Most investors buy rental properties with one goal: earning a profit. After all, it can be a very lucrative business venture if done right. However, if your property doesn’t generate enough cash flow, it could seriously impact the success of your business. Today, we’re going over the basics of monthly cash flow and how much you need to be profitable. Read along to learn about a good monthly cash flow for rental properties and the factors that can impact it.
Contents of This Article:
- What Is Cash Flow for Rental Properties?
- How to Calculate Monthly Cash Flow for Rentals
- What’s a Good Monthly Cash Flow for Rental Properties?
- Factors That Impact Negatively Rental Cash Flow
- How to Increase Your Monthly Cash Flow
- How Taxes Impact Your Rental Cash Flow
- Get Your Best ROI With BMG
What Is Cash Flow for Rental Properties?
As a property management company in Washington, DC, we know how important it is for your rental to be profitable. Being profitable means you have positive cash flow. Cash flow is the amount of money that goes in and out of a business. For rental properties, it includes income such as:
- Monthly rent payments
- Fees (parking fees, pet fees, etc.)
And expenses such as:
- Mortgage payments
- Property taxes
- Insurance
- Maintenance
- Property management fees
- Utilities
To find your cash flow, you simply subtract your monthly expenses from your monthly income.
Cash Flow = Income – Expenses
That said, if your cash flow is positive, that means you’re making more than you’re spending each month–which is the goal if you want to make money! However, negative cash flow is a sign that you’re not profitable and something needs to change.
How to Calculate Monthly Cash Flow for Rentals
Not sure how your rental property business is doing? You’ll want to perform a cash flow analysis by looking at all your monthly expenses and the income you bring in from your rental property. Let’s go over a quick example.
Say you charge $1,500/month for your rental property.
- Monthly Rental Income: $1,500
Then, say you have the following expenses for your rental property:
- Mortgage: $800
- 0Taxes: $250
- Insurance: $50
- Property Management: $150
- Utilities: $100
- Monthly Rental Expenses: $1,350
To find your monthly cash flow, subtract $1,350 from $1,500.
- Income $1,500 – Expenses $1,350 = Monthly Cash Flow $150
In this case, your monthly cash flow is $150. While that doesn’t seem like a lot to work with, a positive monthly cash flow for your rental property is always the goal.
What’s a Good Monthly Cash Flow for Rental Properties?
If you’re making money after your expenses are paid for the month, your property is profitable. However, you’ll want to make enough to make your investment worthwhile. Most investors aim for at least $100 to $200 per month per unit. This means that after all the expenses are paid for, you’re left with this amount of money.
That said, your cash flow might not be the same every month. It can differ depending on several factors, like the property type, location, number of properties, and rental market.
Additionally, the purchase price of the property should be taken into account. After all, making $150 per month from a property you purchased for $150,000 is a lot different from making $150 per month from a property you bought for $800,000.
Factors That Negatively Impact Rental Cash Flow
As much as you plan and prepare, rental cash flow can be unpredictable. Sometimes, you’ll have a good month where you make a significant profit, and other months your profit may be non-existent. A few factors can generally harm your monthly rental cash flow, including the following.
- High vacancy rates
- Unpaid rent
- Emergency maintenance
- Costly evictions
- Severe damage caused by tenants
- Necessary renovations
How to Increase Your Monthly Cash Flow
Your rental property might not always generate favorable cash flow. However, you can do a few things to increase it, including the following.
- Add Value to the Property- One way to increase your cash flow is to add value to the property through renovations. Upgrades like updated fixtures, new appliances, and other renovations can allow you to charge a premium.
- Increase Rent Prices- Keeping your rates current with market values helps ensure you don’t miss out on potential profits. However, keeping rates fair and aligned with comparable rentals in the area is also important.
- Reduce Vacancy Rates– No rental owner likes having vacant properties, as it can cost thousands in lost revenue. As such, it’s crucial to have a solid process for finding and keeping qualified tenants. For instance, a rental property management company can help screen potential tenants.
- Create Additional Revenue Streams- You may have opportunities to create additional revenue streams within your existing investment. For instance, you can add coin-operated laundry or vending machines that tenants can pay to use.
- Reduce Operating Costs- There are a few ways to reduce operating costs. For instance, hiring a comprehensive rental management company is generally more cost-effective than hiring several people to help run your business.
How Taxes Impact Your Rental Cash Flow
While investing in real estate can yield significant returns over time, it’s crucial to understand how much you’ll owe in taxes. Generally, your net rental income is taxed at your regular income tax rate. So, if you fall into a higher tax bracket, you’ll have a higher tax bill on your rental earnings.
That said, you can generally offset your tax liability by deducting various expenses, including some of the following.
- Mortgage interest
- Depreciation
- Property insurance
- Property taxes
- Landlord-paid utilities
- Homeowners Association (HOA) fees
- Legal fees
- Property management fees
- Repairs and maintenance
- Cleaning expenses
Get Your Best ROI With BMG
If you’re in the rental property business, you’re there to make money. As such, knowing how to calculate your monthly cash flow for your rentals and how much you need left over to make a profit is important. That said, if you’re not profitable or want to start earning more, there are several things you can do to earn higher returns.
Need More Advice? contact us today!
One of the best ways to simplify your business and maximize your returns is to hire a full-service rental management team. Bay Property Management Group offers comprehensive rental management services, taking care of every aspect of your business so you can focus on your returns. Contact us today to learn more about our services throughout Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
