514: How to Increase Your Cash Flow

SHOW NOTES FOR EPISODE 514: HOWTO INCREASE YOUR CASH FLOW

Cash flow is king!  You hear this proclamation at the end of every Old Dawg’s REI Network Podcast!  So, if it’s that important, how can we get the maximum cash flow possible for every property?  In this episode, Bill shares specific actions you can take to help increase your rental property cash flow now and in the future.

Tip of the Week – Always have a Plan B

Don’t bite off more than you can chew and always have a contingency plan.  Because just like in life, or in politics for that matter, things in the investment real estate business sometimes don’t always go according to plan.

Always look at the worse case scenario and develop a plan to deflect or reduce risk.

Some real estate investors are sometimes overly optimistic about their abilities. It’s important to be prepared for unforeseen property repairs, tenants that disappear in the middle of the night, or an overly zealous zoning inspector.  Remember that in the investment real estate business having cash available when you need it is critical. Always have able reserves for when the unexpected happens—because it can, and it will.

Also have multiple exit strategies for each property.

How to Increase Your Cash Flow?

According to Rich Dad Robert Kiyosaki, cash flow is the single most important factor when buying long-term rental properties.  Cash flow is King at the the Old Dawg’s REI Network!

Introduction

I own a number of rental properties 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 some things you can do to directly increase your cash flow

Pick the Right Locations

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.

Make Renovations

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 renovations that will result in higher rents include:

• Exterior and interior paint job with contemporary colors
• Upgrade kitchen cabinets/countertops or bathroom – under $1,000
• Add wood floors (laminate) – Saves you from dealing with carpets and ups rents

Other Strategies to Increase Income

• Rent by the Room
• Offer fully furnished
• Rent by week, monthly, 3-6 month lease
• Target key tenant prospects
  • Students
  • Single moms

Convert to an AirBNB property

• Rent entire property
• Rent for more (room by room) – traveling nurses
• Rent a room for $125 per night (or $3,750 per month) vs. the whole house for $800 per month

Corporate Housing

• Offer it furnished
• Annual or monthly leases
• Rent at “slightly less” than comparable hotel

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!

Convert Home to Duplex

• Although generally more expensive, you can convert a single family home to a duplex
• This could increase and perhaps double your rent.

Make proactive long-term repairs (water heaters, other Cap-X items)

• By fixing more items when you first purchase the property, you can save costly repairs or replacements later on, cutting into your precious cash flow

Paying off the mortgage on a rental property

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.

If you’re working, use the cash flow to accelerate mortgage pay-down – applying that amount to principle.

If you use financing to purchase your properties,  you can aggressively pay down one mortgage at a time.   By paying off that home sooner, your cash flow couple double, triple or quadruple. Couple that with the regular/monthly rent increases, and you could making $650 more a month in cash flow on a single family home!

Decreasing Expenses

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, trash.
• Challenging your property tax bill
• 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
• If you do pay utilities, install energy saving appliances and windows, or even convert to more energy efficient options like solar panels?

Refinance

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.

More Options

How do you get more income from your rental properties?  Raising the rent seems like the most obvious way to increase cash flow, but in this week’s Fun Fact Friday episode, we came up with 12 more ways to increase your monthly cash flow.

What if you want better cash flow from your rental properties?  Yes, you can increase rents but what if they are already at market levels – do you want to risk losing tenants?  You can’t just raise the rents arbitrarily.  It has to make sense.  If tenants leave, income goes down, not up.  But if that isn’t an option, what else can you do to increase your monthly cash flow?  There are actually a number of ways.  We came up with a list of 12 that will increase cashflow with less chance of losing valuable tenants.

1. Install coin-operated washing machines. Even if you don’t have the money to do this yourself, you can find a company that will do it for you, and share the income with you.
2. Rent extra parking space. You can charge weekly for renter’s extra cars.  Or, you can rent out unused spaces to neighboring apartment or office buildings.
3. Reduce monthly services expenses by seeking competitive bids on services you already use.  Start asking for competitive bids for your common monthly services such as trash pick-up, lawn or landscaping and pest control services, to name a few.
4. Rent storage sheds. Especially if your apartments are small, your renters may need a place to store their extra things.  Don’t let them spend their money elsewhere.  Utilize unused space in your building such as awkward-sized space, unused units or put up a few water-proof sheds on the property.
5. Enforce late fees. It is perfectly fair to have a fee for late payment of rent, and guess what?  Those who are chronically late usually don’t even mind paying – they just don’t look at these things the same way as others.
6. Offer improvements for rent increases. If it’s worth $25 more monthly rent to a tenant to have a window A/C unit, install a dishwasher, or add another inexpensive amenity.
7. Install vending machines. If your rental properties are large enough, others will do this for you for free, and give you a share of the income.
8. Rent by the room. A three or four-bedroom house or unit might make more money if you include all the utilities and rent by the room.  This has made a lot of fortunes for investors in college towns who offer student housing.  Some even charge by the bed.  It does, however, increase the responsibility of management.
9. Rent-to-own sale. If you have a single family home that you’re having trouble renting, this could make sense.  Usually there’s a significant non-refundable deposit, and higher than market rents in these deals.   When renters change their minds, as they often do, you get to keep the deposit and better cash flow.  This is great when poor cash flow makes you want to sell.  You either sell or get the better cash flow as you repeat the process.  Check out our podcast episodes #029 and #057.
10. Search around for less expensive property insurance.  Seek competitive bids and look closely at your policy to see if there are adjustments that can be made, such as changing coverage from replacement value to actual cash value.  Some insurance companies will give you a bulk rate for many units.
11. Re-Finance your mortgage.  Since you may have improved your property and built a favorable profitability track record, see if you can get a better interest rate and or terms that can reduce your monthly mortgage payment.
12. Institute a RUBS program. A RUBS program, which stands for Ratio Utility Billing System, allocates the property’s actual utility bill to the residents based on an occupant factor, square footage factor, or a combination of both.  The advantage of implementing a RUBS program is that it requires no initial capital investment and it will avoid intrusion upon entering each resident’s apartment to install a meter.  It also eliminates “owner-paid” utilities.

Conclusion

Well, there’s plenty of cashflow increasing options that we came up with — without much thought.  Maybe you can think of more.  You might want to consider  creative approaches like striking a deal with a local cable TV or high speed Internet service company where you get part of the monthly service fee or allow a cell phone company to put a broadcast transmitter on your roof for a monthly fee.   And I’m sure there are a lot more.

Reducing expenses and increasing cash flow not only puts more money in your pocket each month but it also increases the equity in your property – thus increasing the overall value of your investment.

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.

More Podcasts on Increasing Cash Flow

070: 12 Ways to Increase Your Rental Property Cash Flow

284: Ask Bill! Investing over 50 & Over 70, Boosting Cashflow and Fast Mortgage Pay-Off

146: 10 Best Tips to Boost Positive Cash Flow Income

136: 5 Reasons Real Estate is the Best Retirement Cash Flow Investment

109: Creative Strategies to Increase Your Rental Property Net Income

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com