Whether you are a seasoned real estate investor or just getting into the investment game, investing in residential properties is not without its challenges. There is, however, one factor that can help you avoid risky investments and windfall gains: excellent cash flow!
Experienced Chester County property management firms can help you implement the best strategies to maximize your property's cash flow! With the right expertise, investors can ensure stability through problems typical of any market condition. Here’s what real estate investors need to know about cash flow!
Cash flow is the term used to describe a property's ability to generate income and meet expenses. Understanding a property's cash flow potential before purchasing or investing is essential. Then, after adding an investment to your real estate portfolio, it’s crucial to apply the best strategies and maximize that cash flow for long-term success.
Two main factors determine a property's cash flow:
Cash flow plays a central role in passive income for buy-and-hold investors. When you nail down your rental property's potential cash flow before you close, you’re more likely to start with a good property with excellent chances for success!
There are several ways to calculate a property's cash flow. The most common way is to subtract operating expenses from income. However, this method is not always accurate because it does not consider changes in rent prices or other factors affecting a property's income.
A better way to calculate a property's cash flow is to use net operating income (NOI), which measures a property's total revenue minus total expenses. It is the most accurate measure of a property's cash flow because it considers rent and operating costs. To calculate your property's NOI, follow this formula:
NOI = real estate revenue − operating expenses
For example, if your gross operating income is $20,000 and generates an additional $4,000 in miscellaneous income, your real estate revenue is $24,000. Assuming the operating expenses are around $10,000, your property would generate a net operating income of about $14,000.
However, if there are multiple vacancies and the income for the property is only $9,000 while the ongoing costs remain the same, the net operating income would be negative $1,000. When a property's expenses are more costly than its revenue, it's known as a net operating loss (NOL).
It is important to note that cash flow is only one factor you should use when purchasing or selling a property. Other factors, such as the property's location and condition, are also essential.
In general, problems with a property's cash flow will lead to financial loss. Some cash flow related issues include:
It is essential to get as much information as possible about a property before making an offer to make sure that the cash flow will be stable and sufficient for your goals!
Property managers have the experience and expertise a real estate investor needs when calculating cash flow. They're experts at forecasting how much money investment properties can generate—ultimately answering one crucial question: "How much can I rent my house for?"
In addition to the latter, a property manager can help with the rental unit’s cash flow by:
By taking these measures, residential property management services can help to ensure that a rental property remains profitable while it is under their care.
Positive cash flow is just one of many best practices real estate investors need to monitor for success! As you gain experience, plenty of strategies can be incorporated to keep properties profitable long-term.
Our Chester County Property Management team has many insights and extensive experience helping property owners maximize cash flow and returns! If you’re ready to improve rental property returns and find ways to improve profitability, reach out to the Rentwell team today. Our full-service property strategies are ideal for investors looking to get more out of their investment properties.
Contact us today to get started.