What Is the Optimal Cash Flow For Rental Properties?

Every landlord makes a real estate investment for long-term passive income streams. By having an in-depth understanding of how an effective cash flow can be generated can, therefore, help them discern the best rental properties from the rest.

If you’re interested in unlocking these opportunities that grant you a competitive advantage over other investors, you’re in the right place. Keep scrolling through and you’ll find some great tips on how to find properties with the best cash flow.

What Qualifies As Optimal Cash Flow?

Are you familiar with the ‘1% Rule’? If not, here’s a simple way you can estimate a ‘ballpark’ figure for how much rent you should charge your tenants:

If a property costs $250,000, then the 1% rule implies that you should charge ($250,000 x 1$)  $2500 per month in rent, a.k.a ‘gross rent’.

The 1% rule also implies that the optimal cash flow varies from landlord to landlord and that a property’s potential rental income should determine whether it is a good investment.

Now let’s say that you’re looking for rental properties that cost $100,000 and that the average rent in the area is $700 per month. Simple mathematical calculations should tell you that your gross rent is ($100,000 / $700) 0.007% of the price you may pay for the property.

According to the 1% Rule, this property isn’t worth investing in because it doesn’t provide an optimal cash flow. However, you should consider the following factors before all-out discarding these properties:

  1. Is the Expected Rent Below the Market Average?

If this is so, you can always increase the rent to match the market average. Of course, this is only possible if the area has a high demand amongst potential renters.

  1. Is the Property Overpriced?

If the property is situated in a sellers’ market, then this would mean that the property prices are increasing at a faster rate than the average rent. Depending on your investment strategy, this property could still be of some value in the future.

  1. Does the Property Have Deferred Maintenance?

If this seems to be the problem then you can always raise rents once the upgrades and repairs are completed and the property justifies the rent.

How to Strengthen Your Cash Flow

Even though most landlords look for fast-paced opportunities to increase their cash flow, it only tends to make matters worse. Alternatively, they can try to increase their cash flow by about $10 per month, and even though it may not seem like a lot, doing so can help yield thousands of dollars in the long term.

The following are just a few examples of how landlords can help increase their cash flow:

  • Add value to the property to justify an increase in rent, for example, adding updated finishes or energy-efficient appliances.
  • Implement strict background checks and screening process to shortlist potentially problematic tenants.
  • Reduce tenant turnover
  • Implement seasonal maintenance for plumbing and HVAC systems as a means to reduce major repairs in the future.
  • Delegate all of these responsibilities to property managers while you try to sift through the real estate market for more investment opportunities.

Final Words

WIthout an optimal cash flow, your ROI is at risk of imploding in the near future.

Consider the clever investment maneuvers you read about in this post instead of determining a mythical dollar-figure for optimal cash flow. Also, while you’re juggling the finances, it is highly recommended that you hire a project manager to handle tenant disputes, screenings, maintenance and so many other things that keep your phone ringing.

Get in touch with us today if you have any questions or concerns.

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