5 Ways To Increase Cash Flow In A Flat Market
Indeed landlords across the country have had a number of booming years to prosper. Rents have been rising for a long time and cash flow has been wonderful. As we approach a time where those rent increases are tapering off, investors tend to think of the future and look for ways to keep their cash flow momentum strong. For the next few years rent increases in certain parts of the country will continue however at a slower pace than in the past. In other parts of the country the rent peak has been reached and landlords may find themselves in a flat market.
I call this stabilization phase (which is healthy for the overall economy, but as an investor I know you like to see increases all the time).
5 ways to increase cash flow
1. Make sure you are collecting fair market rents
Yes, it sounds simple but many do not follow this. My best investments are those that have been purchased when they were rented below market rents. Investment properties are valued based on revenue, so on the buy side we like finding undervalued rents.
On the owner's side not so much. What are competitive fair market rents in your area? Are you comparing apples to apples. Not all 2 bed, 2 bath homes are created equal and rents will vary by classification of units.
To get a clear vision compare both inside and outside of the units and make sure you are renting to its best capabilities. Comparing your rental property to competition often can yield you higher rents or give you clues as to the little tweaks you can make to justify higher rents.
NOTE: you can rest assured that your tenants are also doing this comparison shopping, so to maintain tenants you want to offer great value. It is not just about charging top rent, but also creating a happy and sustainable tenant base.
2. Rent with multiple year leases
A dollar saved is indeed a dollar earned, the largest cash flow drain a property owner has is a lease renewal. You have to clean, paint, maybe do some carpet repair or replace. Perhaps you will even have a tenant placement fee.
I have found that when you use a two or three year lease you can find tenants who are looking for a long term tenancy and are eager to sign a multiple year lease. You can also use an escalator clause (where rents always increase by X number dollars per year). You always want to get your tenants in the habit of expecting a rent increase. Even if it is just $5 per month.
When they expect a rent increase coming on their anniversary day they will not be disappointed by it. With long term tenants you will increase cash flow by keeping your cash flow. When you have a multi year lease this is all laid out up front and you can rest easy knowing you have a long term tenant without the uncertainty if you will have re-lease fees and expenses coming up each year.
3. Rent to best demographics
Here is an often easily overlooked opportunity. Often demographics can change in an area. When you are buying property in the path of progress a property that was once renting to a lower priced paying tenant can often be upgraded to a more affluent tenant.
Sometimes you can do some minor upgrades such as replacing Formica countertops with granite. Replacing colored appliances with stainless steel and upgrading some flooring and a paint job and the rents can be raised to attract a higher paying tenant. You essentially raise the property from let's say a C class property to a B class property. You increased the cash flow and you increased the property value.
4. Do lease options
Lease options tend to be more of a physiological benefit to a tenant. Tenants who want to own a home, but for a variety of reasons do not believe they can buy one. These people often love lease options. These tenants take better care of the property (reducing your repair costs) lease options tenants will typically pay more money for rent as they aspire to own the property.
Additionally a lease option tenant will pay a lease option fee instead of a rental deposit (lease option fees are not refundable like the deposits are) this suggests a stronger tenant and frankly adds to the cash flow if they do not execute the lease option.
It is actually rare that a tenant will execute a lease option for a variety of reasons such as unable to qualify for a loan or decide to move away or perhaps the family size changes, etc. However there is a big demand now-a-days for these lease options so you may opt to look into this for your area.
5. Have tenants cover minor repairs
With single family type properties, and definitely lease option tenants, it is easy to have your tenants be responsible for the small ticket repairs (this will definitely help your cash flow) when you place tenants who are cool with these leases you know you have a better tenant.
When you do repairs, cheap is seldom better. Always repair for best value. Putting inexpensive bandaids on a repair will only come back at you time and time again for the same repair and may label you as a slum lord. Always look for the best value and fix things permanently. It will save money in the long run and lead to increasing property values and will definitely make for happier tenants.
See it big keep it simple (S.I.B.K.I.S). Happy investing!