How to improve the ROI (return on investments) for rental properties and what role play renters to increase the cash-flow? Look after your investment and set transparent rights and obligations on the tenancy agreement for both parties.
Protect your Investment and Increase Cash-flow
Why Cash-flow and yield?
Investing and building up wealth for later in life is a must if you won’t to be regulated by the welfare state. That is the most common reason why people buy investment properties. For making investment decisions you need to distinguish terms like yield, ROI (return on investment) and cash-flow.
But where do you know whether or not a property is worth buying?
Well, that is why investors use commonly the yield to compare properties, but the cash-flow will make it or break it because the investor has to pay bills. Cash-flow determines the serviceability and that is the first question you have to answer when speaking to financial institutions.
Yield, Return on investment (ROI) vs. Cash-flow
The yield, an annual percentage rate, is based on the market value and investment costs. The net rental yield on a residential investment property, similar to ROI is the gross yield minus rent deductible expenses. However, that rate does not equal the cash-flow. Cash only includes spendable money. So, cash-flow excludes non-cash charges such as depreciation and stands for total amount of money being transferred into and out of the business account affecting the liquidity.
When working to improve your ROI from investment properties, you not only need to understand the fundamentals of splitting rentals in capital growth and yield investments, you also have to develop strategies to increase cash-flow. It might be working harder in a job to increase your salary or improving the ROI of your rental property. In other words a more attractive rental home results in higher cash-flow.
Look after your investment
Resources are limited when investing. Restrictions on finance and income from employment by rising costs and inflation pressure your cash-flow—what can you do?
Counter-question —what was the initial plan? If you want to invest in assets stick to your budget. If you want to build a rental business, then execute your cash-flow strategy.
One of the safer cash-flow strategies is to maintain high standards. Better quality of rentals attracts stable tenancies and continuous rental income. Small improvements can make your investment more appealing to renters and minor repairs at the right time will save you a fortune by avoiding expensive damage repairs. Think about damage from leaks, tree branches, roots, ingress of moisture or condensation...
How do you know what maintenance work is needed?
A fellow-investor had authorized his property manager to deal with any repairs below 500 Dollars per month without owner’s approval. What seemed to be a convenient arrangement turned out that the repair and maintenance costs inclusive additional administration fees had skyrocketed by the end of the financial year. You can guess the impact on the cash-flow that has caused.
Even when using a property manager, liabilities stay with the owner. Less control in money matters is like inviting a thief. When engaging a property manager, it makes sense to specify deliverables like inspection reports, approval procedures for spending your money and documentations about the actual repair. If for example the same defect happens frequently, the owner must take actions. Blindfolded leaving everything to the property manager has its risks and price.
In our tenancy agreements a clause makes tenants responsible for notifying the landlord at the time a problem appears in writing (text, email, etc). If the tenant breaches the agreement, he/she might share the costs. When renters behave well, we don’t have unreasonable repairs.
Maintenance protects your investment,
Tenancy agreement protects both parties
The starting point is awareness. If you as investor/landlord wait until your tenant starts complaining about something, often the damage has already been done.
Quite the opposite, the pro-active approach to keep your rentals in good working order saves you a fortune on repairs. Examples:
· Clear storm water ways and roofs from debris and tree branches
· Check gutters, remove leaves, blockages and sprouts of grass
· Inspect roofs, fixings, flashings and remove build-up of moss and everything that impacts weather tightness
· Prune trees, especially overhanging branches, and shrubs close to the house
· Check for tree roots which might lift up the footpath or entering the house and causing damage to waste/sewer/storm water pipes.
· Touch up damage to paintwork, windows and doors before rotting timber needs to be replaced
· Veranda, porch and carport—check for discoloration and leaks
· Water blaster drive ways
For the general appearance of the rental property, we agree about house rules attached to the tenancy agreement which clarify who does what in terms of
· Mowing the lawn and weed control
· Keeping driveways clear and weed free
· Watering fruit trees and gardens
· Pet rules for owners, etc
A tenancy agreement that makes transparent rights and obligations for both parties is a must.
All in all, if you want to increase your cash-flow start with improving the appearance and quality of your rentals. Remember - good rentals attract better paying renters, and improvements increase the value of your investment (capital gain). Who does not want to live in a well maintained and good looking house? It is renters and investors choice.
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Klauster Blogs lead to a real person, IT professional, investor, landlord and business owner with interests in technologies, residential properties and healthy lifestyles.
The passion of making experiences available comes from renting in different countries and working with people who are interested in home ownership. Helping people to avoid pitfalls has been most rewarding, when forming relationships.
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