, it will not be a great inconvenience or expense to make regular visits when it becomes necessary to do maintenance or inspections.
Of course, if you happen to be a capable handyman and you know one end of a wrench from another, unlike me, then undertaking your own property management makes more sense.
Depending on the quality of property manager you are used to this might actually eliminate some stress since the old maxim, ‘if you want something done properly, do it yourself,’ often holds true in this business.
Ancillary Real Estate Investment Income
In certain properties, this can be a huge and unexpected source of profit.
Ancillary real estate investment income may include things like vending machines in office buildings or laundry facilities in low-rent apartments.
You could also ask your tenants for what additional amenities they would like to have added.
A popular request from tenants is that they are allowed a pet, depending on the tenant, allowing a pet may not prove to be a negative and allowing this would enable you to charge a pet fee, thereby increasing your cash flow.
You can also ask for a pet deposit, refundable or non-refundable in order to protect yourself in the event of damage.
Select the Right Tenants
Expenses such as late or even non-payment of rent or early move-outs are down to the landlords not being careful enough about whom they rent to.
Nothing can impact your cash flow like damage to your property or unexpected vacancies due to evictions. Be sure to screen tenants carefully in the selection process.
It’s quite amazing how many horror stories there are out there of tenants causing damage that you would not dream is even possible.
Another huge drain on cash flow is when you find yourself having to conduct unexpected major repairs due to having been lazy in the initial vetting process.
Put in a little extra work up front and save yourself a ton of stress and cash later.
In addition to all these tips above make sure you are also benefiting from all legitimate tax breaks.
By implementing some or all of these suggestions you may well be able to make a significant improvement in your cash flow.