May 13, 2019
For many, many investors, you either invest in real estate for cash flow or you don’t invest at all. Why such a strong statement? Well, that’s because cash flow is such a strong force when it comes to rental properties. So strong, in fact, that cash flow is one of the main forms of profit made from rental income and so today we are going to discuss more on "Getting to Positive Cash Flow".
Sometimes when we buy a building its not a cash flowing asset because sometimes the vacancy is too high or the property needs renovation to be able to get the higher rents. Of course, we love to have the positive cash flow as soon as possible. So how we have been able to do it is that we buy properties under agreement for sale because we like to get the good financing right off the start if possible. Sometimes it makes sense to bind an agreement for sale and then refinance at the higher price after we get the values up for the property. So how we get the values up for the property is by reducing the vacancy or sometimes renovating the property to get the higher rents.
Here are some of the factors that affects getting the positive cash flow.
Selecting the right tenant by thorough background check that illuminates any possible reason why the tenant could be late or default on his rent payments. By doing so, we could eliminate future costly court fees to remove the tenant in an eviction proceeding which can effectively eliminate any expected profits.
Cash flow is the income you have after you collect rent monies and pay out all expenses. Common mistakes that lead to negative cash flows are underestimating the cost to operate the rental property and overestimating the expected rental income. Fixed operating expenses, such as mortgage, property insurance and taxes are easily calculated, but unpredictable expenses like maintenance and repairs can be tough to accurately gauge. A simple rule of thumb to follow is that total operating expenses for rental properties should fall at roughly 25 percent of the total gross rental income received.
Knowing and understanding the local market also affects the outcome of the cash flow. If you under price your rental property, you could lose out on hundreds of dollars a month that could have increased your cash flow. Conversely, if you over price your rental property, it could sit empty for months until you drop the price. Research your market by looking for at least three other comparison rentals in your neighborhood. Check newspaper ads, property management companies and online classifieds. Set your price competitively to rent the property as quickly as possible after it goes on the market.
First impressions are a big factor when looking for a home or apartment. You can increase your cash flow by making the property as appealing as possible during the initial showing to potential tenants. A home or apartment that smells good, has a fresh coat of paint and is properly staged can help you set a higher price for your rent. While many landlords balk at the idea of making improvements to rental properties, consider this: if you borrow $50,000 to improve your property at an interest rate of 4 1/2 percent, your loan payment would be approximately $166 per month. In contrast, you could increase the value of your property by $700 or more each month, depending on the improvements and the market.
If you provide utilities such as water or trash service to your tenant, it can eat a big chunk out of your cash flow. By installing low-flow toilets and shower heads, you can save hundreds of dollars each year. If you are not comfortable providing utilities, consider dropping this option. Furthermore, a rental property with a yard may rely on irrigation to stay green. It's best to provide gardening service for your tenant because if he turns off the water, it can kill your lawn and that will require re-sodding or plant replacement. These expenses eat into your monthly cash flow as well.
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