Ways to Better Manage Cash Flow at Small Multifamily Properties | Resident First Focus

Investors in large multifamily properties can usually weather a dip in cash flow. There’s often enough income coming in from the other units to cover unexpected costs. Managing cash flow at smaller properties is a different story – and can prove to be much more difficult.

Here are a few ways to better manage cash flow at small rental properties.

Mitigate the Impact of Vacancies

Vacancies are inevitable. A typical pro forma will usually include at least a 5% vacancy rate to account for annual turnover. At a fourplex, this would be the equivalent of 2.4 months of vacancy throughout the year (4 units x 12 months per unit = 48 / 0.05). Baking in a 5% vacancy rate gives the owner some time to make repairs and other improvements to a property before releasing it. This also provides the owner with some time to find qualified tenants.

Often, novice investors will forget to include vacancy in their pro forma. They wrongly assume that because a property is fully-occupied now, it will remain fully occupied throughout the year. Even long-term residents leave from time to time. Mitigate the impact of low occupancy by including at least a marginal vacancy rate in your annual budget. In the event, you are fully occupied, even better! This will boost your cash flow projections and can be used to offset any unexpected costs.

Stagger Lease Expirations

Another way to mitigate the impact of vacancies is by staggering lease expirations. Landlords of small properties are often tempted to keep their resident’s leases on the same timeline. This is especially true if you own property in a college town where leases tend to mirror the academic calendar.

However, keeping all leases on the same schedule can present a significant cash flow property if the units turn over at the same time and do not re-rent quickly. You could be flush with cash one month and unable to cover debt service payments the next.

Instead, stagger leases terms. You can still use 12-month leases, but start leases throughout the year. For a three-family, you might begin leases on January 1st, May 1st, and September 1st. When a tenant goes to resign a lease, perhaps you shorten or lengthen the lease term on a one-time basis to meet those dates. For example, residents might sign a 14-month lease because specifically, because the target expiration would be on August 31st. Play around with the dates included in your leases to ensure you don’t have vacancies hit all at once.

Conduct an Annual Property Inspection

All too often, investors only inspect a property before purchasing it. However, an annual inspection is another way to manage cash flow at smaller properties. This is particularly true for novice investors who may not have a thorough understanding of a property’s condition.

Conducting an annual property inspection will give you a better idea of the repairs and maintenance that are necessary, and when those need to be completed. This helps you prepare your annual budget. If you know there’s a chance you’ll need a new HVAC system within the next year; you can start getting quotes and include this in your budget.

Being proactive about repairs and maintenance can also save you money: instead of being forced into an emergency repair (e.g., a water heater blows), you can do your research and vet contractors accordingly. In emergencies, you’re often at the whim of whichever repair person can get there first—they know that and will usually charge a premium as a result.

During your annual property inspection, also take note of any warranties that will be expiring in the coming year. Items that are still covered may qualify for free inspection and maintenance. You may also be able to negotiate a low-cost extension of the warranty; coverage providers are usually more likely to negotiate with you while you’re still under warranty.

Review Your Contracts

When was the last time you re-read your property management contract? Are you getting the most competitive rate for the quality of service you’re getting? How does the interest rate on your mortgage stack up to existing rates? Is now a good time to refinance? Has your insurance premium gone up?

Smaller-scale investors often default to the status quo when it comes to their existing contracts. Any recurring monthly expense should be evaluated to determine whether you could be getting a lower rate for a similar service or coverage. Even a modest reduction in these costs can improve cash flow at small properties.

The Bottom Line

Managing cash flow at small properties requires a combination of proper budgeting, skill, and foresight. You should be monitoring your cash flow regularly. Implement systems to collect rent payments on time and likewise, make timely payments to your service providers.

A little preparation can go a long way when it comes to preserving cash flow at small properties—and your ability to protect cash flow can ultimately make or break your investment.