Understanding cash flow is key to analyzing any real estate investment deal. If you’re a landlord or real estate investor hoping to purchase a rental property, learn how to predict good cash flow and what to focus on to improve your cash flow over time.
Positive cash flow is vital for rental properties and is a cornerstone of a successful rental business. In this video, rental and real estate expert, Kaycee Miller, shares her strategies to improve cash flow through methods such as lowering mortgage payments, finding affordable insurance, and implementing small annual rent increases to stay ahead of rising costs.
Cash Flow for Rental Properties – Video Transcript
Say you’re browsing your favorite real estate site, and you’re like, “Oh, that looks like it could be a good property. It’s in a good location. I like the layout.”
But it always comes down to that purchase price and then what your income and expenses are going to be on that property.
And what we’re talking about here is doing a cash flow analysis or doing a cash flow calculation prior to that purchase.
What is good cash flow for an investment property?
This video is about cash flow when it comes to rental property – what’s a good cash flow and how do I figure it out before making an investment? My name is Kaycee. I work for Rentec Direct. I’m also a landlord, a real estate investor, and I’ve written about real estate-related topics for over 10 years.
Understanding Cash Flow for Your Rental Business
Today we’re talking about cash flow. Now, cash flow when it comes to rental properties and even when it comes to your own household budget or a business that you might be running, is a pretty simple equation.
It’s basically taking income coming in and then minusing the expenses that you have. And that final number is your cash flow.
Incoming Income – Expenses = Cash Flow
Hopefully, it’s positive, but there’s definitely situations where cash flow might be negative.
And what you always wanna do is look at a big picture. Sure, you might have a month where cash flow is negative, but is the next month gonna be positive? And then, over the year, is this property gonna be generating a positive cash flow? So let’s think more a little bit about cash flow when it comes to a rental property.
Rental Property Income Sources for Higher Cash Flow
First off: what’s our income sources from a rental property? It’s obvious to think that rental income is our big source of income on a property.
But then what else could it be?
Maybe you charge fees from your tenants, like:
- A placement fee when you’re signing a lease with them
- Or monthly you’re collecting a maintenance fee
- A landscaping fee
- A pet fee
- A one-time pet fee when you’re/they’re bringing a pet into the house
So remember, deposits don’t go into your rental income category because that’s not your money, but different things like fees that you’re collecting monthly and monthly rental income can all contribute towards that bottom line of the income coming in as part of our cash flow equation.
Rental Expenses That Subtract From Cash Flow
Now let’s go to the other side of that equation, which is expenses. What expenses are associated with your rental property? One of the most obvious ones is your mortgage payment, but there’s also insurance, property tax, maintenance fees, especially routine maintenance. You might pay a property manager to help with your property.
So that is usually a percentage tax that’s gonna come off of your rental income. And then your reserves fund. So every month I always say you should be putting money into savings just like you would your household budget.
Treat your rental income as any budget, take the reserves out and keep a savings. because You’ll have short-term maintenance, like maybe you need to replace a door, lock box or something on the property.
But then there’s also gonna be those big ticket capital expenditures reserves that you’ll need to save for, like replacing a roof, HVAC systems big appliances. So while that might increase the value of your property over time, you’re still gonna be need to pay for that.
And so taking the savings out of your rental income and putting it into a reserve fund always goes into my cash flow analysis. So you have your rental income, your fee income, that’s your, your top number, and then you’re gonna minus all of those expenses that we just kind of mentioned. And now that final sum of what’s left over is going to be your cash flow. Hopefully, it’s positive. In some cases, like I said, it could be negative, but let’s look at that big picture. There are some months where you might have a big, big expense, or maybe there’s a month where you have a vacancy and now suddenly your income is at zero.
But you might still have these expenses like property tax, your mortgage payments still do. They don’t care if you have a vacancy or not. So I always look at the big picture return or cash flow for a year and then five years, 10 years, 30 years.
Because we’re always looking at what’s the long, long-term return on long-term return on a rental property. And so let’s think about ways that we can increase our cash flow, because It might start out small, but is it ever gonna change?
Reducing Expenses Over Time For More Cash Flow
Well, mortgage payments go down over time, which is exciting. You might refinance and get a better interest payment and that could reduce your mortgage payment and increase your cash flow.
You can shop around for different insurance policies to find a premium that fits better into your budget, increases your cash flow. Maybe you decide to take on some of the maintenance yourself. Maybe you decide to self-manage.
All of these items can increase your cash flow by reducing your expenses when it comes to your rental property.
Small Annual Rent Increases Keep Cash Flow Positive
Another way to increase cash flow. You could raise the rent.
So it’s always important to keep your rental property at market rent, but you might need to think about doing annual routine rent increases. I’m talking like $25 every year, increase in the rent so you can kind of balance out your expenses raising and different items in your cash flow calculation. Balancing out because rent’s going up annually.
Expenses might be going up annually, or maybe they’re not that year and you could have a little bit higher of a cash flow year. But then you always have that routine rent increase built into your rental property finances. So it kind of helps you over time.
Especially, I always think about what if you get to a year where suddenly you’re like, oh my gosh, my expenses are going up because property taxes are raising or cost of goods is going up and now suddenly my rental income isn’t matching my expenses, but I need to raise the rent to match market rent and I need to raise the rent to cover my expenses.
But you’re doing this huge increase on your tenants and that could be kind of cost prohibitive. So think about those annual, routine, small dollar amount, rent increases to kind of cover your expenses over time so you never have to do that big jump.
So that’s just kind of a basic coverage of cash flow analysis when it comes to rental property. Come check out another video where we talk about how to make a quick calculation or quick determination using percentage rules that are common in landlords and real estate investors to find out if a property is gonna be a positive cash flow or negative cash flow, just when you’re doing kind of that mental shopping and stuff.
So again, my name is Kaycee. I work with Rentec Direct. You can always find my articles on the Rentec Direct blog, and look forward for more videos, and follow us on social.