For most real estate investors, the goal is straightforward: drive cash flow with the purchase of a home.
Yes, there are other ways to generate returns through real estate — long-term equity and wealth building among them — but most people who invest in property are working to grow income in the near term.
In this article you'll learn the five main levers for improving real estate cash flow. Before we start, a few essential concepts and terms should be clear:
Put simply, real estate cash flow is the money left over from your property's rental income after all business expenses.
Note that we did not say "rental property expenses."
As a real estate professional and business owner, it matters that you account for all of your expenses: vehicle, phone, office space, insurance, and any other additional cost.
Of course, debt interest may well be your largest expense after taxes, so you should look closely at your debt costs when you calculate your cash flow.
Now let's get into it.
How to increase cash flow
1. Refinance your debt
The fastest way to drive cash flow when buying a home is by restructuring your loans.Over time, your property builds equity in two ways:
- Passively, through rising market value. Properties are worth more as the years pass.
- Actively, through the equity you add yourself via improvements: renovations and remodels when tenants move out, adding meaningful value to the investment property you own.
You can even buy another property. The most disciplined real estate investors keep their capital working by partnering closely with lenders. You can immediately reduce your monthly payment and increase your cash flow if you renegotiate the terms of your loans.
2. Reduce costs
Cutting costs to save on expenses is another way to drive cash flow when you invest in real estate.For example, reducing your vehicle expenses has a snowball effect: you pay less insurance on a less expensive vehicle. Vehicle excise taxes are lower. And so are interest payments.
Likewise, if you rent office space, ask yourself: could you be working from home? You can deduct office space from your earnings, but you can also deduct a home office.
The core point here is that any business relies on a lean back end to maximize profit.
Make sure you also work with an attorney before considering a sale. You may get by with an accountant for your day-to-day tax filings, but if your aim is to start buying and selling properties, a tax attorney who specializes in real estate is essential.
3. Raise rents
Start raising rents, and keep doing it to the extent the market will bear.Tenants legitimately work to keep rents low, so you'll need to apply the same force to keep them at the top of the market for the value of your investment property — and thereby increase your rental income periodically.
Study the law, study the market, and raise rents even if it means losing a tenant from time to time. Over the long run, you have to keep pace with the market to capture more cash flow gains.
4. Zero out every utility you can
Make sure every utility a tenant can pay is handled that way.No one will conserve water, heat, electricity, and other utilities better than the person paying for them. You'll not only reduce costs — you'll help the environment too.
5. Maximize your local rebates
Make sure you take advantage of the discounts and tax credits available when you renovate or remodel.Many utility companies are required by law to offer rebates and tax credits on certain items. Doors, windows, water heaters, thermostats, furnaces — these are the most common renovations that target rebates.
Plan with a contractor how to capture the rebates you're entitled to, following the rules to the letter. Paying less for repairs now and adding equity to your future is another way to impact your cash flow positively. Aim to minimize your expenses if you have to pay utilities.