Key Takeaways
- Understanding and tracking cash flow is essential, it shows whether your rental property is profitable by comparing total rental income against all operating expenses.
- Location, property type, and amenities significantly influence cash flow, as they determine rental demand, operating costs, and how much rent you can charge.
- Optimizing cash flow requires strategic management, including setting the right rent amount, minimizing vacancies, maintaining a strong lease agreement, and keeping the property updated to attract and retain quality tenants.
Do you understand what cash flow is, and how to optimize it to keep your rental business profitable? Cash flow is one concept that landlords need to have a solid grasp of. It’ll let you know whether an investment is going to be worthwhile or not.
We at Propertycare Property Management have put together this comprehensive guide to cover what cash flow is, how you can optimize it, and everything in between!
What is Cash Flow on Rental Property?
Cash flow is the difference between rental income and expenses. Examples of sources of rental income include monthly rent, late fees, lease cancellation fees, pet fees, resident-paid expenses, and withheld security deposit amounts.
When it comes to rental expenses, they include rental maintenance, utilities, property taxes, insurance, travel expenses, and property management fees. To calculate cash flow, simply subtract the property expenses from the rental income.
Cash flow = Total Rental Income – Total Property Expenses
How much cash flow you get will tell you whether or not the investment property is profitable. And for an investment property to be profitable, rental income needs to exceed the expenses. This is what is referred to as a positive cash flow.
But when expenses exceed the rental income, the result is negative cash flow. This would mean the Houston, Texas investment property is generating a loss. As a result, you may need to adjust rent prices, or cut back on expenses.
What is the Average Cash Flow on a Rental Property?
To analyze the potential cash flow when renting out a home, you’d need to look at certain factors. They include the following:
Property Type and Price
The income potential between different residential property types varies. For example, units that offer more space tend to have a higher potential for cash flow than small units. Furthermore, the more privacy a rental offers, the higher the rent you can charge.
Location
Location is the most important thing in real estate. To generate the highest possible cash flow from a rental investment, you must get this right. When buying rental properties, look for areas in Houston, Texas with a strong, growing economy, job growth, and population increase.
Also, the operating expenses, such as property taxes and utilities, should be low. Furthermore, the landlord-tenant laws should be friendly to property owners.
Property and Neighborhood Amenities
Properties with desirable amenities generally rent for more than those without. Desirable amenities in rental properties include in-unit washer/dryer, air conditioning, high-speed internet access, safety features, and pet-friendly policies.
Neighborhood amenities also play a huge role in the desirability of a property. If your rental is located in an area with access to great parks, shopping and dining district, and entertainment hubs, you’ll can charge more in rent and reduce vacancy periods.
How Can You Keep Your Rental Property Business Profitable?
To keep your rental business profitable, you’ll need to maintain cash flow. The following are some strategies to help you in this regard:
Determine the Right Rent Amount
Charging the right amount of rent is essential to attract and keep quality residents, as well as generate optimal profitability. As a rule of thumb, the rent to charge should be about 1% of the property’s total value.
You should also look at what comparable rentals are charging for rent. Check online listing and assess the state of the market to ensure that your rent prices remain competitive while protecting your cash flow.
Draft a Proper Rental Agreement
This is another crucial element for maintaining cash flow in your rental property. A lease or rental agreement is a legally binding document that defines important aspects of a landlord-tenant relationship.
It should cover both the landlords’ and residents’ rights and responsibilities, and rules regarding pets, guests, and smoking. When drafting an agreement, make sure it aligns with federal, state, and local landlord-tenant laws. When you create detailed lease agreements, you’ll less likely to experience costly mistakes and conflict with tenants.
Market Vacancies Quickly
As a landlord, you won’t be able to keep your rental business profitable if you are struggling with vacancies. This is because as you property sites vacant, it can’t generate rental income, but will continue to incur expenses such as property taxes, mortgage payments, and maintenance costs.
The best way to keep rental vacancies minimal is by beginning the marketing process early. Send notices to residents at least 90 days before their lease is over. In the notice, let them confirm whether or not they will be renewing it for another term.
If your tenants are renewing their leases, this can save you a lot of time and money. But if not, early notices will give you an opportunity to begin the marketing process before they move-out.
Keep Your Rental Property Updated
This is another thing that can help keep your rental business profitable. Every few years, re-invest in your rental properties to ensure they keep looking great.
The following are a few things you could do:
- Refresh the walls with a new coat of paint.
- Boost the curb appeal to create a welcoming, positive first impression.
- Replace outdated lighting fixtures to modernize the entire feel of a room.
- Deep-clean or upgrade the flooring.
Bottom Line
The only way to keep your rental business profitable is by optimizing cash flow. If you need help with this, consider the benefits of working with a trusted property management team.
Propertycare Property Management is a skilled and locally-based company in Houston, TX. We can help you handle all your property management needs. Get in touch to learn more!
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