Part of running a business is keeping track of expenses. If you don’t think of your rental properties as a functional business, you’re making a huge mistake and likely failing to maximize the return on your investment. As with any business, numbers matter when it comes to rentals. This is why you need to monitor your monthly real estate cash flow.
For those who have never dealt with cash flow before, here’s a short primer. Cash flow is the amount of money that’s left after all of the expenses have been covered. While it’s exciting to say that you make X amount of dollars each year from your rental property, the reality is that once all of the bills have been paid, that X amount can shrink significantly.
Understanding your monthly real estate cash flow not only allows you to control costs; it can also help you maximize your profit.
The first step is documenting all expenses. Any money that goes out in association with the rental property must be accounted for. This means any advertising you do for the property, legal fees, as well as fees you pay to a property management company.
Utility bills will make up a significant portion of your expenditures, especially if you own a multi-family building with lighting and landscaping irrigation in common areas. Factor in any water/sewer or trash bills for which you will be responsible. Cleaning supplies and maintenance items should also be included, in addition to the cost of hiring maintenance people and repair specialists. Your mortgage, insurance, and taxes should also be included in your expenses. One important expense that’s often overlooked?
Property owners should plan on setting aside a certain percentage each month to cover large, unexpected repairs. Whether you need to replace the entire roof on your rental house or purchase a new elevator for a multi-family building, planning to put aside a certain amount and including it as a monthly expense will help you avoid a financial disaster.
Adding up the income for your monthly real estate cash flow summary might seem as simple as totaling up the rent, but in reality, it’s a bit more complex. In addition to rent, you need to add in any late fees paid, as well as application fees paid by new tenants.
Other sources of income will vary by property. Some landlords require a fee for tenants to register pets when they move into the building or acquire a new cat or dog. In a property with a laundry room, income from washers and dryers will figure into the equation.
Keep in mind that apart from rent, many of these other factors vary from month to month and can’t be relied upon as a picture of what your cash flow will be all the time. Once the numbers on both sides are totaled up, the equation is Income – Expenses = Your Monthly Cash Flow.
You need to start thinking about enhancing your monthly real estate cash flow early on in the real estate investment process. The best way to do this is to purchase properties with an excellent price-to-rent ratio. The lower your monthly mortgage payment is in proportion to the rent you can get, the better for your bottom line.
That doesn’t mean buying a dirt-cheap fixer-upper; it simply means that you should shop wisely. In fact, some of the most valuable properties in terms of cash flow are turnkey rentals. These properties don’t require buyers to put money into repairing and updating them. They’re ready to rent out right away, meaning that the purchaser doesn’t lose time (and income) while they work to renovate the property and install tenants. A real estate company that specializes in turnkey investments can help guide you to properties with a good price-to-rent ratio.
Once you’ve made a choice, a property management company can help you keep track of cash flow by providing you with monthly reports. The best way to manage and enhance your monthly real estate cash flow could be to seek out experience and rely on the experts.