4 Steps to Boosting Cash Flow

As the proud owner of 20+ residential cash flow properties, the question on my mind when I fall asleep at night and wake up in the morning is this: how do I increase my cash flow without increasing my workload, risk, and number of properties owned?

Here are a few ideas that you may be able to use:

1. "Come to cash flow country". Reminds me of that old cigarette commercial! The conventional wisdom is to buy property within x minutes of where you live. As the colonel on M*A*S*H used to say: "horsefeathers!" Just because you like where you live, does not mean that it makes sense to buy investment property there. I live outside of San Francisco, where a house that rents for $2,200 per month costs around $500,000. With 20% down, your PITI payment would be about $2,700. Even if you find a great deal on a foreclosure and can sell for a profit, you become a flipper or dealer, which puts you in the high tax bracket job category. Another problem is that there is intense competition for discounted homes, and you can't make money until it's yours. And it can take a very long time to close on a distressed property in a hot area.

So where is "cash flow country"? You know them as "rust belt" states, but I think of them as "cash flow" states: Michigan, Ohio, Indiana, Pennsylvania, New York. Cold, gritty, unglamorous cities you don't hear much about with Metropolitan populations of 500,000 or more: Indianapolis. Philadelphia. Pittsburgh. Akron. Detroit. Buffalo. Rochester. Maybe you wouldn't want to live there, but who asked you to? Investors in these cities are making quiet fortunes utilizing a variety of strategies. These are places where you can buy serviceable houses for under 30k and rent them out for close to $1,000 per month. You may not get much in the way of long-term appreciation, but you make your money when you buy anyway. "Come to where the cash flow is!"

2. Buy the right properties in the right areas. Certain properties in certain neighborhoods have strong rental demand, and will rent out faster, for more rent, and attract high quality applicants. If you are buying from out of state, make sure you know the city before jumping in. Put test ads on craigslist to test demand.  If you're not getting swamped with emails, either your rent is too high or the neighborhood is undesirable. The truth is that you can buy a bigger house with more bedrooms and bathrooms on a nicer street for not much more than you would pay for a tiny little 2 bedroom house on crack alley. Another common debate among residential cash-flow investors is whether to buy single family versus multi-family.  I own a mixture of single family houses and duplexes, and after 7 years, I definitely prefer a nice-sized single with 4 or 5 bedrooms over a double any day of the week.  Why would anyone want to deal with 2 tenants for the same amount of rent as you can get from one?  Besides, single family houses always attract better quality tenants than multi-family units.

Regarding location: I prefer buying nice-sized houses on the fringes of the city bordering the suburbs. People always want to get as far away from the noise, drugs, and violence as they can, but they don't necessarily want to move into the suburbs or out to the country. The suburbs may be out of their comfort zone, and too far from their families and work. As an investor, cash flow plummets in the suburbs due to higher property taxes and purchase prices. Also, suburban houses may not rent for much more than decent city properties.

3. Wash that property manager out of your hair. I'm beginning to give away my age, but as I have stated in my other blogs, I consider property managers as glorified and overpaid babysitters who take 10% off the top and provide little value in return. In fact, they often make matters worse by aggravating tenants and stealing from you. I understand that they may be a necessary evil with apartment buildings and mobile home parks, but I'm talking about SFR's and doubles here. Again, the solution is to buy desireable properties in desireable neighborhoods which attract desireable tenants which will render property managers obsolete. If you are dead set against having any contact whatsoever with your tenants, you may be in the wrong business.

4. Pay down credit card and mortgage debt. Once you are operating in the black (hopefully from day one), you have some nice options available to you. I use a sophisticated debt paydown software program which helps me identify which debts to pay down first to shorten the time until I am debt-free. The less debt you have, the faster you widen the spread between your rental income and expenses, which in turn gives you more capital to invest in more properties or money you can loan out to other investors. 

This is much more feasible than trying to improve your bottom line by raising rents or slashing contractor's wages. At this point, you are in a "wealth spiral." You are paying less interest to your creditors, putting more money in your own pocket, improving your credit, and qualifying for larger lines of credit at lower interest rates. 

Then, once your properties are free and clear, you can free yourself from further maintenance and management responsibilities by offering them to other investors through seller financing. Then your income becomes truly passive and hands-off.

While you may not be personally interested in landlording, this information can still be valuable to you.  For instance, if you are trying to vet potential investor/borrowers, you want to make sure they are following sound strategic principles. Use these ideas to screen them.