Whether you are a seasoned real estate investor or just getting into the investment game, investing in residential properties is not without its challenges. There is, however, one factor that can help you avoid risky investments and windfall gains: excellent cash flow!
Experienced Chester County property management firms can help you implement the best strategies to maximize your property's cash flow! With the right expertise, investors can ensure stability through problems typical of any market condition. Here’s what real estate investors need to know about cash flow!
What is Cash Flow?
Cash flow is the term used to describe a property's ability to generate income and meet expenses. Understanding a property's cash flow potential before purchasing or investing is essential. Then, after adding an investment to your real estate portfolio, it’s crucial to apply the best strategies and maximize that cash flow for long-term success.
Two main factors determine a property's cash flow:
- Income includes rent collected from tenants, interest, dividends, and royalties.
- Expenses include mortgage payments, repairs and maintenance costs, property taxes, and rental income lost due to vacancies.
Cash flow plays a central role in passive income for buy-and-hold investors. When you nail down your rental property's potential cash flow before you close, you’re more likely to start with a good property with excellent chances for success!
How Do I Calculate My Cash Flow?
There are several ways to calculate a property's cash flow. The most common way is to subtract operating expenses from income. However, this method is not always accurate because it does not consider changes in rent prices or other factors affecting a property's income.
A better way to calculate a property's cash flow is to use net operating income (NOI), which measures a property's total revenue minus total expenses. It is the most accurate measure of a property's cash flow because it considers rent and operating costs. To calculate your property's NOI, follow this formula:
NOI = real estate revenue − operating expenses
For example, if your gross operating income is $20,000 and generates an additional $4,000 in miscellaneous income, your real estate revenue is $24,000. Assuming the operating expenses are around $10,000, your property would generate a net operating income of about $14,000.
However, if there are multiple vacancies and the income for the property is only $9,000 while the ongoing costs remain the same, the net operating income would be negative $1,000. When a property's expenses are more costly than its revenue, it's known as a net operating loss (NOL).
It is important to note that cash flow is only one factor you should use when purchasing or selling a property. Other factors, such as the property's location and condition, are also essential.
What Are Potential Impacts to Cash Flow?
In general, problems with a property's cash flow will lead to financial loss. Some cash flow related issues include:
- Renting a property that is not profitable
- Making unnecessary repairs or upgrades to a property that does not improve its cash flow
- Not being able to afford the monthly payments on a property
- Losing money due to fluctuations in the market
It is essential to get as much information as possible about a property before making an offer to make sure that the cash flow will be stable and sufficient for your goals!
What Can Property Management Companies Do to Prevent These Problems?
Property managers have the experience and expertise a real estate investor needs when calculating cash flow. They're experts at forecasting how much money investment properties can generate—ultimately answering one crucial question: "How much can I rent my house for?"
In addition to the latter, a property manager can help with the rental unit’s cash flow by:
- Monitoring rent prices and other factors that can affect income
- Generating and maximizing an ideal maintenance budget for your rental properties
- Keeping an eye on market trends and making necessary adjustments to price or amenities
- Taking care of rent collection, fees, and following costs for property owners
- Offering an experienced team for all maintenance related requests and issues
- Forecasting repair costs and collecting security deposits
By taking these measures, residential property management services can help to ensure that a rental property remains profitable while it is under their care.
Calculate Your Property's Cash Flow Today and Maximize Your Monthly Revenue
Positive cash flow is just one of many best practices real estate investors need to monitor for success! As you gain experience, plenty of strategies can be incorporated to keep properties profitable long-term.
Our Chester County Property Management team has many insights and extensive experience helping property owners maximize cash flow and returns! If you’re ready to improve rental property returns and find ways to improve profitability, reach out to the Rentwell team today. Our full-service property strategies are ideal for investors looking to get more out of their investment properties.
We also offer a free tool that helps investors estimate ROI. Click to for free access to Calculate Your Rental Property ROI!