Cash flow is necessary when it comes to renting out property. It’s the lifeline of your investment and understanding it is key to being successful. Fortunately for you, understanding cash flow isn’t exactly rocket science. Once you grasp the basics, it’s easier than you think.
The following article by
Peak Residential highlights the important basics to know when it comes to understanding cash flow and keeping your rental business profitable.
Simply put, cash flow is the difference between the rental expenses and rental income of an investment property. Calculating cash flow is a pretty straightforward process. You’ll only need to subtract your total property expenses from the total rental income. The figure you get will indicate whether your rental investment is profitable or not.
Your goal should be to generate a positive cash flow. When it is positive, it means that you’re able to generate more income vis-à-vis the expenses. On the other hand, when cash flow is negative, it means that your expenses are higher than income.
Your journey to maximizing your ROI begins here. You should be able to charge the right rent amount that covers your expenses and leaves you with a decent profit at the end of every month.
Some common rental expenses you’ll need to account for in your calculation include the following:
As for maintenance, this is usually one percent of the home’s value every year. What you don’t spend in a given year should be carried forward onto the next year to cover repairs and improvements that don’t occur on an annual basis. Examples of these types of repairs include roof repairs and appliance maintenance.
A well-written lease agreement is key to boosting your cash flow. A detailed lease can help protect you from undue expenses by clearly stating who’s responsible for what when it comes to things like repairs and maintenance.
Use the lease to define clear roles for each party. The following are some things that you may want clearly defined to ensure minimum expenses and maximum cash flow:
The lease can even help you create additional income streams, such as pet rent or a pet deposit.
Vacancies are profit killers! Every month that passes by without a tenant means you’re losing money. As soon as a tenant shares with you that they won’t be renewing their lease with you, begin marketing the unit as quickly as possible. List the unit on rental listing sites, social media, and print out flyers and posters, among other strategies.
For your marketing campaign to be successful, you’ll need to get certain things right, including charging the right rent amount, and having the right amenities.
Tenant turnover is key in maintaining cash flow as a landlord. Now, multiple things go into ensuring you have a rapid and effective turnover process. They include the following:
A quick tenant turnover process will help ensure you keep your expenses minimal. Ideally, a typical tenant turnover process should be completed within one or two weeks, depending on the condition of the unit.
To attract and retain quality tenants in your rental property, you’ll need to consistently update its look and feel. The following are some telltale signs that you need to update and renovate your rental property for optimal cash flow:
Other indicators include a high tenant turnover rate, difficulty in attracting new tenants, and complaints from tenants about their unit’s condition.
This is a key recipe for maximum ROI. You see, no two tenants are ever created the same. That’s why it’s important to have a meticulous tenant screening process to help you differentiate the good ones from the potentially difficult ones.
A good
tenant screening process is one that examines prospective tenants from a myriad of angles, including their creditworthiness, income level, rental background, employment status, and criminal background. Ideally, hire a property management company to help you in this regard for optimal results.
Now you know what cash flow is and what you can do to optimize it for a high ROI. For additional tips, look no further than
Peak Residential! We are a full-service property management company that can help you manage your Sacramento rental property. Get in touch to learn more!
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