Every real estate investor wants to make a good return on investment from their rental properties. This is why cash flow is very important when it comes to making money in real estate. In basic terms, cash flow is the net difference between cash coming in and cash going out from your income property. So what is cash flow positive in real estate? Positive real estate cash flow is when the income from your rental properties exceeds the expenses incurred.
To make a profit in real estate, you must find ways of buying and maintaining a positive rental property cash flow. We actually have 6 ways to share with you. But first, let’s talk a little bit about how to calculate cash flow.
How Do You Calculate Cash Flow?
Cash Flow = Gross Income – Operating Expenses
The bulk of your gross income will come from the rent collected from your tenants. But you may also consider adding attractive services to have positive cash flow properties. Other sources of income could include revenue from laundry facilities, parking space rental, vending machines or any other services provided.
On the other hand, operating expenses are the costs incurred while running the rental property. Rental property expenses could be mortgage payments, insurance costs, HOA fees, taxes, legal fees, maintenance costs, marketing fees, and other rental property costs. Another crucial factor to consider when calculating operating costs is vacancies. When your rental property is vacant, you are losing rental income. Let’s say the monthly rent for one unit in your rental property is $500. Whenever a unit is vacant, your operating expenses should be increased by $500 to represent the loss.
The difference between these two elements will give you the net income, or the cash flow.
6 Things You Can Do to Always Have a Cash Flow Positive Rental Property
1. Learn how to find positive cash flow properties
Location is very important when looking for positive cash flow properties. Though it would be convenient to find a rental near you, you might have to search further for the best deals. Tools like Mashvisor can help you find cash flow positive rentals within minutes anywhere in the US housing market. Using Mashvisor’s Heatmap, you can analyze neighborhoods with investment property for sale using metrics such as listing price, cash on cash return, Airbnb occupancy rate, and rental income. The Property Finder is another great real estate investment tool you can use to find high cash flowing real estate in up to 5 different cities at once. Learn more about these tools here.
2. Pay less to ensure a cash flow investment property
The less you pay, the higher the net income you are likely to earn from it. This is of course if you are buying a rental property with a mortgage. Paying less will mean cheaper monthly payments and a cash flow positive rental property.
If you want to pay a low price for rental property, consider investing in a distressed property or rehab home. Since the property requires repairs and renovation, you can negotiate with the seller for a lower price. However, before making an offer, be sure to conduct a thorough property inspection. Some of the major areas to check include the wiring, heating system, roofing, and flooring. Get an estimate of the cost of repairs and ask the seller for a price reduction. Getting a good real estate deal enhances the chances of having a cash flow positive rental.
3. Set the right rent based on a cash flow rental property analysis
Since most of your cash flow comes from rent collected, you need to set the right price in order to have a cash flow rental property. If you overprice the rental, it is likely to remain vacant for a long time, thus resulting in negative cash flow. On the other hand, underpricing will mean losing lots of potential rental income.
One of the ways to establish the optimal rental price is by using Mashvisor’s Investment Property Calculator to check comparable houses that were recently sold in your area. You will see how much they are renting for, thus giving you an idea of what price to rent out your property. Once you do this, you should continue with your cash flow analysis. Use the cost estimates given by the investment property cash flow calculator and enter in any unique costs that you may have in mind. Play around with the rental rate to see what values will give you positive cash flow, keeping in mind the range you discovered by looking at rental comps.
4. Lower your operating expenses
One obvious strategy for having a cash flow positive rental property is cutting down your expenses. There are two main types of expenses associated with rental properties: fixed expenses (mortgage payments, taxes, and insurance) and unpredicted expenses (unexpected vacancies, repairs, etc). Generally, your expenses should not be more than 25% of your gross income.
Here are some of the ways to minimize the operating expenses to ensure a high cash flow positive rental:
- Manage the rentals yourself instead of hiring a professional property manager
- Schedule checks on major systems and appliances
- Conduct regular maintenance on all major systems and appliances
- Use energy-saving fixtures such as bulbs
- Recycle water
5. Find the right tenants
Having the right tenants will not only give you peace of mind but will also ensure a cash flow positive rental property. On the other hand, getting the wrong tenant could result in losses of hundreds or even thousands of dollars. This is why it is important to conduct thorough tenant screening before allowing anyone to rent your house. A background check will reveal whether the potential tenant has the ability to pay rent in the long term. One of the warning signs for a real estate investor to look out for is a poor credit score or an unstable employment history. Tenant screening should also involve checking the criminal history, as well as the eviction record of the potential renter.
Even if you buy a cash flow positive property that is in relatively good condition, making some improvements could significantly boost the cash flow. Adding curb appeal, painting the kitchen, adding a security system, painting the rooms or adding new cabinets are minor changes that can add value to your investment property. If you can afford it, go for major renovations like a complete overhaul of the kitchen, adding an extra room or changing the roofing. When your property increases in value, then you will be able to charge higher rents to boost your cash flow.
There are many strategies you can use to always have a cash flow positive rental property. However, making money from cash flowing real estate requires proper planning and budgeting. If you don’t go about it the right way, you will end up losing money instead of making money.