A lot of factors are in play when it comes to making money from your rental property and sustaining a profitable rental investment business. As a new investor, you might be anxious to see your newly purchased property bring in cash flow, but it isn’t typical for properties to produce cash immediately, even when you are an experienced investor.
What affects your property’s ability to produce cash?
Here are two things to consider.
How much money did you put on the table?
Many people initially come to real estate investing as an owner-occupant, then they move out of the home and decide to turn it into a rental property. If you have lived in your home for less than 2-3 years, it’s unrealistic to expect the property to start producing cash right away. It typically takes an average owner 4-5 years to break even with what they pay in mortgage principal, interest, taxes, and insurance (or, PITI payment). Each situation is unique. In many cases, the market doesn’t support rents high enough to cover your PITI payment and put a little extra cash in your pocket month over month.
The time it takes to get to this break-even point depends on how much cash you put down on your initial purchase and how fast appreciation and rental rates go up. Many homeowners take advantage of 10%, 5%, and even 0% down markets. It’s an excellent deal for homeownership, but it’ll take you longer to get to the break-even point, whereby you can start earning cash.
A smart investment strategy is to purchase a property with 20-25% down, with a goal of breaking even on the PITI payment, principal, interest, taxes, and insurance, in a shorter time frame.
For many experienced investors, cash flow is not their primary strategy because any cash earned in the investment cycle is subject to taxation by the government. Investors don’t always want to make cash in the short-term, but you can bet they want to make a profit in the long-term. There is just more to a great return on investment than cash flow alone.
Am I managing my rental correctly?
If you are post-purchase, there’s not much you can do to change the amount of money you put down on your purchase. However, in the short run, other factors could be contributing to your property bringing in less cash than it should on paper.
Maintenance issues and periods of extended vacancy are two essential aspects of managing rental properties, and they can directly affect each other. If you have ongoing or unresolved maintenance issues or repairs or have long periods of vacancy either due to the latter, or because you don’t have the time and know-how to oversee maintenance requests, inspections, and larger renovations properly, your bottom line will be impacted.
It might be time to consider partnering with a property management company to oversee your rental. The benefit to you is that property managers have proven processes, relationships with trusted contractors, and the market expertise to market your property to your ideal audience, rent it quickly, and ensure that the property functions smoothly during the tenancy. If you select the right property manager and follow their advice you should be able to plan on increased productivity and results.
Even if you’ve hired a property manager, maintenance issues and vacancies are incredibly important. Tackle these problems alongside your property manager when getting started. Get a handle on what is happening by having your property manager take pictures, or go together to visit your property in person. You’ll want to deal with any latent issues upfront.
In the end, investing in real estate is a long game. Learn the data and understand your market. And, consider finding a good property management partner. Your property manager will have statistical proof of what the market is doing so that you can ensure the highest performance for your investment. 1836 Property Management can service your rental property from leasing to maintenance. We work every day to care for your property, minimize your risk, and maximize your profit.
By: Matt Leschber, 1836 PM Founder
