CRE Cash Flow: 3 Operational Factors That Can Impact Profitability
Commercial real estate (CRE) cash flow is critical to meeting and exceeding financial obligations, expectations, and growth projections across any CRE firm. Essentially, cash flow dictates your property’s and portfolio’s performance. Positive cash flow creates opportunities to grow the portfolio and can produce faster returns to the sponsor and investor(s). On the other hand, negative cash flow can drain your resources and impact portfolio growth.
Read ahead to understand the meaning of commercial real estate cash flow, factors that could be impacting your firm’s profitability, and tips to maximize CRE cash flow.
What Is Commercial Real Estate (CRE) Cash Flow?
Commercial real estate cash flow represents the net income or profit generated after you’ve paid all operating expenses, subtracted debt obligations, and set an amount for future property repairs. Essentially, the formula you’d use to calculate your cash flow would look something like this:
Property’s Gross Income – Property Expenses = Cash Flow
There are three types of cash flow: positive, negative, and zero cash flow.
- Positive cash flow occurs when the income your property generates is greater than your property expenses.
- Negative cash flow occurs when your expenses are greater than the income your property produces.
- Zero cash flow occurs when your property’s income equals the amount you spent on the property.
Positive cash flow, where income exceeds expenses, is the main objective for commercial real estate firms. Positive cash flow ensures returns for Sponsors and Investors, makes borrowers more attractive to their lenders, and guarantees that the property’s expenses are covered, among many other benefits.
Analyzing Your Commercial Real Estate Cash Flow
The first step in any effective cash flow management strategy is understanding your current financial standing. Conducting a thorough cash flow analysis allows you to assess your income sources, expenses, and potential risks. Identify areas where you can optimize revenue generation and reduce unnecessary costs to create a more resilient financial foundation.
3 Operational Factors That Impact CRE Cash Flow
Your firm’s daily operations can greatly impact its profitability. For example, firms that use multiple error-filled spreadsheets, siloed data, and/or decentralized systems risk inaccurate property, expense, and income data. And when operational data is wrong or incomplete, inconsistencies in reporting are sure to follow.
Below are three operational factors that commonly impact cash flow amongst CRE firms:
Lack of budgeting and expense management
CRE firms that do not have a documented budget and expense management plan are more likely to encounter financial issues down the road. Without a formal budget, the firm may not have a reliable method to track and manage how much cash is on hand or where the money is being spent each month. In this case, if an unexpected expense arises the firm may not be able to quickly determine whether or not the expense is affordable.
Effective budgeting can help you boost cash flow to the investor, reduce unexpected expenses, optimize your expense ratio, and maximize NOI. But first, you must prepare a plan to identify where to allocate your spend and manage expenses.
Here are 5 tips to help you more effectively allocate your spend:
- Consider opportunities to scale your business
- Define clear goals for your properties
- Identify top revenue-generating activities
- Budget for capital expenditures and improvements
- Leverage benchmark data
While these five steps are not an exhaustive list of the actions you can take to determine how to more effectively spend your dollars, they can serve as a foundation as you build and finalize your budget and expense management plan.
Too many vacancies
Although vacancies are a natural part of the rental cycle, they can be costly for your property. Consequently, vacancies can be one of the biggest obstacles to achieving positive cash flow. Each day that a vacant unit sits on the market, expenses increase and revenue is lost. And when multiple units are vacant, cash flow is impacted even more. If vacancies are not immediately filled and there’s no backup cash to offset the additional expenses, the firm’s operational performance and finances can be easily derailed.
Reactive CRE cash flow management strategy (or no strategy at all)
Operational planning for your firm should be handled proactively to mitigate surprises in your portfolio. A reactive cash flow management strategy means that you are moving against the market rather than with the market. Some firms get stuck in this reactive mode and are unprepared for potential roadblocks and new expenses.
A proactive cash flow management strategy can help you forecast and have visibility into cash flow weeks or even months in advance. This forecast can help you plan and prepare for those periods where cash flow is projected to be less than average. With this information, you can proactively set a plan in motion so that your firm stays afloat during those months.
5 Strategies to Maximize CRE Cash Flow for Multifamily
As we mentioned earlier, commercial real estate cash flow is at the core of successful CRE property and portfolio performance. Below are five strategies that can be used to help generate positive cash flow across your multifamily properties.
Optimize your debt and equity.
Refinancing a CRE loan is a common method used to maximize multifamily cash flow. However, with continually rising interest rates, refinancing your loan may not be the best option. An alternative to refinancing could be opting for a second mortgage to optimize your debt and increase equity. The equity gained from the second mortgage can be used to renovate outdated units and in turn attract new tenants and fill vacancies.
Optimize your marketing spend.
Finding tenants who consistently pay their rent on time feels like winning the lottery. A data-driven marketing strategy can be a top source for finding high-quality tenants for your multifamily property. By identifying which marketing channels are generating the best leads for the property, you can better determine how and where to allocate your marketing budget to maximize return on investment (ROI) – and ultimately drive cashflow.
Align the property’s rent with the current market rates (and justify rent increases)
Multifamily rents have grown 10.7% year-over-year since 2021. As inflation and interest rates continue to rise, rent growth is not anticipated to slow down anytime soon. If you find that your property’s rent costs are lower than similar properties in the area, aligning your rents with current market rates can be one tactic to increase the property’s income.
Note: Tenants are more willing to accept rent increases when they are justified. Consider offering new amenities, like a dog park, renovated pool area, or valet garbage services, to help tenants find value in paying more money to live at the property.
Create opportunities for tenants to share social experiences.
In today’s social media-driven society, word-of-mouth and social-proof are both effective and valuable for enhancing your property’s visibility and boosting its online presence. And the best part: social sharing is a free advertisement opportunity for your property
An effective method to inspire tenants to post about their social experiences (and tag the apartment) is to create fun on-site opportunities for residents. Consider throwing an event, such as a pool party, that will inspire tenants to share it on social media. Sure, there’s an upfront investment, but the ROI of creating “insta-worthy” experiences could be worth it.
Maximize the property’s energy usage.
Roughly $21 billion is spent on energy for multifamily housing each year. As multifamily owners seek to reduce costs, more efficient energy usage is becoming a popular concept. More specifically, reduced energy consumption is being considered in modern multifamily housing design and development. Using renewable or solar-powered energy can be a major cost-saver for your property.
Note: Incorporate natural sunlight into the building’s design to help reduce overhead costs.
How CRE Asset Management Software Can Help
CRE asset management technology is a powerful tool that can be used to track and manage your property’s income and expenses in real-time. By using either custom-built or templated dashboards, you can keep a pulse on your portfolio’s financial performance and health. Having on-demand access to income data means that the firm can easily track its profitability and quickly pivot to a new cashflow management strategy if needed.
Read the checklist for 6 Questions to Identify and Eliminate Gaps in Your CRE Cash Flow Management.
