7 Steps To Increase Rental Property Cash Flow – Part I
7 Steps To Increase Rental Property Cash Flow
When it comes to owning revenue property one of the key aspects of being successful is ensuring you have sufficient cash flow to cover contingencies and to generate income.
The problem is, if you haven’t been in the business very long you may not know what you can do to increase those revenues. Well in this article I hope to give you several ideas to help you increase your rental property cash flow.
Not all of these are feasible or even applicable to everyone reading this, but I’m sure there will be a couple gems in here or perhaps realizations in here that will open your eyes to opportunities that you’ve overlooked, or may not have been aware of.
But before we start, let’s break down cash flow a little bit more and discuss what it is.
Cash Flow 101
When I work with new landlords, one of the first areas to look at with income properties is cash flow. If a rental property doesn’t create solid positive cash flow almost from the start, it can create a dangerous scenario for a landlord.
Too often, especially in hotly appreciating Real Estate markets investors get too wrapped up in simply acquiring property as the growth in values easily offsets the break even or even negative cash flow.
The reason I know this is because I was that investor way back!
We bought property after property with our eye on appreciation. If it broke even or made cash flow awesome, if it was negative cash flow we had other properties generating income to offset it.
We believed that the continuous growth in value was our winning ticket. And it was. Until 2007…
Suddenly the break even properties were now losing money as rents decreased due to lower demand. the negative cash flow properties became even more negative and even the properties that were positive cash flow started flowing less.
It created a scary scenario and we had to liquidate many properties at a loss to regain our balance and some we had to simply cover the monthly losses as there simply wasn’t enough equity to sell them. It was a harsh lesson, but a lesson none the less.
The lesson being Real Estate markets don’t always go upwards and appreciation may not always be there. However, positive cash flow properties help you through bad times and become even better in good times.
If we didn’t have as many strong positive cash flow properties as we did at the time, it would have wiped us completely out. In hindsight, we also realized if we had focused more on how to increase rental property cash flow initially, rather than buying with abandon we would have come through the downturn relatively unscathed.
It was a very important lesson about cash flow and the main lesson is Cash Flow Is King.
So What’s Cash Flow
I’ve previously written an article explaining the real Cash Flow from a property which you can find here, Do You Really Understand Cash Flow? It covers some of the misunderstanding new landlords have about cash flow and gives, in my opinion anyway, a more accurate way of how you need to evaluate cash flow.
Basically your cash flow is the money you have left over after you’ve deducted all of your expenses from your income. Rental income less mortgage payments less insurance less taxes less less HOA or condo fees less reserve funds less vacancy funds. (I break out reserve and vacancy funds in the other article I linked to just above, if you haven’t read it yet, you may want to jump there and come back.)
If your cash flow is a positive number after all of your deductions you’re in the black, life is good and the bigger that positive number the happier place you can be in.
If however, the number is negative, you are in the red and need to seriously re-evaluate the property.
If your cash flow is negative you need to do one of two things. either sell the property, or increase the cash flow so it’s no longer negative. Alternatively you could feed the hungry little alligator that eats away at your savings and your sanity and let it fester and nag away at you, but trust me, the sooner you can cut it loose and move forward the better.
So after my extensive preamble are you ready for the most common way yet least done way to increase your cash flow?
Increasing Rental Property Cash Flow – Method One
When was the last time you raised your rents? Earth shattering idea isn’t it?
Disappointingly enough, that is the number one way to increase your cash flow. By simply increasing the amount of income coming in from your tenant.
Unions negotiate yearly cost of living increases into their contracts, inflation eats in to our yearly earnings and even rent controlled areas typically build in allowable yearly rental increases to their programs. Why aren’t you incorporating increases into your business?
Taxes, insurance, bank fees, utilities they all keep going up and rather than shouldering the burden of these increases on yourself and your property, you need to pass at least a portion of these onto your tenants.
You’re already providing shelter and a safe comfortable home for people, you don’t need to shelter them from the real world and the real world of increases and costs that you have to deal with in your landlord business.
Now, if you’re providing zero value to your tenants and your properties are at slum level or barely above, you shouldn’t be reading my content. My content is for landlords looking to provide good rental properties and to improve their financial situations.
If you’re a landlord that provides value in the form of safe secure comfortable rental properties that are well maintained, you shouldn’t have a problem increasing rents as your tenants most likely understand the value you are bringing to the table.
And if they don’t, perhaps they aren’t the tenants for you?
Fears, Fallacies and Fallout From Increasing Rents
Increasing rents on your tenants can be a bit challenging for some landlords usually due to fears that are often over blown. The most common fear being, if I raise the rent the tenants will move.
It’s true, some tenants may leave you. Depending on the type of tenant they are, that can be a bad thing, or it could be a good thing. If you have good tenants, have properly positioned the increase, are increasing a reasonable amount and are providing good value for the tenants, it won’t usually be a problem.
Again, if your increases are reasonable and inline with the market it’s much easier for tenants to stay where they are than to incur the expenses involved with moving and they understand this.
If you’re like many landlords I talk to who haven’t raised rents in years the property may be renting out significantly under market and you’ve been leaving a lot of money on the table. Suddenly increasing the rent 20 or 30% to get it back up to what everyone else is currently charging may indeed be too excessive and may require a slow and gradual increase.
Raising rents to market rates does not make you a bad person, much like lowering your rates when the market is filled with vacancies doesn’t make you a great person. You’re simply a business person running a business that you need to keep profitable and if you fail at it the results affect not just the tenants you have, but your family as well.
Rent Increases And The Laws
This might be the only catch you have to watch out for. Depending on where your rental property is located you may have different rules and regulations pertaining to rent increases.
Increases may be dictated by rent controls, limiting how much you can increase per year. These increases may also not be cumulative, so if you miss out on a year, you never have the opportunity to increase that amount again.
Increases may be dictated by how often you can raise rents. In my area we can only raise rents once every 365 days. So if I discover I under valued the rents on my property when a tenant moved in, I need to wait a full year before I can increase the rent.
There may be caps on the amount rent can be increased. Local regulations may cap increases at a set percentage every year or even a dollar amount.
There may also be certain time frames for rent increases. You may require a full three months notice, or only 90 days from the notice period. Or it could be as long as six months or as little as 30 days.
Understanding local laws and regulations is part of being a responsible landlord. You need to find out these types of details so that any rent increase you provide to your tenant doesn’t get over turned through courts, landlord tenant hearing systems or any sort of tenancy tribunal systems that your area has in place.
Not understanding these rules could cost you not only your increase, but could also lead to additional fines or penalties for breaking the laws. So know your rules!
Wrapping Up Rent Increases
The last word about rent increase is that what goes up, must come down. Rental markets are not static, they do tend to change and you need to stay aware of what is going on with your local market.
If you’re in a smaller town or city where unemployment is growing and people are leaving the city you will soon see vacancy rates increase causing landlord to have to become more competitive with their rents.
This may require rent decreases to keep or acquire new tenant.
Bigger cities tend to be more stable, but examples of places like Detroit come to mind where unemployment went through the roof and vacancies sky rocketed.
If you’ve been diligently raising your rents when times are good and building up reserves and cushions for when times are bad you’ll be in a much better situation to when or if the market does slow down.
So do yourself a favor and start evaluating similar properties to yours today and see if you have some ground to make up and some rents to increase!
Increasing Rental Property Cash Flow – Method Two
Now the big question, have you, or are you considering increasing your rents after step one?
Remember, not all of the steps I’m providing can work for all landlords. You may have already been raising rents every year, you may already be doing several of the upcoming steps already, but I’m hoping a few of them are eye openers to you.
The important take away from all of this is you really need to treat your landlording as a business. This has been a continuing theme I’m always trying to impress upon people visiting my site.
If you treat this as a business you will be happily rewarded over time. And with any business increasing revenues (or at the very least maintaining the same level of profitability) is key to long term success and growth.
So after that preamble, lets talk about the second step for increasing your rents.
Increasing Your Cash Flow With …
Garage and Parking
My ideal residential rental property is an up down suited property with a detached garage. With this type of property I have two suites, the upper and lower units, plus I rent the garage out separately for a total of three revenue streams.
The price for an upper unit with or without a garage is quite often the same as many landlords don;t break it out, but by separating the garage out as a separate unit I can generate anywhere from an additional $100 per month for a single dirt floor garage up to $350 per month for a two car heated garage. Your mileage can vary depending on where you’re located!
For my property with the large garage, that’s an additional $4,200 of income a year or almost three full mortgage payments. For the property with the small garage, it ends up being just over one mortgage payment a year. All with minimal extra work.
Soooo, do you currently have garages that you simply give away to your tenants? Which means you could be leaving multiple thousands of dollars on the table each year?
It doesn’t end there though, depending on your property you may have additional or different space to rent out. If your rental property is near a downtown core where parking is limited and and expensive and street parking is restricted that extra parking pad at the back of your property may be very valuable.
I know of landlords within walking distance of our downtown core that get $300 and more for an off street parking spot which is a steal as parking in the core can easily cost $20 or more per day and covered heated parking is often $600 or more per month. That works out to $3,600 per year of additional income.
Recreational vehicle parking is also a huge opportunity. I remember viewing one property years ago that was on a large lot, had a two car garage and had an extended parking pad that ran down the side of the house.
The landlord there rented out the two suites, the detached garage and also rented out the back half of the parking pad to someone with a motor home for a total of four income streams on one property.
Now this wouldn’t work for every property, but what about yours?
Who Rents Garages and Parking?
When I broach the subject of garage rentals one of the questions I often get is who would rent a garage, or even a parking space? Well it’s often surprising or perhaps not when you look around.
If you’re targeting working class neighborhoods for your rental, which in my opinion are the best areas for rentals, you have droves of potential clients around you.
Whether it’s the mechanic who does side jobs and needs a place to work on or store vehicles, the woodworker who has far too many tools for his garage and needs a shop to the fellow who still has his Pontiac Firebird from high school and needs a place to store it so his wife can park in the garage during the winter, the list goes on and on.
I’ve rented garages out to tenants who use them to store vehicles to a handyman who stored all of his stock to a contractor who stored his equipment, additional vehicles and trailers in a garage. All to people who usually live within a few blocks of the property and like the convenience.
For the RV parking many cities have bylaws in place prohibiting street parking for trailers or motorhomes or restrict how long they can be stationary. With RV storage lots being further and further from cities due to the cost of land and the monthly prices going up as well, having something within your district suddenly becomes very attractive.
The more you think about it the more options and reasons there are someone may want to rent your local space. Even if it’s just for storage, whose costs also keep going up!
Long Term ROI With Improvements
Now you may be thinking this doesn’t apply to you as you don’t have a detached garage, or you don’t have a parking pad, but what if you added one? Or both?
There are many factors you have to work through to even see if this is possible, but if it is the most important one is would it be worth it? Maybe this is time for a little bit of math exercise by doing some dollars and sense?
Does it make sense for you to put money out to improve the property? To start you need to figure out how much rents would be for a garage or parking space. you can do some research on Craigslist or local papers to see if you can get a going rate for these types of spaces and then determine the yearly income it would generate.
If you see a typical single car garage rents for $125 a month that would be $1,500 worth of income per year.
From there how much would it cost to build a single car garage?
Prices vary every where, but let’s say you could get a simple garage in your region built for $5,000. Nothing fancy, but still worth $125 per month. In about three years and four months you would have that garage completely paid for and it would be generating a profit each month.
On top of that, the $5,000 investment could have added $5,000 or more to the value of the property. This makes it a win on multiple levels as you’ve increased the cash flow and the value of the property.
Now if this same garage cost $10,000 to build it would take almost seven years to recoup your investment, so it may not be quite as glamorous, but at the same time if it added $10,000 or more to the value of the property it may well make sense. The $125 per month may even cover any financing costs during that time making it an even swap initially.
It all comes down to the numbers. Maybe a garage doesn’t work but a parking pad does!
Wrapping Up Parking
Are you starting to think differently yet? Are you seeing some additional revenue ideas in your head yet? There are multiple ways out there to maximize your rent and we’ve barely started.
Oh, and if you currently rent out a garage or parking space, or plan on it, tell us about it in the comments at the bottom.
Increasing Rental Property Cash Flow – Method Three
We’re moving right along here with thoughts on improving your cash flow for your rental property, but now it’s time to look at an aggressive way to increase your cash flow almost immediately.
Now this isn’t for everyone and it may be exactly the wrong thing for some of you to do depending on how long you intend to keep your property, how long you’ve owned the property, how close it is to being paid off and and how old you are.
However, if you need to increase cash flow now to improve your situation this may be the solution you were looking for.
Now we’re talking about re-amortizing your current mortgage!
Amortization refers to the length of your mortgage and these are often a 25 year term, although there are also 10 year, 15 year and even 30 year terms available in many places.
The longer the term, the lower the associated payment, but at the same time, the more interest you pay in total!
The important part to understand though, or really the two important parts, is that if you lower your monthly payments, you increase your monthly cash flow and it’s actually your tenants paying the extra interest.
The point being, if cash flow is your priority this is one of the quickest ways to increase cash flow.
Of course with any mortgage product there are likely other factors to look at as well. If you break your current mortgage, will it involve a penalty. Does the longer term work for your end goals. Will you get less favourable interest rates if you change the mortgage and much more.
Ultimately it is not something that works for everyone, especially if you’re priority is to get the mortgages paid off and then live off the eventual equity when retiring. So understand your personal plan.
Increasing Rental Property Cash Flow – Method Four
Not all methods to improve cash flow can be done immediately. Sometimes you have to wait for a vacancy or new tenants and it’s during those times you can really capitalize on some steps that can ensure a long term increase in cash flow.
Updates and Renovations
Over the years we’ve always targeted the better quality tenants in the market place for multiple reasons.
First better quality tenants tend to provide fewer headaches to us as landlords. They pay on time, they communicate better and they tend to stay longer. All great things.
Second, better quality tenants tend to treat the properties they live in better meaning less maintenance and repairs for us, fewer vehicles parking on the grass and generally better relations with neighbours.
To attract those better tenants though, we need to make our properties stand out from the competition.
At the very least this means new paint to freshen the property up and create a modern look. From there the next upgrades include flooring and then onto bathrooms and kitchens.
New carpet, laminate or even vinyl flooring can improve the look, the smell and the appeal of a property and can help ensure you attract the right tenants.
Upgrading the kitchens and bathrooms with newer faucets, countertops and even toilets also contributes to creating a space that stands out and attracts more tenants to the property.
But the big question is, What does this accomplish?
Well, if you have a nicer property than your neighbours rental, you can charge a bit more. We’ve been safely charging 10% premiums for our properties for years and this premium means extra cash flow right in our accounts.
It also helps you fill the property faster. It’s not uncommon for people to stop by our rentals and immediately remark how it’s the nicest they’ve seen and that they simply want it! That saves you time by reducing the time spent showing and reduces vacancy time.
Finally it also self weeds out the tenants looking for the cheapest places. If I’m priced $50 or $100 more than the competition the low end tenants don’t even bother calling as it’s already out of their price range. This saves me money and headaches long term which all contribute to my cash flow!
Wrapping Up Renovations
Before you start planning granite countertops and new hardwood for your rental, remember there are limits.
Regular rentals simply don’t require granite and it could take years to recoup replacing your flooring with high end hardwood, so make sure you work within the numbers to make your property successful.
If you can put $5,000 worth of renovation in place and in return your rent bumps up $200 more per month you will get your money back in just over two years. If you already make good cash flow from it to begin with it could pay for itself in one year or less!
We finished a renovation on a property this past summer that cost us just over $6,000 and involved a complete repaint, new floors and a redone bathroom complete with tile and since we generate around $500 per month cash flow it will pay for itself in a year!
After that year the extra income and the tenant who loves the property will pay us back for years to come.