When it comes to increasing cash flow for your rental property, most advice in the property management world is flat out wrong.
It’s not as simple as raising rent. Instead, you need to find the underlying reasons you’re not making money. Only then can you make improvements that will positively impact your income. Here are five reasons you might be experiencing negative cash flow.
Why Your Investment Property Has A Negative Cash Flow
Reason #1: You’re Unable to Attract Quality Residents
You lose money when you don’t attract residents who pay on time, follow the rules and renew. These tenants search for well-maintained properties. If you’re stingy with repairs and upkeep, you’ll continue to bleed money.
There’s too much competition in the rental market right now for you to succeed with a mediocre product. So, put effort into attracting the right tenants to increase cash flow.
Reason #2: You’re Listing a Property That’s Not Ready
The quality of a property attracts the same quality of tenant. Sometimes landlords get burned with damages after a resident moves out and they’re hesitant to spend money on repairs for the new tenant.
The frustration is understandable, but you can’t show properties with slow drains, landscaping issues or smelly carpets. You’ll put yourself in a cycle of bad tenants who damage your property and cost you money.
Reason #3: You Overpaid for Your Rental
Money is either made or lost when you buy a property. Unfortunately, you’re in for an uphill battle if you buy a property for more than it’s worth. You’ll have to sacrifice on repairs and charge more for rent just to break-even.
There’s no easy way to get out of this situation. However, you can take steps to avoid it. Before you buy, get a second opinion from someone other than the person earning commission from your sale. Landlords often reach out to use for advice. We send them comps to help them make an unbiased decision.
Reason #4: You Have High Turnover
Your property drains money if it has a revolving door. You rack up vacancy loss and real estate commissions on top of utility costs. Vacant units are also prone to vandalism and theft. You need to identify the reason your residents decide to leave.
Is your customer service or response time lacking? Are you meeting the needs of your tenants? We recently ran into a case where a homeowner decided not to fix a fence after it blew over. Their tenant had a dog and the broken fence caused him to move out. A quick fence repair would have eliminated that vacancy.
Reason #5: You’re Not Enforcing Lease Terms Immediately
Set the expectation that tenants must comply with the agreement. Otherwise, they’ll expect leniency. And it’ll impact your bottom line. Collecting rent is the obvious area where not enforcing lease terms will immediately get you in trouble.
We send out our late payment notices on the 4th of each month without hesitation. Residents understand we expect the rent on-time. If we held off on the notice for a few days out of sympathy, residents would take advantage and pay even later. That would mean less cash flow for our investors.
Start Increasing Your Property Cash Flow – Now
If you want to start increasing cash flow immediately, here are a few proven methods we use to help our investors.
1. Decrease Repair Expenses
Start by performing routine preventative maintenance, like changing filters and watering your foundation, to avoid expensive repairs. When you do need to hire someone to fix a problem, think quality over quantity. Always hire contractors you know do top-notch work. Even if they cost a little more upfront, you’ll save money in the long run.
Also, take the time to perform proper background checks to find quality residents. You only want renters with a positive track record who you can trust to take care of your property.
2. Decrease Turnover
Another easy way to increase cash flow is to simply keep your residents happy. When residents are happy, your property stays occupied and you don’t have to deal with vacancy loss or real estate agent commissions. You also won’t you have to spend money on repairs to get your property ready for tours and brand new tenants.
3. Adjust Your Rent Prices — At the Right Time
This strategy isn’t as common as the ones above, but it’s extremely effective. Spring and summer months like May, June and July are peak times for renting. If you raise rents during these months, you’re more likely to find tenants who are willing to pay a higher price. We work with landlords to position their listings at the right time to get the most rent.
In contrast, you should also price aggressively to fill your vacancies between tenants, even if it means manipulating your rent. Remember, your cash flow depends on occupancy. Don’t keep a property vacant just to preserve a high rental rate – it’ll cost you.
If someone wants $2,000 per month for their rental and it’s not moving, we’ll suggest setting a more aggressive price like $1,800 to get it occupied right away. Otherwise, the investor may pay several mortgages without income to hold out for that $2,000.
Coming down to $1,800 is just $200 less per month and $2,400 less over the course of a year. Looking at the bigger picture, an investor is in a better position for cash flow if a property is occupied sooner for a few hundred dollars less per month.
Pitfalls of Increasing Your Rent Without Guidance
If you don’t have a pulse on the rental market you can set your prices too high and lose tenants. Thanks to the internet, renters can easily hop online to compare rental rates. They’ll pass on your property in a heartbeat if they can pay a few hundred dollars less down the road.
If that happens, you’ll lose money from turnover costs and vacancy expenses, and you’ll probably end up having to reduce your rent again anyway to find a renter. It’s a lose, lose situation.
Bumping up rent a few hundred dollars isn’t a band-aid for high turnover, long vacancies, ineffective pricing strategy or maintenance costs. No one’s going to pay more than market for a rental if they can go elsewhere.
Instead, think overall value. Figure out how you can find and keep good residents to limit out-of-pocket costs and keep up consistent cash flow. If you’re looking for help to increase cash flow on your properties, contact us here.