The 3 Top Strategies for Managing Investment Property Cash Flow
Whether you’re looking to buy or simply to maximize the value of a current investment property, cash flow should be at the forefront of your mind. That’s because cash flow is arguably the most important (or at least the most common) measure when evaluating a property’s profitability and assessing future profit projections.
Ultimately, a property with “positive cash flow” is a lower risk investment than one with a negative or fluctuating history. As a current owner of an investment property, cash flow immediately translates into whether you’re turning a profit or losing money – and, of course, that’s important. However, it’s even more important when we consider the longer-term implications, as properties that aren’t experiencing positive cash flow become much harder to sell (when the time comes).
In this post, we’ll explore the three most important strategies for managing cash flow, which you can apply to properties in your current real estate portfolio or proactively consider prior to purchasing a new property.
#1 Calculate Your Monthly Net Operating Income
A surprising number of real estate investors – both casual investors and professional ones – maintain negative or flat-lined cash flows simply because they haven’t tracked the property’s monthly net operating income. They have an anecdotal idea of whether the property is profitable or not, and that feels good enough. If this sounds like you, don’t be embarrassed. You’re in good company. But, it’s time to change your ways.
Understanding each property’s cash flow begins with calculating its net operating income and tracking it month-after-month. At the simplest level, this means calculating the gross income (aka all of the money coming in from rent, etc.) and subtracting all of the expenses. It’s only after you understand your current situation that you’ll be able to develop strategies for reducing expenses and maximizing profits.
As you calculate your monthly net operating income (or as you assess the cash flow of a prospective property), pay close attention to maintenance and repair costs. It’s incredibly common to find that you’re paying a substantial amount on temporary fixes instead of addressing core issues with permanent solutions.
#2 Consider Adding Capital
Simply put – the more upfront capital you invest in a property, the lower your monthly mortgage payments will be. And that’s good for cash flow, since it frees up more of the gross profits.
Of course, there’s a lot to consider when deciding if that’s a viable option for your circumstances, including your access to capital, the details of your loan, refinancing opportunities and implications, and potential opportunity costs. Be sure you work with a trusted and experienced real estate consultant who can help you identify what’s best for your unique situation.
#3 Assess Occupancy Rate and Tenant Turnover
While your property may have the ‘potential’ to make a certain level of gross income, tenant turnover (for long-term rentals) and occupancy rate (for short-term rentals) has a massive impact on the actual amount you’ll see coming in.
Of course, we all know that vacant units fail to bring in profits, but beyond that, there are substantial costs you incur each time you have to fill a vacant long-term unit, such as broker fees and tenant improvement costs (for commercial properties). Legally, you can’t deny an application based on whether you think the tenant will plan to stay long-term or not, but you can set certain terms to help ease the potential burden. For example, if you’re renting a commercial unit to a start-up or higher-risk tenant, you can require personal guarantees for the lease.
If your investment property targets short-term renters (such as AirBnB rentals), be sure you’re assessing the impacts of seasonality with your rental strategy. For example, you may decide it’s best to rent on a short-term basis during the summer months while renting to university students during the school year.
Let’s Talk About How Investment Property Cash Flow May Impact Your Next Transaction!
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