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The following is a guest post from our friends at Avail. Read more articles like this and how they serve real estate investors at https://www.avail.co/
Owning a rental property can be a tremendous investment opportunity. Whether or not your property produces additional cash flow for you will depend on a few key factors: but there are a lot of factors to consider.
You need to have tenants in your property, at the right price, who will pay rent on time...
In this article, we’ll explore the basics of cash flow and how to maximize it, which ultimately gives you more control and more confidence as you run your rental business.
Setting Your Rent Price
The biggest determinant of cash flow and healthy financials as a rental property owner revolves around rent price. You need a high enough price that you make money, but low enough to keep tenants happy over the long-term.
In order to price appropriately, you’ll need to study your market. Find comparable properties and see how they are pricing. Your potential tenants will do the same, so you’ll want to know how your property compares.
You’ll also need to understand what tenants value, which often includes the condition of your property and amenities that you offer.
There are certain items you may take for granted that increase the value of your rental units and they allow you to increase the value of rent. For example:
- Hardwood floors
- Open space
- Great views
- Furnishings
- New appliances
These are all simple elements to enhance the value of your place and can be highlighted and displayed as examples for holding a price in line with the value you are providing.
Which brings us to the next point: how you display and promote your space is a big determinant of finding tenants and capturing proper value.
To maximize cash flow, you want to provide a quality experience for tenants and have a price that reflects that value. Your best opportunity to do this is in your rental listing. How you write your rental listing description and share the photos and differentiate yourself from the rest can bring you great tenants who are willing to pay a higher price to get a great experience.
Collect Rent On Time Every Time
Now, if you have tenants, the next thing to do is make sure you are collecting rent as quickly as possible.
The goal is cash flow - and the definition of cash is when it’s in your bank account - not when someone has agreed to pay it. This is important because delays in cash flow can add pressure to your business,create more of an unknown, and add stress if you have mortgage payments to make on time
If you have a set date when you are paid, and the money comes in on those days, you can pay expenses and operate with confidence.
If your tenant doesn’t always pay on time, several things happen. First, you delay cash coming into the bank which means you can’t use it and lose that flexibility.
Additionally, unpredictable rent collection means you waste a lot of time reaching out to tenants and working to bring in the money. This wastes time and increases the chance that payments fall through the cracks.
If you don’t have a great system for getting paid in time, you’ll need to at a minimum have a great system for finding who owes you, how far past due your tenants are.
Ultimately this cycle of tracking down payments slows you down, creates stress and reduces the flow of money through your account.
The goal should be to streamline the payment process and make sure your tenants are strongly encouraged to pay on time every time. If you can, find ways to make it easy for them. Online rent collection is a great way to speed up the flow. Instead of checks, envelopes, and deposits, you have money going straight to your bank account.
With Avail, you’ll get online payments that are made for landlords:
- Automatic reminders
- Rent receipts
- Automatic late fees (let us be the bad guy)
- Next-day payments
- Same-day credit card payments
- Help your tenants boost their credit and motivate them to pay on time with CreditBoost
When you make it easy for the tenant to pay and are upfront about expectations you can ensure the money comes in predictably and effortlessly every time. If that’s a challenge in your rental property - online rental payments are definitely something to consider.
Screening Tenants to Reduce Turnover
Making sure your tenants pay you on time every time is a great way to maximize cash flow in your rental property. But do you know who is really hard to get payments from? Tenants who are no longer in your property.
So to maximize cash flow, you need to not only get tenants, and get paid by them — you need to keep them so your income is consistent.
Turnover can take on a lot of forms, and is, of course, unavoidable. But you want to reduce turnover because it’s a huge headache. Turnover means starting the process all over again of finding a tenant. More importantly, it usually means a gap of some time with less income while the unit is empty.
To reduce turnover, the most important thing you can do is have a great screening process for potential tenants.
Screening can include background checks, credit reports, and understanding rental history. You are looking for quality tenants who will take care of your property and have the ability to pay you on time, which you can check by having them upload their w-2 or paystub with their online rental application.
Taking screening lightly and having bad tenants is going to make a huge dent in your cash flow.It’ll also rob you of your time as you deal with issuesmaking sure you get paid. So, it’s well-worth the upfront investment to screen your tenants, which only 66% of landlords currently do today.
As we discussed earlier, a premium level rent price is helpful for cash flow if you know the true value of your property and can get tenants. The higher price also can be a natural screening process itself as you won’t attract renters who are looking for the lowest possible price.
As stated above in discussing collecting payments, the goal with cash flow is consistency. Consistent income allows you to plan ahead, make decisions, and invest in the future.
In addition to screening, it’s also important to get feedback and communicate well with your tenants after they have moved in.
When you communicate and show them the effort you have put into the property, they gain a sense of appreciation and loyalty which makes them want to stay and possibly even tell others about your properties.
Cash Flow Considerations for Landlords
Cash flow is the lifeblood of your rental property business. Assets are good and tenants are great, but consistent, profitable cash flow allows you to re-invest money, stay on top of improvements, and build a healthy investment.
Cash flow problems cause you to think short-term and react to problems. Predictable cash flow frees you up to look to the future and stay focused on what you are trying to build.
As a rental property owner, take a look at your cash flow and make sure you have systems in place to keep the cash flowing into the business.
We recommend building a budget for anticipated revenue and expenses so there are no surprises. Routine maintenance will also help maintain the value of your properties and demonstrate to tenants that they should also take care of the space.
Create your budget, plan ahead, then make it easy for tenants to find you and pay you. Then, you’ll be on your way to predictable cash flow and a solid investment that gives you control and flexibility.