Ensuring you have a positive cash flow is one of the most important steps in succeeding as a landlord. Unfortunately, one of the problems that I have seen far too often is that investors purchase a rental property that produces a negative cash flow. While equity is important in terms of your primary residence, when it comes to rental properties, positive cash flow is far more important.
How does a negative cash flow situation happen?
Suppose you purchase a single-family rental property for $100,000. The property rents for about $800 per month. Your mortgage payment is about $525 per month. At this point, you might think to yourself that you will have a positive cash flow of $275 per month. That's not really the case, however. There are always other expenses that you must account for beyond the mortgage, such as insurance, property taxes, vacancies, repairs, etc. Once you factor those expenses into the equation, you realize that you are actually losing money each month. Thus, you have a negative cash flow.
So, what can you do in this type of situation in order to increase your cash flow?
Long-term interest rates have been resting at all-time lows for a while now. Additionally, in most markets, there is an increased number of people looking for rental properties. While the terms of your investment property might have seemed attractive enough when you first purchased the property, as the market has changed, those terms may not be as favorable. As interest rates fall, taking advantage of the opportunity to refinance your mortgage could provide you with a number of benefits, including the ability to increase your cash flow.
This can be particularly true if you have built up a substantial amount of equity in your investment property. One option is to obtain a cash-out refinance. You can also opt to refinance at a lower rate or even extend the term of your mortgage loan, resulting in a lower monthly payment and even further increasing your cash flow.
Have you been considering upgrading your property? We all know that rental properties need maintenance from time to time, but making improvements to your property can help you to attract quality renters and raise the rent. As a result, you can boost your property's cash flow even more. Just a few options you might consider for improving your property include:
- Remodeling the bathrooms
- Upgrading kitchen appliances, flooring, or cabinets
- Repainting the exterior
- Increasing living space by building an addition
Keep in mind that while refinancing can be a great way to boost your rental property's cash flow, it is important to conduct some due diligence. Just as you did when financing your property the first time, take the time to shop around and find the best terms for your new loan. Remember that refinancing often incurs some fees, so be clear about the fees involved so that you can ensure you receive the most benefits possible for increasing your cash flow.