Owning real estate is one of the most “surefire” ways to win with money and build wealth. But it comes with its fair share of challenges and uncertainties. This is definitely true when you consider commercial properties, which have the ability to make or break you as an investor.
At the end of the day, a successful commercial property investment all boils down to cash flow. It’s the lifeblood of any business and should be your focal point.
Whether you’re a seasoned property owner or just getting started in the real estate business, understanding how to optimize your cash flow can make a substantial difference in your success.
In this article, we’re going to explore some of the ways you can optimize and improve for better results.
Start With a Cash Flow Analysis
The first step is to begin with a cash flow analysis. It’s important to have an accurate understanding of your property’s current financial standing so that you know where you can improve. This cash flow analysis will act as a snapshot of your financial health, empowering you to make informed decisions.
The basic cash flow formula is calculated as follows: Cash Flow = Income – Expenses. Thus, to determine your cash flow, all you need to do is figure out how much income you have and what your expenses are.
- Income: Include all revenue generated by the property, such as rent from tenants, parking fees, vending machines, and any other sources of income.
- Expenses: Account for all operational expenses, including property management fees, maintenance and repair costs, property taxes, insurance, utilities, and any other recurring costs associated with your property.
Most people understand how to calculate cash flow – that’s not the issue. The key is to have accurate financial records of your income and expenses. This is where most people mess up. Take the time to carefully document all financial records in a single system for easy accounting.
Look for Ways to Improve
Every commercial property is unique. It’ll be up to you to identify areas for improvement that work for your property and situation. With that being said, here are several suggestions:
Optimize Rental Income
Start by looking for ways to optimize your rental income. Here are two options for doing so:
Increase Rent: If the market supports an increased rental rate, then you’re certainly justified in increasing what you charge. If your current tenants don’t agree, then there are likely thousands of other renters who will swoop in to sign a lease.
- Reduce Vacancy Rate: You can effectively improve your income by reducing your vacancy rate. In fact, sometimes it makes more sense to slightly discount your rent in order to reduce vacancy, which results in net positive cash flow at the end of the year.
Manage Operating Expenses
Controlling and reducing your operating expenses is another key to improved cash flow. You should start with an expense audit where you review all operating expenses and identify areas where you can potentially cut costs.
If you’re not experienced with expense management, you may find it useful to hire a commercial property manager to help you in this area. For example, the Los Angeles Property Management Group recently got a new client a $11,000 check back from the City of Santa Monica by disputing an excessive water bill. The property owner wouldn’t have known to dispute this without the expert guidance of the property manager. This just goes to show why it’s important to have the right professionals in your corner!
Consider Financing Strategies
What does your current financing situation look like? It may be possible to refinancing existing loans (or simply restructure them) to see an improvement in cash flow.
- Interest Rate Evaluation: Keep a close eye on interest rates in the financial market. If rates have decreased since you initially secured your loan, consider refinancing to take advantage of lower rates. This can lead to reduced monthly mortgage payments and improved cash flow.
- Cash-Out Refinancing: In some cases, you may want to consider cash-out refinancing. This allows you to refinance your property for an amount greater than your outstanding mortgage balance. You can then use the excess funds for capital improvements or other investments that enhance your property’s income potential.
Adding it All Up
Improving cash flow on your property should be one of your primary points of emphasis. In fact, you could argue that it’s the only thing that matters. And with the tips outlined above, you should be able to move the needle in a positive direction. Good luck!