7 Steps To Increase Rental Property Cash Flow
The problem is, if you haven’t been in the business very long you may not know what you can do to increase those revenues. Well in this article I hope to give you several ideas to help you increase your rental property cash flow.
Not all of these are feasible or even applicable to everyone reading this, but I’m sure there will be a couple gems in here or perhaps realizations in here that will open your eyes to opportunities that you’ve overlooked, or may not have been aware of.
But before we start, let’s break down cash flow a little bit more and discuss what it is.
Cash Flow 101
When I work with new landlords, one of the first areas to look at with income properties is cash flow. If a rental property doesn’t create solid positive cash flow almost from the start, it can create a dangerous scenario for a landlord.
Too often, especially in hotly appreciating Real Estate markets investors get too wrapped up in simply acquiring property as the growth in values easily offsets the break even or even negative cash flow.
The reason I know this is because I was that investor way back!
We bought property after property with our eye on appreciation. If it broke even or made cash flow awesome, if it was negative cash flow we had other properties generating income to offset it.
We believed that the continuous growth in value was our winning ticket. And it was. Until 2007…
Suddenly the break even properties were now losing money as rents decreased due to lower demand. the negative cash flow properties became even more negative and even the properties that were positive cash flow started flowing less.
It created a scary scenario and we had to liquidate many properties at a loss to regain our balance and some we had to simply cover the monthly losses as there simply wasn’t enough equity to sell them. It was a harsh lesson, but a lesson none the less.
The lesson being Real Estate markets don’t always go upwards and appreciation may not always be there. However, positive cash flow properties help you through bad times and become even better in good times.
If we didn’t have as many strong positive cash flow properties as we did at the time, it would have wiped us completely out. In hindsight, we also realized if we had focused more on how to increase rental property cash flow initially, rather than buying with abandon we would have come through the downturn relatively unscathed.
It was a very important lesson about cash flow and the main lesson is Cash Flow Is King.
So What’s Cash Flow
I’ve previously written an article explaining the real Cash Flow from a property which you can find here, Do You Really Understand Cash Flow? It covers some of the misunderstanding new landlords have about cash flow and gives, in my opinion anyway, a more accurate way of how you need to evaluate cash flow.
Basically your cash flow is the money you have left over after you’ve deducted all of your expenses from your income. Rental income less mortgage payments less insurance less taxes less less HOA or condo fees less reserve funds less vacancy funds. (I break out reserve and vacancy funds in the other article I linked to just above, if you haven’t read it yet, you may want to jump there and come back.)
If your cash flow is a positive number after all of your deductions you’re in the black, life is good and the bigger that positive number the happier place you can be in.
If however, the number is negative, you are in the red and need to seriously re-evaluate the property.
If your cash flow is negative you need to do one of two things. either sell the property, or increase the cash flow so it’s no longer negative. Alternatively you could feed the hungry little alligator that eats away at your savings and your sanity and let it fester and nag away at you, but trust me, the sooner you can cut it loose and move forward the better.
So after my extensive preamble are you ready for the most common way yet least done way to increase your cash flow?
Increasing Rental Property Cash Flow – Method One
Disappointingly enough, that is the number one way to increase your cash flow. By simply increasing the amount of income coming in from your tenant.
Unions negotiate yearly cost of living increases into their contracts, inflation eats in to our yearly earnings and even rent controlled areas typically build in allowable yearly rental increases to their programs. Why aren’t you incorporating increases into your business?
Taxes, insurance, bank fees, utilities they all keep going up and rather than shouldering the burden of these increases on yourself and your property, you need to pass at least a portion of these onto your tenants.
You’re already providing shelter and a safe comfortable home for people, you don’t need to shelter them from the real world and the real world of increases and costs that you have to deal with in your landlord business.
Now, if you’re providing zero value to your tenants and your properties are at slum level or barely above, you shouldn’t be reading my content. My content is for landlords looking to provide good rental properties and to improve their financial situations.
If you’re a landlord that provides value in the form of safe secure comfortable rental properties that are well maintained, you shouldn’t have a problem increasing rents as your tenants most likely understand the value you are bringing to the table.
And if they don’t, perhaps they aren’t the tenants for you?
Fears, Fallacies and Fallout From Increasing Rents
Increasing rents on your tenants can be a bit challenging for some landlords usually due to fears that are often over blown. The most common fear being, if I raise the rent the tenants will move.
It’s true, some tenants may leave you. Depending on the type of tenant they are, that can be a bad thing, or it could be a good thing. If you have good tenants, have properly positioned the increase, are increasing a reasonable amount and are providing good value for the tenants, it won’t usually be a problem.
I’ve previously talked about rent increases in other articles, so to help you along with this, I’d suggest you take a look at both of these to assist you with any potential increases.
Again, if your increases are reasonable and inline with the market it’s much easier for tenants to stay where they are than to incur the expenses involved with moving and they understand this.
If you’re like many landlords I talk to who haven’t raised rents in years the property may be renting out significantly under market and you’ve been leaving a lot of money on the table. Suddenly increasing the rent 20 or 30% to get it back up to what everyone else is currently charging may indeed be too excessive and may require a slow and gradual increase.
Raising rents to market rates does not make you a bad person, much like lowering your rates when the market is filled with vacancies doesn’t make you a great person. You’re simply a business person running a business that you need to keep profitable and if you fail at it the results affect not just the tenants you have, but your family as well.
Rent Increases And The Laws
Increases may be dictated by rent controls, limiting how much you can increase per year. These increases may also not be cumulative, so if you miss out on a year, you never have the opportunity to increase that amount again.
Increases may be dictated by how often you can raise rents. In my area we can only raise rents once every 365 days. So if I discover I under valued the rents on my property when a tenant moved in, I need to wait a full year before I can increase the rent.
There may be caps on the amount rent can be increased. Local regulations may cap increases at a set percentage every year or even a dollar amount.
There may also be certain time frames for rent increases. You may require a full three months notice, or only 90 days from the notice period. Or it could be as long as six months or as little as 30 days.
Understanding local laws and regulations is part of being a responsible landlord. You need to find out these types of details so that any rent increase you provide to your tenant doesn’t get over turned through courts, landlord tenant hearing systems or any sort of tenancy tribunal systems that your area has in place.
Not understanding these rules could cost you not only your increase, but could also lead to additional fines or penalties for breaking the laws. So know your rules!
Wrapping Up Rent Increases
If you’re in a smaller town or city where unemployment is growing and people are leaving the city you will soon see vacancy rates increase causing landlord to have to become more competitive with their rents.
This may require rent decreases to keep or acquire new tenant.
Bigger cities tend to be more stable, but examples of places like Detroit come to mind where unemployment went through the roof and vacancies sky rocketed.
If you’ve been diligently raising your rents when times are good and building up reserves and cushions for when times are bad you’ll be in a much better situation to when or if the market does slow down.
So do yourself a favor and start evaluating similar properties to yours today and see if you have some ground to make up and some rents to increase!
Increasing Rental Property Cash Flow – Method Two
Now the big question, have you, or are you considering increasing your rents after step one?
Remember, not all of the steps I’m providing can work for all landlords. You may have already been raising rents every year, you may already be doing several of the upcoming steps already, but I’m hoping a few of them are eye openers to you.
The important take away from all of this is you really need to treat your landlording as a business. This has been a continuing theme I’m always trying to impress upon people visiting my site.
If you treat this as a business you will be happily rewarded over time. And with any business increasing revenues (or at the very least maintaining the same level of profitability) is key to long term success and growth.
So after that preamble, lets talk about the second step for increasing your rents.
Increasing Your Cash Flow With …
Garage and Parking
My ideal residential rental property is an up down suited property with a detached garage. With this type of property I have two suites, the upper and lower units, plus I rent the garage out separately for a total of three revenue streams.
The price for an upper unit with or without a garage is quite often the same as many landlords don;t break it out, but by separating the garage out as a separate unit I can generate anywhere from an additional $100 per month for a single dirt floor garage up to $350 per month for a two car heated garage. Your mileage can vary depending on where you’re located!
For my property with the large garage, that’s an additional $4,200 of income a year or almost three full mortgage payments. For the property with the small garage, it ends up being just over one mortgage payment a year. All with minimal extra work.
Soooo, do you currently have garages that you simply give away to your tenants? Which means you could be leaving multiple thousands of dollars on the table each year?
It doesn’t end there though, depending on your property you may have additional or different space to rent out. If your rental property is near a downtown core where parking is limited and and expensive and street parking is restricted that extra parking pad at the back of your property may be very valuable.
I know of landlords within walking distance of our downtown core that get $300 and more for an off street parking spot which is a steal as parking in the core can easily cost $20 or more per day and covered heated parking is often $600 or more per month. That works out to $3,600 per year of additional income.
Recreational vehicle parking is also a huge opportunity. I remember viewing one property years ago that was on a large lot, had a two car garage and had an extended parking pad that ran down the side of the house.
The landlord there rented out the two suites, the detached garage and also rented out the back half of the parking pad to someone with a motor home for a total of four income streams on one property.
Now this wouldn’t work for every property, but what about yours?
Who Rents Garages and Parking?
If you’re targeting working class neighborhoods for your rental, which in my opinion are the best areas for rentals, you have droves of potential clients around you.
Whether it’s the mechanic who does side jobs and needs a place to work on or store vehicles, the woodworker who has far too many tools for his garage and needs a shop to the fellow who still has his Pontiac Firebird from high school and needs a place to store it so his wife can park in the garage during the winter, the list goes on and on.
I’ve rented garages out to tenants who use them to store vehicles to a handyman who stored all of his stock to a contractor who stored his equipment, additional vehicles and trailers in a garage. All to people who usually live within a few blocks of the property and like the convenience.
For the RV parking many cities have bylaws in place prohibiting street parking for trailers or motorhomes or restrict how long they can be stationary. With RV storage lots being further and further from cities due to the cost of land and the monthly prices going up as well, having something within your district suddenly becomes very attractive.
The more you think about it the more options and reasons there are someone may want to rent your local space. Even if it’s just for storage, whose costs also keep going up!
Long Term ROI With Improvements
There are many factors you have to work through to even see if this is possible, but if it is the most important one is would it be worth it? Maybe this is time for a little bit of math exercise by doing some dollars and sense?
Does it make sense for you to put money out to improve the property? To start you need to figure out how much rents would be for a garage or parking space. you can do some research on Craigslist or local papers to see if you can get a going rate for these types of spaces and then determine the yearly income it would generate.
If you see a typical single car garage rents for $125 a month that would be $1,500 worth of income per year.
From there how much would it cost to build a single car garage?
Prices vary every where, but let’s say you could get a simple garage in your region built for $5,000. Nothing fancy, but still worth $125 per month. In about three years and four months you would have that garage completely paid for and it would be generating a profit each month.
On top of that, the $5,000 investment could have added $5,000 or more to the value of the property. This makes it a win on multiple levels as you’ve increased the cash flow and the value of the property.
Now if this same garage cost $10,000 to build it would take almost seven years to recoup your investment, so it may not be quite as glamorous, but at the same time if it added $10,000 or more to the value of the property it may well make sense. The $125 per month may even cover any financing costs during that time making it an even swap initially.
It all comes down to the numbers. Maybe a garage doesn’t work but a parking pad does!
Wrapping Up Parking
Are you starting to think differently yet? Are you seeing some additional revenue ideas in your head yet? There are multiple ways out there to maximize your rent and we’ve barely started.
If you want more information about renting out garages here are a couple other articles you can dig into for inspiration,
Oh, and if you currently rent out a garage or parking space, or plan on it, tell us about it in the comments at the bottom.
Increasing Rental Property Cash Flow – Method Three
We’re moving right along here with thoughts on improving your cash flow for your rental property, but now it’s time to look at an aggressive way to increase your cash flow almost immediately.
Now this isn’t for everyone and it may be exactly the wrong thing for some of you to do depending on how long you intend to keep your property, how long you’ve owned the property, how close it is to being paid off and and how old you are.
However, if you need to increase cash flow now to improve your situation this may be the solution you were looking for.
Now we’re talking about re-amortizing your current mortgage!
Amortization refers to the length of your mortgage and these are often a 25 year term, although there are also 10 year, 15 year and even 30 year terms available in many places.
The longer the term, the lower the associated payment, but at the same time, the more interest you pay in total!
If you’re really curious about amortization I have a more in-depth article I’ll provide a link to at the bottom of this section that goes further into details.
The important part to understand though, or really the two important parts, is that if you lower your monthly payments, you increase your monthly cash flow and it’s actually your tenants paying the extra interest.
The point being, if cash flow is your priority this is one of the quickest ways to increase cash flow.
Of course with any mortgage product there are likely other factors to look at as well. If you break your current mortgage, will it involve a penalty. Does the longer term work for your end goals. Will you get less favourable interest rates if you change the mortgage and much more.
Ultimately it is not something that works for everyone, especially if you’re priority is to get the mortgages paid off and then live off the eventual equity when retiring. So understand your personal plan.
Wrapping Up Extended Amortization
So just to close this section off, remember that this is a rather specific strategy that won’t work for everyone, so do your homework.
And to help with that, here’s the link to an additional article that goes into more about mortgages and amortization,
This article is a bit long as well and does go into numbers and details, so get prepared for a lengthy read.
Increasing Rental Property Cash Flow – Method Four
Not all methods to improve cash flow can be done immediately. Sometimes you have to wait for a vacancy or new tenants and it’s during those times you can really capitalize on some steps that can ensure a long term increase in cash flow.
Updates and Renovations
Over the years we’ve always targeted the better quality tenants in the market place for multiple reasons.
First better quality tenants tend to provide fewer headaches to us as landlords. They pay on time, they communicate better and they tend to stay longer. All great things.
Second, better quality tenants tend to treat the properties they live in better meaning less maintenance and repairs for us, fewer vehicles parking on the grass and generally better relations with neighbours.
To attract those better tenants though, we need to make our properties stand out from the competition.
At the very least this means new paint to freshen the property up and create a modern look. From there the next upgrades include flooring and then onto bathrooms and kitchens.
New carpet, laminate or even vinyl flooring can improve the look, the smell and the appeal of a property and can help ensure you attract the right tenants.
Upgrading the kitchens and bathrooms with newer faucets, countertops and even toilets also contributes to creating a space that stands out and attracts more tenants to the property.
But the big question is, What does this accomplish?
Well, if you have a nicer property than your neighbours rental, you can charge a bit more. We’ve been safely charging 10% premiums for our properties for years and this premium means extra cash flow right in our accounts.
It also helps you fill the property faster. It’s not uncommon for people to stop by our rentals and immediately remark how it’s the nicest they’ve seen and that they simply want it! That saves you time by reducing the time spent showing and reduces vacancy time.
Finally it also self weeds out the tenants looking for the cheapest places. If I’m priced $50 or $100 more than the competition the low end tenants don’t even bother calling as it’s already out of their price range. This saves me money and headaches long term which all contribute to my cash flow!
Wrapping Up Renovations
Before you start planning granite countertops and new hardwood for your rental, remember there are limits.
Regular rentals simply don’t require granite and it could take years to recoup replacing your flooring with high end hardwood, so make sure you work within the numbers to make your property successful.
If you can put $5,000 worth of renovation in place and in return your rent bumps up $200 more per month you will get your money back in just over two years. If you already make good cash flow from it to begin with it could pay for itself in one year or less!
We finished a renovation on a property this past summer that cost us just over $6,000 and involved a complete repaint, new floors and a redone bathroom complete with tile and since we generate around $500 per month cash flow it will pay for itself in a year!
After that year the extra income and the tenant who loves the property will pay us back for years to come.
I do have a few other articles you can read through as well that talk about renovations and first impressions, you can find them here.
Increasing Rental Property Cash Flow – Method Five
Part of increasing your cash flow involves lowering your costs and one of the best methods to do this is to have your tenants pay for their utilities!
Many landlords like to include utilities with the rent either because it’s what everyone else is doing, or because it’s easier, but it’s also a way for you to be throwing away money.
Including Utilities Costs YOU Money
It’s true, if you’re including utilities every time the tenant leaves a door or window open or has a twenty minute shower it’s money directly out of your pocket.
After all, it doesn’t cost them anything as they aren’t paying for it!
As we move forward over the next several years this is only going to be an even more expensive situation for many landlords as everything is falling together to create a perfect storm of increased utility costs.
Between pressures over climate change, closure of many cheap coal plants and extra pressure on electrical grids we could be looking at potentially skyrocketing utility costs and if you’re paying utilities it will dramatically affect your cash flow.
That’s why I’m recommending that if you haven’t set up your properties so tenants are paying for them yet, you need to make it a goal for this next year!
Putting the cost of utilities onto the tenants create a forced frugality where none existed before. When they start seeing how much a twenty minute hot shower every day can cost or how leaving the windows open and the air conditioning on affects their bill you will see some drastic changes.
More importantly it will also create some drastic changes in your profitability as you won’t be forced to pay for their waste.
I’ve heard from landlords time after time how they visit their properties and see windows open and heat on or water needlessly running and by passing those costs onto the tenants versus paying out of your pockets it sets yourself up for a much happier situation. Don’t be that landlord!
Wrapping Up Utilities
Just to close this up, I have two more articles you can reference if you’re looking for additional information about including utilities in your tenants rent.
They are available here,
Increasing Rental Property Cash Flow – Method Six
In method five we talked about passing the expense of utilities off to your tenants so you don’t get stuck with their wastage, but some times you don’t have an option. You are simply stuck paying the utilities, so what do you do?
Well, instead of simply getting stuck with the extra costs it might be an opportune time to see what expensive, outdated and inefficient fixtures you may have in your rental you can replace and update.
If you have an older property with those old aluminum slider windows they are extremely inefficient and leak heat like crazy. Depending on where you are it may be a relatively cost effective task of replacing two to five windows or it can be quite expensive, but either way that expense typically ends up paying for itself in savings within a few years.
If you have a low efficiency furnace, upgrading to a high efficiency unit could pay for itself quickly in colder climates. If you have a 20 year old air conditioner, upgrading it in southern climates could have the same effect.
There’s also more cost effective fixes you can consider like replacing seals around doors, upgrading to LED lighting or simply getting furnaces cleaned more regularly so they work better. It almost becomes a game after a while as you look into ways to save heating and cooling costs.
Rebates, Grants & Savings
This is the part that can really help you out. Between rebates and grants available through many federal, state, provincial and even municipal agencies there are tons of potential programs that can help you reduce the costs of many of these upgrades.
I know of landlords that have had paid to upgrade all their windows and received 50% rebates back through upgrade programs, I’ve heard of government grants that cover costs of insulating rental properties entirely and even municipal water saving programs where you get a rebate for upgrading to more efficient toilets and shower heads.
These do vary from place to place and often aren’t widely or well promoted so it can take some digging to find out details, so it does require some legwork (or finger work if you’re doing it on the computer), but it can be a great way to improve and save without breaking the bank.
Wrapping Up Efficiency Improvements
This is definitely a great long term play and if you know you have a big upgrade coming up, why not plan accordingly and start setting aside some of your extra cash flow in advance.
It’s normally a good idea to be doing this from the beginning so you have a war chest in case of problems, but who says it can’t start now if you haven’t started already.
If you plan in advance it will make the upgrades easier and likely more cost effective than trying to do it in a rush when an old furnace or hot water tank dies and you’re stuck paying emergency repair or replacement costs.
Sorry no additional articles on this topic, at least not yet!
Increasing Rental Property Cash Flow- Method Seven
Lucky number seven, the final method for increasing your cash flow is reducing your expenses.
This method can become a bit of a rabbit hole as there are so many sub areas that I could go into, but let’s talk about two big ones.
First property management.
If you only have a single property or two and you’re paying a property manager to manage it, why?
It’s not that hard and you’re likely giving away 10% of your rental revenue that could go into your pocket. If you’re renting a property for $2,000 per month that is $2,400 a year or more as a huge expense against your bottom line.
With good systems in place, proper planning and a thorough understanding of how to acquire good tenants you could be saving yourself a ton of money. By working with other landlords you could even create a group to help cover each other off for vacations or time off.
If you’ve been having a bad run with your property manager maybe now is a good time to rethink about finding another one and taking the role over yourself.
The second big expense landlords run into is accounting. Now personally we pay big dollars to have our accountant go over our yearly numbers and to make sure we are paying the least amount of tax possible, but that expense also saves us a ton of tax money.
We also paid to have a bookkeeper come in once a week to balance out our weekly accounts and to keep us on top of everything, but we’re talking about hundreds of transactions every month and it became a matter of balancing our time versus hiring someone else to deal with it.
If you again only have one or two properties or units it might be much more economically feasible for you to do much of the paperwork organization yourself in order to save money on bookkeepers and accountants.
Maybe you even take a course on small business accounting at the local community college to get yourself educated about that aspect of your business.
Even small efforts in your bookkeeping system can go a long ways towards decreasing your expenses for accounting.
You really don’t want to be the landlord who hands your expensive accountant a shoe box full of unsorted unorganized receipts every year.
Wrapping Up Reducing Your Expenses
There are so many ways you can reduce your expenses in your business that the list could be almost endless. I’m only focusing on property management and accounting as they tend to be two of the bigger ones.
As this article is coming out at the end of the year maybe it can provide you an opportunity to review your yearly expenses and to help you make some decisions going forward for the year.
To help in that regards, i have two more additional articles for you, one about property management and one about setting up an accounting system that works!
More Ways To Increase Your Rental Cash Flow
I’ve only provided 7 methods to increase rental property cash flow and I’m sure after reading this many of you can add to this list with additional ways, so why don’t you?
Leave me a comment, tell me which of these ways you already use to increase your rental cash flow or which ones you are going to start using?
Or let me know some additional tactics to increase rental property cash flow you’d recommend to help other landlords as I’d love to hear them ad I’d love to share them!