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How Much Cashflow Should I Get on Rental Properties?

How Much Cashflow Should I Get on Rental Properties?

100 dollar bills

While no real estate investment comes with a guarantee for success, finding the investment that is successful stands to generate the investor cash flow income as tenants pay rent. This is the reason that investors do it; they understand the risk they are taking in hopes of it paying off in an even greater return.

Understanding Cash Flow

Some investors get into real estate for the short term, buying low-priced houses and making some improvements before flipping them for profit. This is the opposite of investing in cash flow properties. Cash flow properties are a long-term strategy to get a return on the initial investment. Investors purchase properties to rent out, make any necessary improvements, and then list the houses or units for rent. 

Cash flow is generally a simple concept. It is the sum of monthly expenses subtracted from the monthly income from the property. Good property investments have a positive cash flow, while bad or underperforming ones are negative. With rental investments a long-term real estate strategy, cash flow is a major factor to consider.

Despite this, there is not one specific “good” cash flow number to meet as the value is based on the specific income and cost of a property. Instead, strategies to increase the value amount that a tenant is willing to pay are crucial for long-term success. 

This should be an important factor in investing itself. Rather than investing in a cheap property that rents cheaply for low margins invest in a competitive neighborhood with competitive rent. Margins are bound to be much higher.

In addition, upgrading the rental property with new applications, flooring, or cabinetry increases the units’ value to current and prospective tenants, making them likely to spend more on their rent to secure a modern, updated home. 

However, in any type of renovation or repair, do not cut corners. Making quick, cheap fixes might seem easier when the problem is minor, but if it’s left improperly fixed, more damages and costs will incur. Eventually, this will hurt your cash flow and bottom line. 

Tax Benefits for Property Owners 

To maximize cash flow throughout the year, rental properties come with their own sets of tax deductions that the investor can benefit from. 

  • Mortgage Interest: If the property owner has a mortgage on the property, they can deduct the interest from their income taxes. 
  • Depreciation: While the hope is that a property will appreciate over its lifetime, in terms of taxes it is viewed as a business asset. Like other business assets, rental properties will depreciate, which can be claimed during tax season.
  • Property Taxes: Rental property owners can deduct property taxes from their income taxes as well. It is common for property owners to forget to include this deduction. 
  • Repairs: During the life of your rental, repairs are bound to be needed. Fortunately, they can be deducted from income taxes. These fixes may include repairing walls or appliances. However, “capital improvements” like adding on or replacing the roofs should not fall under this deduction. 
  • Utilities: While most utilities are likely going to be paid by the property’s tenants, sometimes utilities like water or heat may be included. If this is your case, you can deduct the utility costs from income taxes.

two people doing tax paperwork

Investing in Rental Property Management

While adding another expense may seem counterintuitive to maximizing cash flow, establishing a property management partner will be an asset in the long run. They will be able to help you find the best tenants as quickly as possible and avoid complications that would increase the risk assessment substantially. People want tenants that they can trust to pay on time, so property management helps to assure this is a reality. 

Performing Home Inspections 

For soon-to-be property owners, having a professional inspection is essential to maximizing cash flow long-term. Typically part of the buying process, it is the home inspector’s job to analyze and assess a property for any issues that may not have been apparent or made known through the process. This includes performing tasks like ensuring plumbing is up to code, major repairs to electrical are not needed, and all systems like heating and air conditioning are in full, working order.

Having a comprehensive home inspection before completing the purchase ensures that the home buyer is not met with any unanticipated and costly challenges that will drastically affect the cash flow of the property. Unless the house is being bought specifically to flip, costly repairs can be disastrous to the bottom line so home inspections should be done to help mitigate this risk.

Holding Period Considerations

For any investor, the holding periods should be determined as part of their overall strategy. How long are they looking to hold onto the property? This can help determine how much they are looking to get out in returns. Depending on the real estate market, properties can be owned as little as a year or two or much longer. Deciding the right time to sell will depend on many factors, such as the investor’s need for cash or a booming real estate market that gets you the maximum sale price for your property.

Property management partners and experienced turnkey property investment companies understand these delicate balances and work with you to maximize your investments.

Choosing Memphis Cashflow

Many factors play into what you can expect to have for a cash flow on rental properties. There is no magic formula for determining what a “good” cash flow looks like, just that it depends on each property.

By following these tips and reaching out to Memphis Cashflow on your real estate aspirations, we can help you through the process of establishing rental properties for passive income. 

Ready to come on board?

Posted by Katie Eldridge at 1:03 PM