When you have a commercial property, sometimes the smallest improvements or changes can make the biggest difference. This is especially true when it comes to cash flow. A few tweaks here and there could totally turn your ROI around.
Calculating Cash Flow on a Commercial Property
When it comes to real estate investments, it’s easy to get caught up in complex numbers and long-term ROI calculations. And while you certainly have to be mindful of these figures (particularly when seven- and eight-figure commercial properties are involved), sometimes it helps to strip it back to the basics.
Cash flow is a foundational metric. It’s the number that everything else is based on. Whether you’re calculating your cash on cash return (ROI), internal rate of return (IRR), return on equity (ROE), or any related measures, cash flow is at the heart. If you optimize cash flow, you’ll also optimize your return.
So, before we dig into some of the unique strategies for increasing commercial property cash flow, let’s make sure we’re clear on how to calculate this figure. Thankfully, it’s an extremely simple process.
- Step 1: Determine the gross income you bring in from the property.
- Step 2: Subtract all expenses and debt service related to the property.
- Step 3: The remaining amount is your property’s cash flow.
You can calculate cash flow on a monthly, quarterly, and/or annual basis. (Most commercial property owners typically track monthly cash flow and then use these numbers to analyze the annual cash flow at the end of each year.)
5 Tips for Increasing Your Property’s Cash Flow
When the numbers are larger, it’s tempting to over-complicate simple calculations like cash flow. However, in reality, it’s no different than if you were to calculate the cash flow of a single-family home or small business. In order to accomplish this goal, you either increase the income or decrease the expenses. (Ideally, you do both.)
Not sure where to begin? Here are some strategies that tend to move the needle in a positive direction:
1. Refinance Your Debt
If you haven’t already taken advantage of low interest rates in this market, now could be one of the final chances you have to lock in a lower rate and potentially save hundreds or thousands of dollars per month.
Depending on what your current interest rate is and how much lower the current market rate is, it might make sense to speak with lenders about refinancing. That much is pretty obvious. But have you considered the possibility of rolling multiple loans into a single refinanced loan with one low rate? Make a list of all debt you have, including construction loans, credit cards, and other business expenses. Consolidating and refinancing at the same time could be a very smart move.
2. Increase Rent
This might be the easiest way to give your cash flow a boost. And in a market like the one we’re in, you can get away with fairly regular rent increases. The key is to be intentional, diplomatic, and fair when doing so. The timing has to be right for this to work.
When committing to a rent increase, you have to justify it. Common examples include:
- A booming economy and real estate market where other similar properties now have higher rates than your own.
- Recent improvements or renovations that add value for tenants.
- An increase in your own expenses, like higher energy costs.
Consider that rent increases should be reasonable and gradual. In other words, you can’t legally jump from $5,000 per month to $10,000 per month just because property values are rising in the area. Most states have caps on how much you can increase the rent on an existing tenant at a single time.
Let’s say your current rent rate of $5,000 is too low. You run the numbers and look at comps and notice that the going rate is right around $5,500. Rather than immediately bumping the rent up by $500 (which is beyond the “reasonable amount”), you should introduce escalating increases of $125 each quarter for the next year.
3. Hire a Property Management Company
At first, this might seem counterproductive. Wouldn’t hiring a property management company actually increase the expense side of the balance sheet and hurt cash flow? Technically, yes. But that’s a very shallow view of the value a property manager brings to the table.
When you hire a property management company, like Crown Commercial Property Management, you instantly benefit from their skill and experience. They’ll help you shore up weaknesses and allow you to maximize cash flow by reducing vacancy, improving lease collection efforts, and keeping the property in tip-top shape. When it’s all said and done, they have a net positive impact on your cash flow.
4. Improve Energy Efficiency
If you’re looking for opportunities to increase cash flow long-term, try investing in energy efficiency improvements to lower the month-to-month operating costs of your building. Options include improving insulation; switching to newer LED light fixtures; integrating smart building technology; and investing in solar panels.
5. Offer Extras and Add-Ons
Brainstorm new extras and add-ons you can integrate into your building to generate additional cash flow. This could include options like covered parking, vending machines, a cafe in the lobby, storage units for business supplies, etc. There’s no guarantee that tenants will use these things, but if you listen carefully to their problems and needs, they’ll tell you exactly what to add.
Optimize Your Real Estate Investments
Real estate investing is really a mathematical equation. There really isn’t much room for emotions or gut feelings. The numbers either work or they don’t. You either have the cash flow to justify the underlying investment or you’re losing money. Steady, long-term ROI is the name of the game.
We’ve mentioned several ideas in this article. Don’t feel like you have to implement every one of them this month. The best thing you can do is pick one tactic and run with it. Once you’ve successfully nudged your cash flow in the right direction with that technique, add another one into the mix.
Eventually, you’ll be able to implement several different strategies and the results will speak for themselves.