When you’re thinking about buying an investment property, one of the most important factors is a positive cash flow. Sometimes investors buy rental properties and settle for a negative cash flow, hoping the property will appreciate quickly. This isn’t always the wisest choice.
But let’s rewind. What is cash flow, exactly? Cash flow is the revenue generated by your investment property after expenses. When you calculate expenses, you need to include more than just your mortgage payment, insurance, and property taxes. Repairs, maintenance, HOA fees, vacancies, and any other costs you may have count too.
So, how do you calculate cash flow on your investment property? It’s pretty easy once you figure out what your expenses are. All you have to do is subtract your costs from the total rent payments you receive each month. Ideally, the figure you come up with is a positive number. If it’s negative or not as high as you’d like it to be, there are some steps you can take to help it grow. We outline some strategies for increasing the cash flow on your investment property below.
Know your market value
It seems simple, but do some research and see what similar properties are renting for in your area. Compare both the inside and outside of the units to make sure you’re renting at a fair price. If you’re charging below market value, increasing rent is an effective way to boost your cash flow.
Don’t be afraid to make improvements
Many landlords balk at the idea of improving their rental properties. However, increasing the value of your building means you can increase your rental price as much as a couple hundred dollars per month, thereby enhancing your cash flow.
Get a two- or three-year lease
Aside from vacancies, one of the biggest drains on cash flow is tenant turnover. When a tenant moves out you have to clean and paint to get the unit ready for new renters. Finding tenants who are looking to stay long-term will reduce the frequency of these costs.
Repair for value, not price
When something needs to be repaired, cheap is seldom better. Putting a Band-Aid on a problem rather than spending the money to fix it permanently will come back to haunt you time and again. Repairing for value will ultimately save you money in the long term. And it could keep your your tenants around longer, too.