Cash flow is the key to success with owning rental properties anywhere in the United States because it’s the reason why every investor gets started with buying rentals.
If you’re interested in getting a better return on investment from your rentals, here’s how you can improve the cash-on-cash return from your property.
Calculating Cash on Cash Return
Let’s take a simplified scenario to illustrate how CCR is calculated.
You bought a property for $100,000 (and let’s assume that includes closing costs). You then spent another $50,000 on improvements so your total investment is $150,000.
Cash on Cash Return = Net Operating Income/$150,000
You sign some really great tenants and charge them $5,000 a month. After 12 months, you’ll collect $60,000, before taxes and expenses. Let’s say your expenses over those 12 months are $5,000. So, your net operating income is $55,000.
Cash on Cash Return = $55,000/$150,000
Here’s your result:
36% = $55,000/$150,000
Of course, this is an over-simplified scenario that assumes you paid cash for your property and all improvements. If you took out a mortgage, you’d have to consider the original mortgage amount, the remaining balance and the mortgage rate. You’d also have to consider the value of the property now and in the future.
To avoid the headache of all that math, check out this very handy cash on cash return calculator.
How to Improve Your Cash on Cash Return
Unfortunately, experts don’t really agree on what exactly a good CCR is. Some say 8 percent, while others insist on nothing less than 20 percent. No matter what the number, if you’re not comfortable with your CCR, there are ways you can improve it.
Improve to the Unit or Building
Look around your property. Are there simple improvements you could make to increase its value? Even a coat of paint goes a long way in making your rental more attractive.
If you have bigger projects to tackle—a new roof, a new furnace—it may reduce your CCR in the short term, but it should increase it in the long term. But don’t stop at the basics. Consider adding amenities that will attract and keep tenants.
Things like smart appliances or heated bathroom flooring could be a real draw. If you own a building with several units, think about adding bike storage, a small fitness area or a common room with table-top games to attract community-minded tenants who are willing to pay more for extra amenities.
Find Long-Term Tenants to Cut Turnover Costs
Everyone knows keeping a tenant costs a lot less than finding a new one. Talk to tenants before they move in and gauge whether they’re looking for something long-term or if they just need a place for a year or less. Once you’ve found them, give them every reason to stay. Build a good, professional relationship, be attentive to their needs and keep the unit in good shape.
Make the Neighborhood More Attractive
Get involved in your neighborhood and work to bring the kind of businesses and amenities that attract tenants. Do you have a run-down park with an old playground? Start or join a group to restore the park to appeal to families. Are there vacant storefronts? Partner with business associations on new events that can help bring attention to the unique qualities of the neighborhood.
Expand Your Renter Base
Without realizing it, you may have gotten yourself into a bit of a tenant rut, attracting only a small part of the market. Think about how and where you advertise and how you can attract other segments of the tenant population that would see value in your units.
You could, for example, consider allowing pets if you don’t right now. While pets can damage apartments, you can ask for more rent to cover those potential costs. And since rentals that allow pets can be few and far between, most tenants are willing to pay a little more for a dog- or cat-friendly place.
Get Property Management Here
Are you ready to hire a property manager to professionally manage your portfolio of rental properties or maybe you’re not satisfied with your current property management company and are searching for a better company?
Contact Martin Property Management today by calling us at (617) 957-0166 or connect with us online.
