When deciding to invest in a property, there are many important factors to consider. The location, the amount of work it’ll take to make it livable, and your estimated ROI are all things investors must think about before moving forward with their investment. Another important thing to consider when getting involved in real estate investments is how to generate positive cash flow. It’s impossible to be 100% sure that a rental property is going to result in positive cash flow, but there are a few rules of thumb that can help you invest with confidence:
Finding The Right Tenant
You’re not going to get paid if you don’t have tenants in your rental property. Finding quality tenants that will pay their rent on time is crucial for smooth and positive cash flow. Background checks, calling referrals, screening and checking credit reports can help you get an idea of your tenant’s payment history. If you end up with a tenant that doesn’t pay, not only will you not receive the rental income you need but evicting them can cost you as well. Be picky about your tenants since they are the ones responsible for paying the rent. Many investors don’t have the time to carefully screen and interview tenants, which is why they opt for turnkey rentals that already have solid tenants in place.
Expect The Unexpected
While there are expected and routine expenses associated with investing in a rental property, smart investors always expect the unexpected. Overestimating how much rent you will receive each month or underestimate what it costs to maintain a rental property are two ways to quickly dip into the negative cash flow zone. Avoid this by budgeting for the busted pipes or any other unexpected issues that may happen. The total operating expenses for a rental property are usually about 20% of the total gross rental income.
Stay Competitive
If you are marketing the home yourself and don’t carefully analyze the market, you could cost yourself a lot of money. Knowing how much comparable properties in the area are selling for is the best way to stay competitive and generate a positive cash flow on your rental property. Find at least three other properties that are around the same size and have the same amenities when deciding on your rental rate. If your rental rate is too high, the home will sit empty, and you won’t make anything. If it’s too low, you could be getting by with the bare minimum and missing out on major funds that would contribute to a positive cash flow.
Go Green
Not only is going green good for the environment, but it’s also a smart step towards a positive cash flow for your rental property. The everyday utility bills, like water and electricity, can negatively affect your cash flow if you’re not careful. By installing low flow toilets or eco-friendly features like energy efficient windows and doors, you can help reduce utility expenses and allow more of the rental income to flow towards your bank account. Keep an eye on monthly utility and maintenance costs, such as irrigation, to make sure you’re not paying for something your property does not need.
Positive cash flow is the end goal for most real estate investors. And while there is no sure-fire way to ensure your rental property will produce a positive cash flow, doing your research and being proactive can help you invest with confidence.
