IIt’s so difficult to find, finance and buy a cash flow positive property that it can be depressing to learn that your work has only just begun. Once you buy, you need to find and select tenants, track repairs and maintenance, track your expenses, file your taxes, and somehow keep the property’s cash flow going. positive forever.
All businesses – and your rental property is a business – need internal controls and procedures. It may take time to figure out what your procedures are, but the sooner you get them in place, the better.
You need to decide what your screening criteria will be for new tenants, how you will respond to complaints and inquiries, how you will manage money, how and where to list the property and how to show it. If you define procedures for all of these, you can test them over time and adjust them. It’s also easier to refuse tenants or enforce payment terms if you refer to “the policy”.
With those in place, here are five tips to keep your rental cash flow positive.
1. Find a trusted handyman
Homes and appliances depreciate. Over time, things will go wrong and need to be fixed. If you struggle to find a new person to send each time you get a request, you won’t be able to budget and manage properties effectively.
Find a good handyman who can usually get to the unit in a week or less. Most rental owners aren’t experts at patching up a wall or installing a new door and wouldn’t know if they’re being overcharged. If you have someone you trust, you can hand over most issues to them and expect the job to be done quickly and inexpensively.
A good handyman also helps when the device is turned over. A person we used would go into the unit for an hour and send me a list of everything he thought would be good to fix, along with the prices. I could then choose which line items I wanted to fix at that time and send them back. If the tenant complained about the amount of the security deposit they got back, I had a detailed listing from a professional showing what the deposit was used for.
2. Track your finances
Bookkeeping is one of those jobs that’s incredibly easy – until it’s not. If you let your bookkeeping fall behind for months or even years, good luck getting everything properly accounted for. Set aside a time each month, or even quarterly if you don’t have a lot of tenants, to reconcile your bank account and enter it into an accounting program.
The most popular accounting programs should integrate with your bank account so all you have to do is export the transactions and then figure out which category they go to. Some programs even have a rental company’s chart of accounts pre-integrated.
Keep track of your cash flow as you go. If your margins start to drop or you start burning money, you can quickly figure out the problem and fix it. You don’t want to find out you’ve lost five figures when you do your taxes next year.
3. Maximize tax savings
Many rental landlords don’t do enough to maximize tax savings. If you don’t completely depreciate every asset, track your miles, use a home office, hire your kids, keep all your receipts, and even keep track of the books you buy to learn about real estate investing, you’re paying too much. in taxes.
Almost any expense that you can relate to your real estate investment can be deducted, i.e. written off. That means going to your properties, paying to have them cleaned, fresh coats of paint, and buying a laptop that you use to run it all.
4. Use debt well
Debt is what makes real estate investing attractive. Real estate prices generally do not rise as much as stocks, but the long-term intrinsic value of the asset is more stable. This means that you can usually borrow 80% or more of the purchase price. This leverage multiplies your cash-on-cash returns.
Don’t be afraid to use your debts to buy rent and don’t pay them off too quickly. If your debt has a rate of 4%, you effectively “earn” 4% when you prepay it. There is an opportunity cost to this payment. If you can reliably earn more than 4% on other real estate ventures or the stock market, it probably makes more sense to use it there.
Of course, not everyone has the same mindset when it comes to debt. Some people want to pay it off as quickly as possible so they can sleep well at night. It’s also OK. Your long-term returns should be satisfactory as long as you apply good investment principles.
If you’re okay with taking on a lot of debt, consider refinancing as well. If you can improve a property and get a long-term lease, it’s very likely to value more, even in a stable market. While rates are still good, refinancing could allow you to take equity out of the property and use it for another investment.
5. Hire professionals
This is a shortcut for almost all of these tips. Hire a property manager to market the property and screen tenants and sort out any issues. Use an accounting firm to do the accounting and maximize tax savings. Work closely with an investment banker to manage and restructure debt as well as possible.
Each of these professionals has their own policies and procedures developed over years of working with tenants and rental investors. Instead of developing your own policies through trial and error and second-hand knowledge, you can rely on their expertise. The best part is that every dollar you pay them can be written off.
10 stocks we like better than Walmart
When our award-winning team of analysts have investment advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They have just revealed what they believe to be the ten best stocks for investors to buy now…and Walmart wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
View all 10 stocks
Equity Advisor Returns 2/14/21
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.