Rules of Thumb for Positive Cash Flow for a Rental Property

One of the most important factors when determining whether to buy an investment rental property is a positive cash flow. In a weakened housing market, buying a property and settling for a negative cash flow in the hopes that the property will appreciate rapidly may not be a wise investment. There are basic rules of thumb that can help you accurately determine whether your rental property will be profitable.

Select the Right Tenant

The single most important rule of thumb to follow to increase your cash flow with a rental property is to select the right tenant, according to real estate expert Eddie Bernard of Eddie Bernard Realty. Perform a thorough background check that illuminates any possible reason why the tenant could be late or default on his rent payments. If you settle for a tenant who seems OK, but has a spotty credit report or difficulty paying the rent, he could potentially cost you hundreds, if not thousands of dollars per month. If he doesn't pay the rent, not only will your rental income dry up, but also you could be looking at costly court fees to remove the tenant in an eviction proceeding, which can effectively eliminate any expected profits.

Operating Expenses Vs. Gross Rental Income

Cash flow is the income you have after you collect rent monies and pay out all expenses. Common mistakes that lead to negative cash flows are underestimating the cost to operate the rental property and overestimating the expected rental income. Fixed operating expenses, such as mortgage, property insurance and taxes are easily calculated, but unpredictable expenses like maintenance and repairs can be tough to accurately gauge. A simple rule of thumb to follow is that total operating expenses for rental properties should fall at roughly 25 percent of the total gross rental income received, according to agent Bernard.

Know Your Market Value

If you under price your rental property, you could lose out on hundreds of dollars a month that could have increased your cash flow. Conversely, if you over price your rental property, it could sit empty for months until you drop the price. Research your market by looking for at least three other comparison rentals in your neighborhood. Check newspaper ads, property management companies and online classifieds, advises Marilyn Lewis of MSN Real Estate. Set your price competitively to rent the property as quickly as possible after it goes on the market.

First Impressions Count

First impressions are a big factor when looking for a home or apartment. You can increase your cash flow by making the property as appealing as possible during the initial showing to potential tenants. A home or apartment that smells good, has a fresh coat of paint and is properly staged can help you set a higher price for your rent. While many landlords balk at the idea of making improvements to rental properties, consider this: if you borrow $50,000 to improve your property at an interest rate of 4 1/2 percent, your loan payment would be approximately $166 per month. In contrast, you could increase the value of your property by $700 or more each month, depending on the improvements and the market, emphasizes Bernard.

Monitor Utilities and Maintenance Services

If you provide utilities such as water or trash service to your tenant, it can eat a big chunk out of your cash flow. By installing low-flow toilets and shower heads, you can save hundreds of dollars each year. If you are not comfortable providing utilities, consider dropping this option. Furthermore, a rental property with a yard may rely on irrigation to stay green. It's best to provide gardening service for your tenant because if he turns off the water, it can kill your lawn and that will require re-sodding or plant replacement. These expenses eat into your monthly cash flow.

Elite Wealth Creators have been involved in the property and finance industry for over 20 years.  Our Investment Property Strategists deliver investment grade properties to the investment market and mediate between the developer and the investor. We also assist first home buyers in purchasing their first home in QLD through our house and land packages – this includes receiving $20,000 cash back towards their mortgage by buying one of our full turn-key packages.
Our service will take you through the complete process of buying positive cash flow property, including:
• educating you on positive cash flow and the ability to pay your mortgage off years in advance
• saving you thousands of dollars in interest
• supporting you in the decision on which property to buy
• assisting in the organizing of your finances, if required
• preparing you for settlement of contracts
• liaising with other professional advisers on your behalf if required.
Our Strategists specialise in delivering quality positive cash flow property and also helping investors pay off their mortgage years in advance

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