You’ve purchased your first investment property, congrats! Now it’s time to get to work! Beyond the immediate required repairs, your first job is to try to maximize the cash flow.
What is cash flow?
In laymen’s terms, cash flow is the money you have left after deducting all of your rental expenses including mortgage payment, insurance, property taxes, vacancy, maintenance, management and repairs (don’t forget about HOA/strata fees if you own a condo). It may also include hydro, gas and water if the rent is inclusive of utilities, plus any extras like snow removal, garbage pickup and lawn care.
Hopefully you’ve bought a property that is cash flow positive in its current state (we always recommend that). If not, or if it’s tight, increasing cash flow is a vital first step. Increasing cash flow will make the property self-sufficient, meaning that you won’t need to infuse any further cash for repairs and upgrades.
**Note: For those wondering why someone would buy a property that is breaking even or even cash-flow negative, some people speculate on market growth and bank on the future appreciation of a property. While some people can make money this way, it is a strategy with a high risk (think of it like investing in single stocks vs mutual funds/ETFs). For most property investors, it is best to stick to properties with existing positive cash-flow to reduce risk.
So what are some strategies for maximizing the cash flow of a property?
This is an obvious first option if rents haven’t increased in a while. If the current tenants are paying under market rent, you may be able to increase rent (depending on if rent has been increased recently or if you have rent controls in your area). A word of caution with raising rents: if you have great long-term tenants, you may wish to offer more gradual annual increases or skip this entirely if they take really great care of your property.
This is a great option if you’ve taken vacant ownership of the property, or alternatively, you can do this as each tenant moves out. By upgrading finishes and adding attractive additions, you will be able to command more rent and you’re likely to attract higher quality tenants.
What upgrades should you offer? Offering in-unit laundry is very attractive to potential tenants as many have had to deal with off-site laundry facilities and know what a hassle it is. Upgraded appliances and kitchen finishes are always attractive to tenants, as are upgraded/modern bathroom amenities.
Adding Income from other sources
Consider charging for parking if you’re not already. In cities, parking comes at a premium and people are willing to pay for it. If your tenants don’t need parking spaces, consider renting parking spaces out to employees of nearby businesses.
Other options include on-site storage facilities and/or laundry facilities. Both provide convenience to your tenants while offering you another income stream.
I’ve also heard of property investors renting out the garages of SFH to woodworkers, entrepreneurs, or even just as storage space for neighbours.
The opportunities to add income are limitless. But they do require that you think outside of the box when it comes to your property. Consider that adding just a couple hundred dollars a month can add up to an extra mortgage payment or two.
Adding a unit
This method comes at a cost, but the long-term payback will often be the highest of all of the options listed here.
If you own a single family home or duplex, can you put in a basement suite or add laneway house? Maybe you have a multi-unit property that you can squeeze another unit in by breaking up a larger unit.
Adding an additional unit can have a major impact on your cash flow to the tune of $700-1200 per month in most cities.
Adding a bedroom
Like adding a unit, adding a bedroom can majorly impact your cashflow. Depending on the location of the property, another bedroom can add $400-$700 to your bottom line each month, especially in student rental areas.
While more simple than building out an entire unit, consider the cost and the rent-ability of the unit with the additional bedroom (e.g. is that many bedrooms common for the area of town you are in? Is it desirable in your location? Does it come at the cost of a dining room, smaller bedrooms or less common space?)
First and foremost, reducing vacancy comes down to tenant selection. By taking the time to get the right tenants in your property, you are more likely to keep your vacancy rates down. Good tenants respect your property and leave the property in the same condition they received it in. This means your turnarounds can be quicker and you are less likely to experience months of vacancy.
In addition to getting the right tenants, keeping your property in good condition and treating tenants well will encourage tenants to stay longer. This will reduce vacancy and property management costs.
Reduce property costs
We’ve mentioned a ton of different ways to increase your income, but you can also look at the other side of the equation and reduce your expenses. While your time and effort is usually better spent increasing your income, once you’ve maximized that, there are some strategies to reduce expenses.
Some people will talk about reducing maintenance or property management costs, but this usually doesn’t work out well for your property. Instead we suggest looking at big-ticket savings like refinancing your mortgage to a lower interest rate. Getting your interest rate lowered by even a half percentage point can save you thousands over the course of your loan.
Another option to decrease expenses is to have tenants pay for their own utilities (if they’re not already). Keep in mind that it is usually hard to have tenants take this over if they’re not currently paying for them. You can either wait until tenants move out and get new tenants to pay it, or offer a discount off of your current tenant’s rent. Either way, this will save you thousands of dollars if you are holding the property for 10+ years. Many tenants don’t care about their utility use when it is not coming out of their pocket.
At the end of the day, anything you do that maximizes cash flow will be beneficial to your bottom line.
What strategies have you implemented to increase your cash flow?