At the most basic level, cash flow is the amount of money your Southwest Michigan rental property is earning for you. Today, we’re talking about what it means to you as an investor, and how you can increase the amount of cash flow your rental property earns.
Understanding Cash Flow and Rentals
Most real estate investors rely on the one percent rule when it comes to evaluating cash flow on a potential investment property. According to this rule, your rental income must be at least one percent of the property’s purchase price in order to be a positive and profitable investment. So, if you bought a property for $150,000, you should be earning at least $1,500 in rent every month to achieve a positive cash flow.
There are several different models that can be used to evaluate your cash flow and to determine whether a rental property is a viable investment. However, this one percent rule can be a good way to consider how much you should be earning before you purchase an investment or put a home you own on the rental market. This rule depends on market strength and the property you’re buying. It doesn’t consider appreciation or depreciation or any of the other financial benefits that come with a real estate investment. When you’re measuring cash flow, you’re looking strictly at the money you earn every month compared to the money you spent to acquire the investment.
Positive versus Negative Cash Flow
Another important consideration when it comes to cash flow is how what you earn measures up to what you spend. If you’re earning $1,500 in rent every month but your mortgage payment is $1,000 and your taxes and insurance payments are $300, an you find you’re spending $200 per month in maintenance and repairs, you’re not earning a profit. When you’re spending less than you earn, you’re in a negative cash flow state. That’s going to hurt your ROI, and it may make the investment difficult to keep up. In high-dollar markets like California, this may be tolerable to investors. But, in Michigan, you should expect to earn a positive cash flow on your rental home.
Increasing Cash Flow Potential
We work with our investors and landlords to increase cash flow whenever possible. There are a few things you can do.
- First, limit your vacancy time. Price your home correctly, make sure it’s in great condition, and market it strategically. When you’re able to get a good tenant in place quickly, you can begin earning more money on it.
- Next, make sure you place a highly qualified tenant. Good tenants will help your cash flow by paying rent on time and taking care of the home. Bad tenants will cost you money with late payments, lease violations, property damage, and the potential for evictions.
- Pay attention to preventative maintenance. Repairs are never going to get easier and less expensive with time. Take care of little things so they don’t grow into big things.
- Provide an appealing property. Great tenants are going to want to rent homes that are well-maintained and updated. You don’t have to renovate the whole property, but make sure there’s fresh paint and make minor upgrades when you can. Not only will you attract better tenants, you’ll also be able to charge more in rent.
