What to Do About Negative Cash Flow
I just got a lead from a motivated seller. I’m staring at my deal evaluation sheet right now. The guy is very motivated, I’ll have plenty of equity, but there’s one problem. His payment is $1,450 a month, however, the market rent is only $1,250 a month.
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What can I do? Well… I could always walk away from the deal, but that’s no way to get rich as a creative real estate investor. In fact, I believe every deal that comes across your desk should be evaluated from multiple angles to see if there is any possible way to make some money from it.
So for this deal I’m going to go to the handy proposal of trying to get the owner of the property to pay me. How much? I’m going to ask the owner to pay me $400 a month until I sell the property to a tenant buyer. I’m asking $400 a month because I want to be able to cash flow $200 a month (which would technically make my payment $1,050 a month).
Will he agree to this? If he’s motivated enough he will.
I’ve done this multiple times in the past and an owner who is shelling out $1,450 a month for a property will be more than happy to only pay $400 a month for as long as it takes.
But I know what you’re thinking. “What happens if the owner stops making the $400 a month payments to you”-right? Well, I have a strong clause in my contract that states if the owner ever stops making his monthly payments to me then I will stop making his mortgage payments and this could result in his property getting foreclosed on and his credit ruined.
And of course, when I am putting together the deal I point out the clause and make it very clear that if a payment doesn’t come in I will immediately stop making my payment. I tell the owner that my company is not a charity and it doesn’t matter what his excuse is.
In fact, only once in my life has a seller stopped making the monthly payments they owed me. This was several years ago when I was a lot less experienced. I did a deal on a property in Baltimore, MD, but looking back I should have never done it. I got a bad feeling from the homeowners but I was a greedy new investor who wanted the deal too badly.
The owners were supposed to pay me $300 a month.
They did for a little while but then stopped making the payments. When I called to inquire about it the wife of the owner said something like, “we just didn’t feel like making the payments anymore.” Then later on when I talked to the husband he made some excuse about a car accident and I could tell I was getting lied to.
So what did I do? Stopped making the mortgage payments of course. The owner thought I was bluffing but not when he started getting calls from the mortgage company. And all of the sudden he had the money and started making the payments again.
Anyway, I’ll keep you posted and let you know what happens with this particular deal. But I like this method of getting the sellers to write you a check because it’s pretty risk-free since most people are honest and will make their payments.
So quit walking away from deals with negative cash flow and inject a little creativity into your business.