How To Increase Cash Flow From A Rental Property

Owning rental property is all about making your money work for you, so you can enjoy the payoff of your real estate investment. But managing rental property is similar to managing a business, and that can be complex. There are revenues, capital costs, taxes, insurance and other operating expenses to monitor and navigate. At the end of the day, you want to make sure your cash inflows exceed your outflows.

How To Calculate Rental Property Earnings

Before you focus on increasing cash flow, you need to figure out how much of it your investment property currently generates. Cash flow from rental property can vary widely. Ultimately, you want to see a positive cash flow, meaning the property brings in more money than it costs to operate.

To calculate cash flow from rental property, simply subtract your rental property expenses from your rental property income.

The formula for calculating cash flow is:

Income From Rental Property − Expenses From Rental Property = Cash Flow

Here’s a real-life example:

You own a multifamily property with four units that each rent for $2,000 per month, totaling $96,000 per year in rental income.

But your vacancy rate is estimated at around 10%, so you subtract $9,600 from the total rental revenue to get $86,400.

Then you have to subtract your annual expenses from your rental revenue. Your mortgage payment totals $42,000 for the year. On top of that, you’ll spend around $25,000 for insurance, real estate taxes, property management, maintenance, repairs, lawn care and utilities.

These bring your total annual expenses to $76,600. Subtract that from your gross rental property income and you have an annual cash flow of $19,400.

8 Ways To Generate More Cash Flow On Your Rental Property

While increasing rent might seem to be the most obvious option, it is not the only way to boost your profit. Read on to learn about other ways to improve cash flow on your rental property.

1. Reduce Vacancies

Sometimes increasing the rent can actually hurt your cash flow in the short term. If the monthly rent is too expensive and you can’t find tenants, vacancies can do more harm than renting for a lower price.

In addition to pricing your rentals competitively, you may want to consider other strategies to reduce vacancies, such as offering incentives (like smaller security deposits) or agreeing to more flexible terms (like multiple lease term options). Keeping your tenants happy can help ensure that they’ll keep renting from you.

2. Upgrade And Add Amenities

Upgrades and amenities can help you command a higher monthly rent and will increase cash flows as a result. Adding in-unit laundry facilities, providing on-site storage or renovating kitchens and bathrooms could make your property stand out from other rentals in the area.

3. Improve Energy Efficiency

A 2022 study by the American Council for an Energy-Efficient Economy (ACEEE) showed that renters were 21% more likely to pursue rental listings that provided positive energy efficiency information compared to listings that didn’t provide any. In addition to being better for the environment, energy-efficient buildings tend to cost less to operate and usually improve resale values.

4. Expand Existing Units Or Build New Ones

Though there’s a significant upfront cost, expanding existing units or building new units can open up new opportunities to increase cash flow. Building an addition or accessory dwelling unit (ADU) can offer more living space or another rental unit. If you’re thinking that sounds expensive, you may be able to take out a home equity loan or HELOC on your investment property to pay for the renovations.

5. Switch To Short-Term Rentals

While short-term rentals require more active management, they may also help you generate more rental income. If you own rental property in an area with high demand for short-term rentals, transitioning from long-term rentals to an Airbnb investment could potentially increase your cash flow.

6. Claim Tax Deductions

One of the advantages of owning rental property is that you can claim a variety of tax deductions. The tax benefits of real estate investing include write-offs for expenses such as maintenance, repairs, property management, insurance and other costs.

7. Appeal Your Property Taxes

If you successfully appeal your property taxes, you can reduce your operating expenses and increase your cash flow. Real estate taxes on rental property are unavoidable, but you can push back if you think your taxes are higher than they should be.

You can challenge your property tax assessment through a formal appeal process set out by the municipality. Before you file an appeal, it helps to understand property values of comparable homes in your area. It’s also recommended that you speak with an appraiser and an attorney to ensure that it’s worth pursuing an appeal.

8. Refinance Or Recast Your Mortgage

Refinancing or recasting your mortgage is another way to improve cash flow by reducing expenses. When you refinance or recast your mortgage, you can reduce the size of your monthly payments, potentially pay less interest and ultimately increase your cash flow.

The Bottom Line: Maximize Income, Minimize Expenses

Increasing your rental property cash flow comes down to maximizing your rental revenues and reducing your operating expenses, among other costs. If you can improve your property, keep tenants happy and lower your overall expenses, you should be well on your way to a higher cash flow and a more rewarding rental property.

If you’re ready to refinance to lower your mortgage expenses or to take out a home equity loan to cover upgrades to your property, you can get started today with Rocket Mortgage^®.