SWORP-HOW(ie): Boost Your Rental’s Cash Flow
AKA Do your housework
In this article:
- practical example of cash flow calculation
- cash flow increase methods
- SWORP TIP!
In the previous article, we defined cash flow (CF), explained its importance, and learned how to calculate it. Today we will demonstrate how cash flow works on a practical example and introduce surefire ways to increase it.
Let’s dive in!
Miss Novotná purchased an apartment in Prague. She paid the whole purchase price in cash. As for rent, she charges her tenant 18 000 CZK monthly. What will her net cash flow be, if the expenses are the following:
- Insurance: 2500 CZK annually
- Taxes: 500 CZK annually
- Property management fees (if applicable): 0 CZK
- Legal fees: 2400 CZK annually
- Vacancy Rate: 2%
- Garbage disposal: 200 CZK monthly
- Utilities (if applicable): 3000 CZK monthly
- Maintenance: 750 CZK monthly
- Advertising and promotion (if applicable): 0 CZK
- Mortgage installment, insurance, and interest: 0 CZK
NCF = monthly income (rent) - monthly expenses
NCF = 18 000 - (208+42+200+360+200+3000+750)
After receiving total rent from her tenant and paying all expenses, Miss Novotná is left with 13 240 CZK of net cash flow she has at her disposal. Not that if she were paying off the mortgage, it would be a completely different story for the amount of cash flow.
Miss Novotná wishes to increase the cash flow in a significant way. What is she supposed to do?
- option #1: raise rent
Raising rent just like that is not what we mean. Quite many landlords do the same mistake of not raising rent according to market rent simply because they fear losing tenants or because they don’t want to deal with making contract amendments, communicating about the raise, writing notifications… The fact is that both landlords and tenants should be well aware that keeping the rent amount the same for years isn’t working. Don’t hope that lower rent will attract the right tenants, it only depreciates your investment. Also, don’t get greedy.
- option #2: cut expenses
Careful! Definitely not on maintenance and repairs, because a step like that is never worth it, as in the long-term horizon it only costs you more. You could cut expensive software you use for property management as now with SWORP you don’t need it anymore. If you pay for utilities, find a cheaper energy/internet provider or common premises cleaning. Also, consider how much you pay for advertising and promotion - which platforms bring tenants? Which are merely a “just in case”?
- option #3: add value
Does your property have a garden shed/garage/moorage/vacant attic? Rent it. Great way to boost your cash flow instantly.
- option #4: prefer long-term tenants
Tenant turnover and vacancies are powerful cash flow terminators. Keep your tenants as long as possible so that you are prevented from recurrent general maintenance and repair costs that come hand in hand with every tenant turn. Value your long-term tenants by quickly resolving their maintenance requests and fair rent raise applied for objective reasons.
- option #5: refinance
Keep in mind checking mortgage interest rates, because if rates are falling down, it is a good opportunity to refinance - reducing monthly mortgage installments boosts the cash flow.
- option #6: perform preventative maintenance
Never underestimate large repair expenses, as they could potentially wipe out your cash flow way ahead. Preventative maintenance prevents you from much more painful expenses in the future. Have the trees trimmed, gutters cleaned, wires, pipes, and heaters checked, and mold removed. Think ahead and avoid learning the hard way.
- option #7: charge extra fees for late rent payments
No exceptions. A certain kind of tenant thinks that it doesn’t matter when they pay. They pay eventually, co what is your problem, right? Well, you have your bills to pay, too. Not everyone is blessed with such luxury to pay whenever he feels like it. So charge late payments with no hesitation. I guarantee that the late-payment addicts will learn to keep up with contracts sooner than eventually.