Increasing Cash Flow on Your Rental Units
Analyze Variable Expenses Regularly
The standard equation for figuring out profitability on a rental unit is rent income – expenses = loss or profit.
Expenses include depreciation, interest expense, and operating expenses. Depreciation of the building is tax deductible. The cost of your property, minus the value of the land, is depreciated over 27.5 years. Each year, you deduct an equal portion from your taxable income on your return.
If you have a mortgage on your property, the interest paid is tax-deductible, as are operating expenses attributable to your rental property business—but since we are not in the tax-advice business, make sure you check with your tax advisor or tax attorney about just what is and is not deductible, as well as how the laws affect your personal situation.
Depreciation, mortgage payments and interest are fairly fixed, predictable expenses. Operating expenses, however, can be all over the place. So much depends on where you live, the condition of your rental property, the damages inflicted upon it by tenants, the cost of labor, weather conditions in any particular year, and more.
Operating expenses are the biggest unknown in renting property, but they are also the only expenses you can really control. Controlling variable expenses is the only way to increase cash flow if you cannot raise the rent or refinance your mortgage—both options that are not available to many landlords, especially in this banking and rental environment.
Analyze your variable expenses regularly. Is it time to take over property management yourself? Or to search for a management company that offers lower rates? What about the value your landscape and handyman providers give you? Are there lower-priced providers that would love to have your business?
With the business climate hurting form the recession, there is no better time to renegotiate your agreements and contracts with service providers—or to search out new, lower-cost relationships. Just about every industry is hurting—so it’s likely landlords can find alternative contractors in every category.