According to Rich Dad Robert Kiyosaki, cash flow is the single most important factor when buying long-term rental properties. In this episode, Bill presents 10 key tips to help you increase your current rental property cash flow now and for the future.
I own a number of rental properties, ranging from single family to apartment building, and my goal on each property is to have great cash flow. However, rental properties with the biggest margin between the rent and mortgage payment will not always have the highest cash flow. There are many factors you have to consider when figuring cash flow — expenses, turnover, vacancies, management and more.
Here is a quick list of 10 things you can do to directly increase your cash flow
It can’t be said enough: location, location, location. Pick a location that is profitable, not convenient. A profitable location has high demand, a good job market, infrastructure development, and market growth. Follow people’s movement. College towns provide great investing potentials because of the high and stable demand, low vacancies, and premium location but so does senior housing.
When looking for locations, home prices and rental rates are the most important factors. Home prices and expenses should be compared to the market condition to determine if the property is worth the costs. The rental rates should provide enough income to cover expenses and generate profit. Depending on your budget and market conditions, try targeting neighborhoods that have high rental yields.
Whether purchasing, getting an inspection will reveal any issues and give you the opportunity to make renovations ahead of time and save costs in the long-run. Renovations – big or small – help increase a property’s value and rental income. Find ways to economically make renovations; sometimes a property just needs repairs as opposed to replacements which can save money. A deep cleaning and adding some minor touches like upgraded light fixtures can go a long way for tenants.
Examples of rennovations that will result in higher rents include:
For example, if you notice that the crew at a nearby construction site has a two-year contract working on the local roads. This group is from out of town and stay in motels during the week.
The crew was paying $80 a night per room for the 2-man crew’s motel rooms, which comes out to $800 per work week, Monday through Friday, and you figure you can beat the $3,200 monthly rate they were paying.
So you make a proposal to the company and they accept your all-inclusive offer to house the crew for $2,800 per month with weekly housekeeping. It’s a 12% savings for the company, and the crew loved the laundry service you included, because they no longer needed to spend their weekends doing laundry.
The housekeeping, laundry, upgraded cable TV, plus regular expenses cost you $1,965 per month, so you’re able to net $835 each month. That’s $8,820 more per year than a traditional landlord would make!
The easiest way to increase cash flow is to pay cash for a rental property, assuming you have the cash. I don’t pay cash for rentals because it lowers my cash on cash returns even though it increases my cash flow.
I like to use financing to purchase my properties and then aggressively pay down one mortgage at a time. I paid off my first rental property earlier this year using this strategy! By paying off that home, I increased my cash flow by $400 a month. Couple that with the $250 a month rent increase, and I am making $650 more a month on that property than I was two months ago!
To make more money you either have to increase your income, or decrease your expenses. Thankfully, there are a variety of ways to drive down costs. This can include renegotiating contracts with service providers like landscapers. It could be challenging your property tax bill, or separating services like internet. Utilities are one of the biggest areas of waste for landlords too. Can you pass those on and have tenants pay directly, install energy saving appliances and windows, or even convert to more energy efficient options like solar panels?
Mortgage interest rates are still low, and debt service is one of the biggest drains on cash flow. This could be time to refinance or structure financing. Drive down those costs with a better loan, or bring in equity partners, which can provide an even more secure position at the same time.
Cash flow is extremely important when investing in long-term rental properties. It is important to do your research and realize the properties with the highest price-to-rent ratios may not always produce the most cash flow. Ease of management, expenses, turnover and vacancies must be considered when figuring cash flow. Your strategy regarding how you finance and pay down mortgages will greatly affect cash flow as well.
For cash flow saving tips, I have another podcast episode #070, entitled – 12 Ways to Increase Your Rental Property Cash Flow.
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