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What is Real Estate Cash Flow and How Do You Maximize It?

If you live in an expensive market and you’re ready to invest in rental property, one of the greatest advantages of investing OUTSIDE your area is: Cash Flow!

Cash Flow

If you want to grow your wealth, create additional income streams, and not have to hop on that hamster wheel every day… two words...

Cash flow is amazing. It’s awesome. It can create freedom in your life. And financial freedom is a big reason you’re probably reading this right now. So, let’s take a deep dive into one of the most powerful topics in real estate!

What is Cash Flow?

When looking at a real estate investment, there are two main components you need to fully understand and be able to forecast: income and expenses. Understanding the key financials of a property allows you to understand exactly what cash flow is.

Cash flow is the amount of profit you bring in each month after collecting all income, paying all operating expenses, and setting aside cash reserves for future repairs. For buy-and-hold real estate investors, cash flow is the primary lever used to increase passive income.

Why do you want positive cash flow?

Well, you want to bring in more money than you spend each month, right? With the right systems and strategies in place (like quality property management), cash flow is essentially passive income. Meaning it’s income you bring in monthly, quarterly, and annually that doesn’t require a lot of your active working hours like a typical 9-5 job.

Why else do you want to harness the power cash flow?

• Cash flow creates more opportunity. Reinvesting profits from an investment property into another investment is a great way to exponentially grow your financial well-being.
• Cash flow creates safety. The extra monthly income you bring in can help create a larger savings reserve to protect you against unexpected life expenses (like medical bills, car maintenance, etc.).
• Cash flow creates freedom. By building up your cash flow to the point where it covers your monthly expenses, you no longer have to work for a paycheck. With your investments running smoothly, you can spend more time with family and friends. You can focus on education, growth, and passion projects.

Tenant Turnover

This is a cash flow killer. Sometimes when a tenant moves out, there will be repairs/cleaning you’ll have to take care of beyond what their security deposit covers.

Not only that, but many property management companies charge a “new lease fee” when they find a new tenant for you, and it’s sometimes equivalent to one month’s rent. Think about that...with a signed 12-month lease...you may only receive 11 months of rent.

Missed Rent

Every once in a while, your tenant may not pay rent on time -- or they may not pay at all. Cash flow is severely reduced when a tenant does not pay in full and it’s literally non-existent if your tenant misses a payment. On top of that, you’re now forced to cover all expenses out of pocket (mortgage, if you have one, insurance, taxes, etc.).

Vacancy

A vacant property = a non-cash flowing property. Without any income, there’s no way you have cash flow coming in.

Factors That Help Your Cash Flow

Increasing Rent

The most obvious way to increase cash flow is to increase the rent amount on your property.

This can be done by acquiring an under-performing property (where current rents are lower than market demand) and aligning the lease to market rent. Or you can renovate a property, add new amenities (central AC, dishwasher, etc.), and improve cosmetic finishes to bump up rent.

Long-Term Tenants

As mentioned earlier, turnover and vacancy are two of the biggest cash flow killers, so you must put yourself in a position to have long-term tenants in your property. You can increase your chances of having long-term tenants by keeping them happy.

That means, ensure your property management company responds to their maintenance requests in a quick and professional manner. That also means you shouldn’t get too greedy in increasing rents when their lease expires.

Sometimes demanding an extra $50 for rent during a renewal isn’t worth losing the tenant.

Preventative Maintenance

Large repair and maintenance expenses can wipe out cash flow for months. Preventative maintenance can protect against much larger expenses in the future.

HAS Properties recommends cleaning out gutters before the Winter hits, trimming trees that are close to your property, and routinely taking care of your HVAC units. Large expenses don't happen often, but they do happen and it’s important to think ahead to try to avoid these surprises.

Appealing Property Taxes

Property taxes can go up every year. If they increase faster than you’re able to raise the rent, you may run into a diminishing cash flow problem.

Depending on the market you invest in, it sometimes makes sense to appeal your property taxes with the local government if you feel the increase was unjustified.

Refinancing

It’s a good idea to occasionally check in with your lender and monitor mortgage interest rates. If you see rates falling, you may be able to refinance, lower your monthly mortgage, and increase your cash flow at the same time.

Obviously, make sure you run all your numbers and factor in lender and closing fees, but keep this strategy in mind!