Does Cash Flow Increase as Rents Annually Increase?

[Gabriel Hernandez]

Hello, I’m a new poster and investor from Phoenix, AZ. It seems the general data shows that rents have gone up about 3% per year over the last 30 years. If I own a rental now that cash flows about $200 a month, will it’s cash flow increase each year as rents go up about 3% per year? Maybe there will be years ahead where the rent grows less than others but it seems that the 3% average growth accounts for this. I understand that inflation will also drive expenses up but it seems like that still wouldn’t be able to keep up with rent growth. I typed in my rental into the BP cash flow calculator and it supported this theory. It showed that cash flow goes up every year because of the rent growth. I would love to hear input on this.

[Derrick Dill]

property taxes usually go up as well. More repairs the older a house is

[Bjorn Ahlblad]

@Gabriel Hernandez welcome to BP. To see an increase in rental income you need to be on your game. Yes rents increase but as was pointed out so do taxes and repairs. So raise rents every year and make sure new tenants are at market rent. Keep the property looking good inside and out to get the best tenants. Like any business you have to work at it.

[Valden J Ellis]

All expenses go up about 3% except your mortgage, assuming you got a fixed rate...so yes if you are cash flowing with a mortgage, you will eventually increase cash flow if your rent increases keep up with inflation.  

[Joe Villeneuve]

Sometimes.  Taxes and insurance will also increase so it depends on which increase is greater.  CF could go down.  This is one of the reasons why I think low cash flow is just negative CF waiting to happen.

[Michael Plante]

Originally posted by @Joe Villeneuve:

Sometimes.  Taxes and insurance will also increase so it depends on which increase is greater.  CF could go down.  This is one of the reasons why I think low cash flow is just negative CF waiting to happen.

Words of wisdom from Joe once again

[Scott M.]

If expenses stay the same but income increase yes, your cashflow increases.  If both increase depends which increases more : ) 

[Gabriel Hernandez]

Thank you all for the responses. It may seem like a common sense question but I was curious what the more experienced investors have seen so thank you for that. I am hoping because I’m in a very hot Phoenix market (one that seems to have been hot my whole life) with some of the lowest property taxes in the country that rent increases will outpace expenses. I am very happy with our property management company as they asked for more in rent than I would have because they knew this rental market better than I did. They are also pretty on top of stuff so I feel at peace with our decision to hire property management. 

[Bill B.]

Vegas example:

Property tax $2400/year

Insurance $600/year

Rent $1950/month

Taxes are 3% max increase per year (tax cap rate) so $72/year higher. Insurance is about 4-6% so $30/year higher 

Rents this year are up 20% or more, but let’s say 5% is $98/month. Or $1176/year. So $1074 of that goes to bottom line. At least an extra $85/mo.that number gets higher and higher each year because your doing increases on $3,000/year worth of expenses versus $24,000/year in income. If your expenses don’t increase 8x faster than income you’re golden. 

Don’t forget, your income is also going up as your interest expenses go down. 

[Gabriel Hernandez]

Wow thank you for that breakdown Bill! Thats exactly what I was looking for.