As a new real estate investor, it’s vital that you’re able to measure your investments’ success and how you’re doing. And that requires getting clear on your cash flow.
What is Cash Flow?
It’s easy to become confused by the noise. Every peer is telling you what to focus on, which equations to prioritize, and how to measure success. However, cash flow is arguably the only metric that matters.
“In real estate, cash flow is the difference between a property’s income and expenses including debts,” investor Liz Brumer writes. “Cash flow is used in properties that produce income, like rental real estates such as an apartment complex, single-family rental, duplex, or commercial building.”
Calculating cash flow is fairly straightforward. You take the property’s gross income, subtract all property-related expenses, subtract debt service, and the difference is the cash flow. Positive cash flow means you’re making money. Negative cash flow means you’re in the hole.
Cash flow can then be compared against the underlying investment you have in the property to understand your monthly rate of return. It’s up to you to determine what rate of return makes sense for your portfolio.
5 Tips for Improving Cash Flow
Improving cash flow is a property-specific endeavor. However, here are some general rules of thumb you can use to walk away with meatier margins each month:
Hire a Property Management Company
Trying to manage your own rental property without any experience can be tough. While it’s certainly possible, you’re likely missing out on some cash flow. Hiring a property manager can help.
A good property management company will boost cash flow by enhancing the quality of tenants, streamlining rent collection, and reducing long-term holding costs by proactively addressing maintenance and repairs. Plus – and this might be the most important benefit – having a property manager on your team gives you invaluable peace of mind that everything is under control.
Refinance Your Mortgage
If you’re still working with a mortgage that’s several years old, you may be able to save hundreds of dollars per month by refinancing to a lower rate. There are no guarantees that low rates will continue to stick around, so now is the time to act. Shop around and compare rates from a variety of lenders.
The obvious way to improve cash flow is to raise the rent. If you can raise the rent on a property by $250 per month while keeping all other expenses the same, you’ve instantly increased cash flow by $250. It’s as simple as that – or is it?
In theory, increasing rent is a no-brainer. But when you consider the ramifications, you may want to think twice. At best, raising rents will frustrate your existing tenants. At worse, it could be illegal. (If you raise them by too much.) Use discretion and make educated decisions.
Add New Income Streams
Another option for increasing gross revenue is to add new income streams. Examples include leasing parking spots, renting storage, adding a pet fee, adding a coin-operated laundry (for multi-family), or providing U-Hauls and trailers (to rent out when tenants are moving in or out).
If increasing income is one side of the cash flow coin, cutting expenses is the other. A dollar saved is equal to a dollar earned. Here are some possible options:
- When was the last time you reviewed your insurance policies? Meet with a broker to get quotes from several companies. This could save you hundreds of dollars per year.
- Stop hiring a contractor for every job. Have tenants keep a running list of small punch list items – like changing light bulbs or patching tiny holes in the drywall – and do them yourself.
- Meet with your accountant to make sure you’re maximizing all rental property tax deductions
To cut expenses, you may have to get creative. Evaluate every expense on your cash flow statement and consider different ways to save. There are more options than you probably realize.
Adding it All Up
Cash flow is the number one metric to focus on. If you aren’t bringing in a net gain at the end of each month, nothing else matters. Refine your approach in this area and you will be successful.