Where should I invest? It’s a pretty simple answer. Invest in rental properties. Property value increases over time, as does rental income. In a downturn, your investment value will never go to zero. You can’t say that about stocks. The fact is that even in a downturn, more people look for rental homes. But the best part, is that a well managed positive cash flow property provides optimal monthly income. You get a little bit of your investment back, while the value of that investment continues to grow.
2 Keys to rental property cash flow
There are two major components to generating cash with income producing property.
- Revenue Maximization
- Expense Control
The concept of driving revenue and controlling expenses sounds simple. There are many things you can do over the long term to master and control them. However, most of the fundamental costs and revenue features are determined based on the property you acquire. Let’s take a quick look at ways to find positive cash flow via maximizing revenue and controlling expenses.
Rental Property Revenue Maximization
Location, Location, Location. We’ve all heard the old real estate adage about location being the most important driver in value. It’s as true today as ever. The question is: How does one account for this adage in their acquisition strategy?
Consider hiring an experienced investment realtor. They’ll help with diligence in selecting property near the best schools, shopping, parks, and jobs. A great positive cash flow property will always share these traits.
Configuration. Remember that good design is essential. Avoid homes with dated galley style kitchens, segregated formal dining rooms, low ceilings, and tight hallways. Today’s tenants are from the Pinterest generation. They demand open floor plan concepts. They are looking for extra bedrooms that can be used for in-laws, grown children, or office space. They want space to entertain and like you, they prefer a great room over separate kitchen and family room spaces.
Features can really drive demand and rate. Consider a property with ample parking, generous garage spaces, and additional parking for recreational vehicles. Look for high demand items, like laundry shoots in two story properties, finished basements, and private yards where appropriate.
Property Marketing is essential. Simply placing an ad on Craigslist and hoping for the best, will likely lead to disappointment. Professional sites like the Multiple Listing Service, Zillow, Trulia, and Realtor.com will increase the visibility of your property. Higher visibility means more tenant applications to choose from. Listing your rental property with a professional property manager, ensures the most marketing exposure and the highest quality tenants.
Rental Rates are the primary determinant for rental yield. Rental yield is the total rental income generated by your property. The items listed above should be factored into an advertised rental rate. Property managers have often helped investors drive yield simply because they increased the rent. However, pricing a property above market can wind up killing cash flow by causing a vacant property to sit idle.
Another way to drive yield is via additional rental charges such as; pet rent, late rent, and lease administrative service fees. If you’re not sure of the implications of yield enhancement opportunities, consider speaking with a professional property manager.
Investment Property Expense Control
Tenant Screening or the failure to properly do so can make all the difference in the performance of a rental property. If you have a professional property manager they’ll have systems in place to handle this for you. If you are self managing, pull back ground checks on all adults who plan to live in the home. A credit report, criminal history, previous landlord references, and verification of income, are essential components of a thorough tenant screen.
Age of home will impact expenses. Homes approaching 15 years of age or more are highly likely to need major replacements. Water heaters, heating and A/C systems, and kitchen appliances have a life expectancy of between 10-15 years. Be sure to check the age of these systems prior to purchase.
Construction quality. Rental properties need to be durable. Wood floors and carpet are beautiful, but consider tile wherever possible. Base level Home Depot cabinets can be attractive to new property owners. However, going cheap can wind up being a very expensive mistake if they have to be replaced after the second tenant.
You get what you pay for. Look for well constructed durable components and keep your long term expenses to a minimum. A positive cashflow property is a well constructed property.
Property Condition. Cash flow positive properties are properties that are kept in top condition. A tenant’s favorite words are, “it was like that when we moved in”. If a tenant perceives that a property is in poor condition upon move in, it’s a guarantee that it will be in worse condition on move out.
In addition, poor conditioned properties attract tenants who are willing to live in them. They do not typically attract tenants who are willing to improve the condition. Start each rental with a clean fresh slate.
High maintenance landscape. Tenants aren’t home owners and often don’t appreciate a property the way an owner would. Large grass yards with ample vegetation are great for resale, but they often go unattended by tenants. Look for properties with low maintenance requirements, that require virtually no expense on the part of the tenant.
Pools. A common misconception with rental property is that pools improve the performance of the investment. However, pools typically cause negative cash flow. It’s true that a pool will increase the amount of rent that can be charged. However the ongoing maintenance of a pool is greater than the income it produces.
High end finishes. A common mistake investors make is thinking that high end carpets will last longer and attract better tenants. The reality is, carpet isn’t tenant proof. It will usually need to be replaced every 3-7 years in a rental property. Expensive carpet is just expensive. It will need to be replaced on the same schedule. Keep an eye out for other expensive finishes in a property. Replace them with durable, but moderately priced alternatives.
Investing in rental property is an excellent opportunity for capital growth. However, the name of the game is cashflow. Carefully determine the purchase price, and perform due diligence. Then drive revenue and control expenses to maximize the cashflow on your investment.
When buying a property you need a professional on your side. Look for a real estate agent who works with a property management company. They will have experience in investment property analysis. They can speak to ROI, cap rate, depreciation, and 1031 exchange. With interest rates at all time lows and rental rates near all time highs, now is an excellent time to invest.
Century 21 Northwest Property Management employs a team of talented property managers who specialize in working with property investors. With years of experience overseeing investment properties of all kinds. Their services include:
- Marketing rental homes
- Collecting rent
- Handling maintenance and repair issues
- Responding to tenant complaints
- Ensuring governmental compliance to tax, and fair housing laws
- Pursuing evictions
- Maximizing your rental property ROI
- Selling your rental property for the most money when the time is right
Your financial freedom can be obtained by building a portfolio of positive geared cash flow properties. If you need property investment advice or a trusted property manager, contact us any time.