Rental property portfolio cash flow is ultimately every investor’s dream. What’s a portfolio for, if not to pad your savings coffers? Few financial strategies, for that matter, can compete on the same level as a properly built rental property portfolio. The convergence of the right assets can very easily supplement your golden years, and passively might I add.
It’s worth noting, however, that even the best property in a great location isn’t guaranteed to produce positive cash flow. A number of factors, both tangible and intangible, can point the arrow in any direction. That said, there are a number of rules rental property owners need to abide by if they hope to increase their odds of earning positive cash flow.
If you hope to realize positive rental property portfolio cash flow, there are a number of things you should already be doing, not the least of which include what I am about to tell you.
If you want your rental property portfolio cash flow to reflect positive gains, may I recommend the following?
1. Select The Best Candidate
The single, most important thing a rental property owner can do to increase the likelihood of a cash-flowing asset is to complement their property with the right tenant. If for nothing else, it’s the tenant that will be providing you with the cash flow you so desperately need. It only stands to reason that the more dependable they are, the more likely you are to receive your monthly rent check. If that’s not the first rule to realizing positive rental property portfolio cash flow, I don’t know what else is. It’s that simple: a good tenant will see to it that money is coming in every month. Consequently, the wrong tenant can actually end up costing you money. Whether it’s in the form of maintenance issues or eviction fees, a poor tenant can just as easily ruin your chances of making money on an investment as a good tenant can make you money on one.
Nothing is more important to rental property portfolio cash flow than the tenants you have residing in your assets. That said, it’s in your best interest to vet prospective tenants thoroughly. Perform an exhaustive background check that could uncover anything you deem important. Better yet, try to illuminate any reasons the tenant in question may not be able to meet their rent obligations. Have they defaulted in the past? What’s their credit history like? Are there any red flags that question your confidence in their ability to pay on time every month?
Take the time to find a good tenant. Whereas settling for just anyone could result in a slew of problems, the right tenant will be worth their weight in gold and tilt the scale in your favor.
2. Rental Income Should Easily Cover Operating Expenses
While it may sound like common sense, it’s too important to leave off the list: the gross rental income you make from a tenant should be more than enough to cover the property’s operating expenses. It’s worth noting, however, that far too many inexperienced landlords underestimate the costs associated with owning a rental property.
Fixed operating expenses are relatively easy to calculate, but I digress; not all expenses are fixed, nor are all of them easy to account for. Of course, it’s easy to account for things like the mortgage, property insurance, HOA fees and taxes, but they are only one part of the equation. In addition to the predictable expenses, there are those that are, well, less predictable. Fees associated with routine maintenance and repairs, for example, can run the gamut from negligible to exorbitant. If you fail to budget accordingly, you could find your rental property hemorrhaging money in the worst way possible.
In order to realize positive rental property portfolio cash flow, you must demonstrate an increased level of awareness for each individual property. Is it relatively new and not in need of desperate repair? Perhaps it’s older and you expect higher maintenance rates. Whatever the case may be, it’s up to you to develop a feel for each property and budget accordingly. It’s only in accounting for every expense imaginable that positive cash flow is going to be more likely.
While everyone’s budget will be different, and can vary dramatically from region to region, I recommend budgeting approximately 25 percent of your total gross rental income for operating expenses.
3. Stay True To Your Home’s Market Value
For one reason or another, there will always be rental property owners that stray far from their property’s true market value; that’s a grave mistake. I can’t think of anything else that will sabotage your efforts of earning positive cash flow than miss-pricing your own rental property.
If for nothing else, today’s potential renters are smarter than they have ever been. With more access to online tools and valuation sites, we must assume each prospective tenant has done their homework. In other words, they probably know what your home should be renting for.
If you underprice your unit, you could very easily lose out on hundreds of dollars a month, effectively crippling the cash flow potential of your own asset. If you overprice the same property, however, you run the risk of scaring away tenants before they even talk to you. An overpriced home is more likely to sit stagnant on the market without receiving any inquiries than it is to attract a bevy of interested tenants. It should go without saying, but a vacant home isn’t a cash-flowing home; you do the math.
In order to increase your odds of running a cash-flowing rental property, you need to price it right. Skewing too high or too low will work against the very thing you are trying to accomplish: running a lucrative rental property. With that in mind, it’s in your best interest to stay true to comparables. What are similar homes in your area renting for? Feel free to call around to find out for yourself, and never assume. It’s only in identifying the true market value of your home that you will be able to ensure positive cash flow.
Following The Rules
Again, positive rental property portfolio cash flow isn’t guaranteed by any means. The success or failure of an asset is the result of too many variables to be so cut and dry. However, there are certain things you must do if you hope to put the odds of success on your side. The three things I highlighted above are not the only rules to abide by, but they are a great place to start. At the very least, they will make it easier to generate profits from your own rental portfolio.