Good cash flow occurs when the rental income you receive each month is higher than your property’s expenses. Typically, the ideal range for annual cash flow is between 10% and 15% of the property’s value.
For example, if a property is valued at $200,000, a good cash flow would be around $16,000 to $20,000 per year. However, in high-demand areas like Michigan, rental income can fluctuate significantly. This variability can impact overall cash flow, making it crucial for property owners to adapt their strategies to maintain profitability.
Read this article to learn more about the good cash flow on a rental property and tips to improve it.
What Is Cash Flow In Real Estate?
Real estate cash flow refers to the money a rental property makes after paying all its expenses. It shows how profitable the property can be. However, the term “cash flow” is essential. Two terms give a clearer picture of profitability: Net Operating Income (NOI) and Cash Flow Before Tax (CFBT).
NOI is the property’s operating profit, calculated by subtracting expenses from total income. It helps determine property values, especially for commercial real estate.
CFBT is calculated by subtracting the debt payments from NOI. Investors refer to this amount as cash flow, as it’s the money they can receive.
How Much Cash Flow Is Good For A Rental Property In Michigan?
The amount of cash flow that’s good for a rental property can vary based on location, property type, and market conditions. Generally, positive cash flow is good. The higher it is, the better. Have a look at the key points we’ve included:
Location:
Location plays a crucial role in determining rental property cash flow. For example, the Detroit metropolitan area, MI, ranked #1 on the cash-flowing cities list, offers high rental returns. Property taxes, association fees, and interest rates also affect profitability.
To estimate cash flow, it’s important to compare rental data from nearby areas. For instance, Gratiot Woods, a neighborhood in Detroit, has a 20% year-over-year appreciation rate. This growing demand is largely due to its proximity to colleges, making it a valuable area for rental investments.
Improvements such as renovations and added amenities can further boost cash flow. A good benchmark for cash flow is achieving at least 10% cash-on-cash return or higher.
Property Type and Price
The type and price of a rental property affect cash flow. More expensive properties often generate higher returns. Single units with $100-$200 monthly profit are good, but duplexes or triplexes should provide at least $400 monthly.
How To Calculate Rental Cash Flow?
To calculate rental cash flow, you need to know a few key details about the property:
- Gross income: How much the property earns before expenses.
- Total expenses: Including mortgage, taxes, insurance, and maintenance costs.
- Debts: If there are any loans or debts tied to the property.
Gross rental income comes from rent payments and possibly extra fees like pet fees or late charges. To find the cash flow, subtract the total expenses from the total revenue.
For example:
Monthly rental income: $1,200
Monthly operating expenses:
- Mortgage: $400
- Taxes: $150
- Insurance: $75
- Water and trash collection: $100
- Maintenance costs: $75
Cash flow = Income – Expenses = $1,200 – $800 = $400
This property would have a cash flow of $400 per month.
Critical Factors That Kill Your Rental Property Cash Flow
Managing rental property cash flow can be tricky. Several factors can harm your profitability. Here, we have listed some of the common mistakes that can help you avoid financial losses and maintain a steady income.
i) Uncontrolled Expenses
Expenses can quickly add up if you don’t control them. There are two main types of expenses: recurring and periodic. Recurring costs include your mortgage, taxes, and insurance that you pay regularly.
Periodic expenses, like maintenance or repairs, happen from time to time. If you don’t keep track of both, you might end up spending more than you expect, which can hurt your cash flow
ii) Increasing Your Rents Too Quickly
While raising rent is a good idea, it can backfire. Residents may feel the increase is unfair and decide to move out. When they leave, it can cost you a lot of money because you’ll have to pay to find new residents, and your property will be empty for a while. It will lower your cash flow
iii) Working With Someone You Can’t Trust
If you hire someone who isn’t reliable, it can cost you a lot of money. For example, bad contractors might do poor-quality work, leading to extra repair costs later. A partner who isn’t trustworthy can create financial problems, too. If someone doesn’t hold up their part of the deal, it can hurt your cash flow, and you might lose money.
iv) Expecting Rent Outside of Market Norms
Setting rent too high compared to other properties in your area can drive away potential renters. Residents often compare prices before deciding. If they find cheaper places with similar features, they might not rent from you.
v) High Vacancy Rates
When your property sits empty for a long time, you’re not earning any money. High vacancy rates mean fewer renters, meaning no rental income is coming in. The longer your property stays vacant, the more money you lose.
Expert Tips To Increase Rental Cash Flow in Michigan
Many property owners struggle with low cash flow due to a lack of knowledge about how to maximize their rental income. AmeriHome suggests some strong strategies to help you increase your rental cash flow and make your investment more profitable.
1. Increase Your Rent:
Adjusting your rent to match the market value each year can help increase your income. It will ensure you’re charging enough and prevent vacancies. Just be careful not to raise the rent too much, as it could scare away good residents.
2. Appeal Your Property’s Taxes:
If similar properties nearby are worth less than your home, you can lower your property tax. You can appeal your tax rate to the local government. Remember, the tax rate might increase if your appeal isn’t successful. So, we recommend to proceed with caution.
3. Keep Vacancies At A Minimum:
A high vacancy rate can hurt your cash flow. To avoid this, screen applicants carefully and try to find reliable ones. Offering long-term leases also helps keep your residents for longer periods, reducing vacancies.
4. Save On Insurance:
Different insurance companies offer different rates. So, it’s worth comparing options. You can save money by comparing prices for landlord insurance. Even a small monthly saving, like $25, can add up to $300 a year, boosting your cash flow.
5. Lower Your Maintenance Costs:
You can save money by making smart decisions about your property. Look for energy-efficient upgrades, like LED lighting or better insulation, that can lower utility bills. Additionally, Keep maintenance costs low, skip unnecessary repairs, and find better prices for services.
In Closing
High rental returns, low entry prices, and strong cash flow are making the Detroit metropolitan area, MI an attractive choice for both local and international investors. To make the most of this opportunity, understanding cash flow is crucial.
Good cash flow means your rental income covers all expenses and still leaves you with a profit. Adjusting rent, keeping vacancies low, and managing costs can help boost your cash flow.
Focusing on these factors can make your investment more profitable. Contact our property professionals for expert advice or assistance in optimizing your rental cash flow.
Frequently Asked Questions
Can my rental property cash flow be negative?
Yes, if your rental income doesn’t cover your expenses, including mortgage, taxes, and maintenance, you will have negative cash flow. It’s essential to keep the costs in check to avoid this.
What are recurring vs. periodic expenses in rental properties?
Recurring expenses are regular costs like mortgage, taxes, and insurance, while periodic expenses include occasional maintenance and repairs. Both need to be well-managed for positive cash flow.
How do property taxes impact cash flow?
Property taxes are a significant expense that can reduce cash flow. High property taxes can lower your monthly profit, so it’s important to factor them into your financial planning when investing in rental properties.
Is it better to rent long-term or short-term for higher cash flow?
Long-term rentals generally provide stable, consistent cash flow, while short-term rentals may yield higher returns but come with more work and fluctuating income. Consider your goals and market conditions.
