It's so hard to find, finance, and buy a cash flow-positive property that it may be depressing to hear that your work is just getting started. Once you buy, you need to find and screen tenants, keep up with repairs and maintenance, track your expenses, file taxes, and somehow keep the property cash flow positive indefinitely.
All businesses -- and your rental property is a business -- need internal controls and procedures. You may need time to determine what your procedures are, but the quicker you have them in place, the better.
You need to decide what your screening criteria will be for new tenants, how you'll respond to complaints and requests, how you'll manage cash, and how and where to list the property and how to show it. If you set procedures for all of these items, you can test them over time and adjust. It's also easier to decline tenants or enforce payment terms if you refer to "the policy."
Once these are in place, here are five tips to keep your rental property cash flow positive.
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1. Find a trustworthy handyworker
Houses and appliances are depreciating assets. Over time, things will go wrong and need to be fixed. If you're struggling to find a new person to send out every single time you get a request, you won't be able to effectively budget and manage properties.
Find a good handyworker who can usually get to the unit in a week or less. Most rental owners aren't experts at patching up a wall or getting a new door installed and wouldn't know if they were being overcharged. If you have someone you trust, you can refer most issues to them and count on the work getting done quickly and cheaply.
A good handyworker also helps when the unit is turned over. A person we used would go into the unit for an hour and send me a list of everything he thought would be good to fix, along with pricing. I could then pick and choose which line items I wanted to be fixed that time and send it back. If the tenant complained about how much of the security deposit they got back, I had an itemized list from a professional showing what the deposit was used for.
2. Track your financials
Bookkeeping is one of those tasks that is incredibly easy -- until it isn't. If you let your bookkeeping fall behind by months, or even years, good luck getting everything accounted for correctly. Set a time each month, or even quarter if you don't have a lot of tenants, to reconcile your bank account and enter everything into an accounting program.
The most popular accounting programs should integrate with your bank account so that all you have to do is export transactions and then determine what category they go to. Some programs even have the chart of accounts for a rental business pre-built in.
Keep track of your cash flow as you go. If your margins start going down or you start burning cash, you can quickly figure out the problem and get it fixed. You don't want to find out you lost five figures when you're doing taxes the next year.
3. Maximize tax savings
Many rental owners don't do enough to maximize tax savings. If you're not deprecating every asset fully, tracking your miles, using a home office, hiring your kids, saving all your receipts, and even keeping track of the books you buy to learn about real estate investing, you're paying too much in taxes.
Almost every expense that you can tie to your real estate investing can be deducted, i.e., written off. This means travel to your properties, paying to have them cleaned, new coats of paint, and buying a laptop that you use to manage everything.
4. Use debt well
Debt is what makes real estate investing attractive. Real estate prices usually don't go up as much as stocks, but the long-term intrinsic value of the asset is more stable. This means you can usually borrow 80% or more of the purchase price. That leverage multiplies your cash-on-cash returns.
Don't be afraid to use debt to purchase rentals, and don't pay it off too quickly. If your debt has a 4% rate, you're effectively "earning" 4% when you pay it off early. There is an opportunity cost to that payment. If you can reliably earn more than 4% on other real estate projects or the stock market, it probably makes more sense to use it there.
Of course, not everyone has the same mindset when it comes to debt. Some people want to pay it off as quickly as possible so they can sleep well at night. That's also OK. Your long-term returns should be just fine as long as you're applying good investing principles.
If you are OK with shouldering a lot of debt, also consider refinancing. If you can improve a property and get a long-term lease record in it, it's very likely that it will appraise for more, even in a flat market. As long as the rates are still good, refinancing could allow you to take equity out of the property and use it for another investment.
5. Use professionals
This is a shortcut for almost all of these tips. Hire a property manager to market the property and screen tenants and take care of issues. Use a CPA firm to do bookkeeping and maximize tax savings. Work closely with a business banker to manage and restructure debt as well as you can.
Each of these professionals have their own policies and procedures developed over years of working with rentals and rental investors. Instead of developing your own policies through trial and error and secondhand knowledge, you can lean on their expertise. The best part is that every dollar you pay to them can be written off.
