But before we start, let’s break down cash flow and discuss what it is.
What’s Cash Flow?
Basically, your cash flow is the money you have left after deducting all of your rental expenses (mortgage payments, insurance, property taxes, income tax, HOA or condo fees, vacancy fund, etc.) from your rental income. After deduction, you might have one of three results:
- Positive cash flow: It means you are making money from your real estate investment, and the more money you make, the better.
- Zero cash flow: It means you are just breaking even – that should not be the goal of any real estate investor.
- Negative cash flow: It means that you are losing money on your rental property, and should re-evaluate the investment property.
If your cash flow is negative, you need to either sell the investment property or increase the cash flow, so it’s no longer negative.
Strategies to Maximize Cash Flow
1. Maximize Cash Flow by Increasing Rent
The number one way to increase your cash flow is by simply increasing the amount of rental income coming in from your tenant. However, increasing rents can be a bit challenging for some landlords, usually due to their fear of tenants moving out. It’s true, some tenants may leave you. But if you’re providing safe, secure, and comfortable rental properties that are well maintained, and your increases are reasonable and in line with the local rental market, then you shouldn’t have a problem increasing rents as your tenants will most likely understand the value you are bringing to the table.
Keep in mind that there are laws regarding rent increases depending on where your rental property is located. Increases may be dictated by rent controls, which limits how much you can increase per year, or there may be certain time frames for rent increases. Understanding local laws and regulations is part of being a responsible landlord. You need to find out these types of details, so that no rent increase leads to fines or penalties for breaking the laws.
2. Maximize Cash Flow by Reducing Your Rental Expenses
With a good system in place and proper planning, you could save yourself tons of money. Research your financing options and find the best one available to you. Lower rate and longer amortization periods (the length of your mortgage) will maximize cash flow. Also, try to spend as little as possible – within a reasonable limit – on your rental property in order to make extra money from it.
For example, you don’t have to hire a professional property management company to take care of your income property; you can do all the property management work on your own. This will save you lots of money and also ensure that your rental property is in an excellent shape as you (as the owner and the manager) will take the best care of your real estate investment. In addition to that, simple things that reduce maintenance or energy costs will all save you money in the long run.
Using an investment property calculator will prove of great help as it calculates the ratio of the property’s cash flow to the amount of cash spent on the investment.
3. Maximize Cash Flow by Adding Income from Other Sources
Other sources of rental income include adding new amenities and providing additional services.
Adding New Amenities:
One of the easiest ways to maximize cash flow from your rental property is to do some fixes around the real estate investment and add new amenities that you didn’t have before. This will not only make you able to charge more rent from tenants, but it will also keep your tenants satisfied. Conduct investment property analysis and ask your tenants for their recommendations before you consider what new amenity to add.
You do not have to go overboard with the new amenities. Just add something simple, like a toaster or a coffee machine, and that would be enough. The increase in rent will not be drastic, and tenants will most likely welcome this slight increase if the amenity fills their needs. The gain may not seem too significant, but it will make a huge difference in the long term.
Providing Additional Services:
You could increase your cash flow by also providing tenants with additional services, such as cleaning services, storage, garage, or parking space. Real estate investors with the best rental properties offer tenants something special that others in the area do not offer. In this way, the investor will be able to maximize cash flow from the additional service and still be ahead of any competitors.
Another service you can provide is allowing pets with a pet fee. Many landlords ban pets, but if you are very selective about who your tenants are and you include in your lease agreement that they are responsible for keeping your rental unit in a good condition, then this is a great way to maximize cash flow because this service is in great demand and tenants with pets are generally willing to pay more to keep their pets with them.
4. Maximize Cash Flow by Choosing Good Tenants
Choosing good tenants and making sure that they pay the rent on time and do not destroy your property actually requires hard work. Make sure to choose the final tenant after the necessary background checks and verifications have been completed.
Real estate investors should keep in mind that taking enough time and putting sufficient efforts into choosing the right tenants will pay off eventually. Best rental properties are the ones rented out by good tenants simply because when you make sure that you’re renting out investment properties to tenants who will not damage it, you are in fact minimizing the need to conduct major repairs, which is a great way of how to maximize cash flow as a landlord.
5. Maximize Cash Flow through Tax Deductions
One of the first things that real estate investors should study carefully in any location where they decide to invest in is the local legislation on tax deductions in the real estate business. You may not be aware of this, but interest on mortgage, depreciation, insurance, legal fees, repairs, income property supplies, and losses are all tax deductible items. These deductions will help you decrease your tax bill, thus, maximize cash flow. Many real estate investors actually miss out on these deductions because they believe their property is too old, or because they believe their accountant is looking after it already. So, dig deeper and do your research on tax deductions; you might be missing out on thousands of extra dollars in cash flow that should be in your pocket.
Real estate investors work towards making money and generating positive cash flow at all times by adding more and more properties to their real estate investment portfolio. However, keep in mind that there are ways to maximize cash flow from the income properties which you already own. To know more about how to maximize cash flow and what method is the best for your investment, head over to Mashvisor; it provides you with detailed investment property analysis in the city of your choosing, and don’t forget to check out Mashvisor’s investment property calculator.