Cashflow is the lifeblood of any enterprise from a street stall, corner shop or charity, right through to a transnational conglomerate. When cashflow plummets (or isn’t there right from the word go), then the enterprise faces, at best, challenging times.
The same applies to property investment. We may delude ourselves into thinking that as long as capital growth is attractive, we are willing to take a hiding on cashflow. Many people don’t even mind having negative cashflow (being negatively geared) if the capital growth is high enough. However, usually these people seek to offset their operating loss (the cashflow loss) against other earned income, therefore reducing their overall tax-liability. In effect, the government subsidises their loss from the property.
The point to note, however, is that overall, these people still have a healthy cashflow situation. If the only income you have is from property, and it is negative, then you need to take action.
Even if you are not negatively geared, improving your cashflow can have the wonderfully beneficial effect of improving your current account and increasing your reserves, enabling you to reduce debt, buy more property, or simply spend more money.
Let’s then explore some of the measures you may take to improve your cashflow.
1. Increase the rent
The most obvious way of increasing your cashflow with property investment is to increase the rent. This need not necessarily make you a rapacious racketeer! Frequently, properties are acquired with low rents in place (in other words, these rentals are already well below market rentals for similar properties in a similar area). Increasing the rent under these circumstances to market levels does not make you a bad person.
Similarly, the rents may have been at market levels when you acquired the property, but over time, you have simply neglected to monitor market rental trends, and now, eight years later, you are 50% below market rentals. Bringing the rent up to market levels would be a very smart move.
There are other ways to increase the rent, even if the current rentals are already at market. Now if your immediate reaction is to think: “What tricky, underhand technique is he going to suggest to increase the rents given that they are already at market levels?”, then you have to change your thinking from essentially adversarial (vis-à-vis the tenants), to mutually beneficial. Remember how Zig Ziglar said: “You can get whatever you want, so long as you help enough other people get what they want”? It’s time to start figuring out what your tenants want.
For instance, you could ask your tenants if there are any changes that they would like in the property. If they suggested that you cut down the dead tree in the front yard, you would do that as a gesture of goodwill. But if they wanted the addition of a bedroom, you could do your homework and then make a proposal. You may have found that an additional bedroom costs $20,000 to build. So you could say to the tenants that if they are willing to pay an extra $80 per week, you will arrange to have the bedroom built.
The extra $80 per week income is around $4,000 per year, or a 20% return on the investment of $20,000. That is good from your perspective. It gets even better if you borrow the extra $20,000 required to build the bedroom. At an interest rate of 8%, you would be collecting an extra $2,400 net a year ($4,000 extra income less $1,600 mortgage interest) and have a happy tenant who otherwise may have felt forced to move on, to a property with the extra bedroom. Furthermore, you now have a property with a higher capital value, you have more assets to depreciate for taxation purposes and increased cashflow. In fact, you would be mad not to build the addition.
You needn’t just implement the ideas of your existing tenants. When you are between tenants, you can always remodel the kitchen, put in the extra lavatory or bathroom, build a carport, or landscape the garden. It may even be easier to get new tenants to pay the higher rental for the improved property than it would have been to get tenants paying the old rental for the property as it was originally. These are classic win-win situations.
2. Decrease your expenses
We said that increasing the rentals was the most obvious way of improving the cashflow from your property. However, you can also improve the cashflow by decreasing your expenses. Some expenses (like rates) are fixed, but there are many that may be slashed. Don’t just pay the annual insurance premium without first shopping around to make sure you are still getting a good deal. Get quotes from competing property management companies to make sure that you are getting a good value for money. Check with a property-savvy accountant to make sure that you are claiming all you can legally claim against the property.
Since the greatest expense for many investors tends to be the mortgage interest, then often the greatest saving to be made is to re-finance (or re-negotiate) the mortgage. If it will cost $2,000 to re-finance your loan, and you will pay 1% less, then on a $300,000 loan, you will be ahead after about 8 months. Better still, consider getting a revolving line of credit (sometimes called a floating mortgage), where you can put money in and take money out of the account at will.
These are but some of the simple ways of improving the cashflow on your property. You could try more radical approaches. For instance, if you have a large property, and local building regulations allow it, why not put a second residence on the property? After all, the land component will cost you absolutely nothing. Or if that sounds like too much of an effort, why not get a large caravan or trailer home, and drive it onto the property as a sleep-out or spare bedroom?
If your income is from a job, then to get more money, you need to put in more hours. In particular, an extra 10 hours worked this week will not increase your income for next week. But when it comes to property, any effort expended in improving your cashflow is likely to give you that new cash flow forever, at least until you find a way to increase it again.
Successful investing!
