4 Tips to Turn a Negatively Cash-Flowing Property Around

4 Tips to Turn a Negatively Cash-Flowing Property Around

4 min read
Chris Clothier

Chris Clothier began building his rental portfolio in 2003 as a successful entrepreneur looking to diversify his investments. He quickly gravitated toward passive investing, establishing a portfolio of over 50 single family homes in Memphis, Tenn. As an original client of his family’s firm Memphis Invest (now REI Nation), Chris experienced firsthand what a passive investor endures when purchasing out of state. In 2007, Chris moved his company and family back to Tennessee, wound down his brokering company, and joined REI Nation as a partner and director of sales and marketing.

Experience
Since joining REI Nation, the business has grown into the premier turnkey investment company in the country and a standard bearer for best practices in the industry, managing over 6,000 investment properties for 2,000 passive clients. In addition to managing the development and implementation of sales and marketing processes, Chris serves as an ambassador for the company, working with the team to help potential investors define their purpose for investing in real estate and educating peer companies on best practices.

REI Nation clients’ portfolios hold a value of close to $800 million in single family assets in seven cities. The company has been featured as a six-straight year honoree in Inc. magazine’s list of the 500/5,000 “Fastest Growing Companies in America.”

In 2019, Chris’ team assisted 600 investors with purchasing just under 1,000 fully-renovated and occupied turnkey homes. Chris led the re-brand of his family’s company on January 1, 2020, from Memphis Invest to REI Nation.

Chris is also an experienced real estate speaker and addresses small and large audiences of real estate investors and business professionals nationwide several times each year, including IMN single family conferences, the PM Grow property management conference, and the Ignite conference in Las Vegas each December.

Chris continues to hold a sizable single-family rental portfolio in both Tennessee and Texas. Along with his family, he owns several commercial buildings in the greater Memphis area.

When not working with the team at REI Nation, Chris is busy raising five kids, operating a racing company in Memphis, and serving as CEO for The Cancer Kickers Soccer Club, a Memphis-based 501c3 providing comfort and care for kids battling childhood cancers.

Founded in 2017 by Chris and Michelle Clothier, the non-profit organization focuses on providing a team environment for kids to find encouragement and strength in their battle. The company worked with over 500 children from six countries in 2019.

Press
Chris has been featured in stories published in Money Magazine, The New York Times, The Wall Street Journal, and DN News, as well as the Memphis Business Journal. In 2018, McGraw-Hill Publishing purchased Chris’ manuscript, The Turnkey Revolution, and worked with Chris to publish his first book in May 2018.

Chris also publishes two weekly blogs at ChrisClothier.com and REINation.com. Chris has also published articles on the BiggerPockets Blog since 2009.

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For any real estate investor, considering a real estate property, whether existing or new, with negative cash flow is nothing to sneeze at. A property with negative cash flow is the complete opposite of what investors want and need in an investment property. It makes money shrink, and that’s it. Yet does that mean that negative cash flow properties are all bad? Not even close.

If you find one of your properties needs to turn negative into positive cash flow, you’ve got challenging work ahead of you. Challenging, but not impossible. While we don’t recommend buying a property that’s already in the red, we don’t necessarily believe you have to throw in the towel, either.

Negative cash flow properties are a special category, and there are brilliant real estate investors who make a fantastic investment career out of buying negative properties. At the same time, if you find yourself in trouble and have a property that is suddenly not performing, there are steps you can take to turn that property around, and that is what I am going to focus on today.

4 Tips to Fight for Positive Cash Flow

Work with generous buffers.

We all know that numbers are important for any investment property. While we usually want to be optimistic about our properties, the best path to a positive outcome (and positive cash flow) is through being realistic. Whether you’re buying or adjusting your strategy for an existing investment, be sure to use the right figures for your calculations. Don’t underestimate your costs or even be conservative with them. Overestimate. Expect more. Plan for more from the beginning. That way, you’ll either be pleasantly surprised or you’ll have the resources prepared to anticipated hiccups and hidden costs. 

If you spend time trying to talk yourself into a bad deal by justifying numbers that simply don’t add up, you’re only going to hurt your own wallet in the end. At the same time, you need to be as accurate as possible and be honest with the items you are calculating. Include everything and make an honest evaluation of how your property has performed. 

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Related: 4 Essential Strategies for Taking on a Negative Cash Flow Property

Don’t buy in hopes of appreciation.

Always ground your real estate investments in real numbers, not in blind faith. Some buy with the belief that negative cash flow is ok because the property will appreciate in the end and you’ll be able to compensate for the loss. This is rarely true for inexperienced real estate investors. Wouldn’t it be smarter to use buy and hold on something that will make you money right now? Appreciation is great, but it shouldn’t be at the foundation of your strategy if you’re in the market for positive cash flow and reliable passive income.

This is where the professional, experienced investors separate themselves from those that do not approach real estate from a professional, full-time vantage point. They know how to buy negative cash flow properties in the right areas with the proper demographics and metrics that point to appreciation and a positive outcome when they exit the property. That is not easily done and has absolutely nothing to do with timing! Don’t kid yourself. While luck plays into every success, expecting luck to bail you out of a negative cash flow property is a poor strategy. The pros create their own luck by making calm, cool, calculated decisions.

The keyword from this section is reliable. Don’t invest in things that are built solely on hypotheticals and hopes. You’ll be disappointed in the end.

Pinpoint the “why” behind negative cash flow.

Are you just throwing things to the wall to see what sticks? Negative cash flow is a result of paying more in expenses for a property than you’re receiving in rental income. How did this happen? Go back. Look at the last time that property had positive cash flow and look to see what’s changed since then. Have you had high tenant turnover? Have you adjusted for demand? Did you possibly lease the property well below market rent out of fear of vacancy? You can’t fix something when you don’t know why it broke in the first place. Maybe in the end you paid too much for the property and it turned out to be a dud. Wrong location, wrong timing, wrong neighborhood, wrong something.

You may experience negative cash flow one month and not the next, depending on the source. Did you have to pay for more repairs in one month thanks to a streak of bad luck? Spending on renovations? Have trouble finding tenants? There are a lot of things that can contribute to negative cash flow that aren’t necessarily something you can control or fix. In many cases, these are anomalies that may disappear.

Related: 4 Non-Negotiable Rules For Buying a Negative Cash-Flow Property

And do not misunderstand the point made in this section. A negative cash flow property, in my definition, is one that is negative month after month with no hope of changing without the owner taking action. A property that experiences a cap ex charge, an unexpected vacancy or even a prolonged vacancy is not what I consider a negative cash flow property. Its yearly income may be low and may even be negative due to a really large expense, but when the property functions properly, it provides a positive return each month. That is not a negative cash flow property.

You can best handle these months by ensuring that you set aside some of your cash flow into an emergency fund to compensate.

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Know when to cut your losses.

There are times when you’ve just got to throw in the towel. Don’t let pride force you into keeping ahold of an investment property that isn’t working. Even if you have to sell at a loss, it’s probably better than losing month after month. You can move on to new, better opportunities. Just live and learn.

If you don’t want to sell, consider offering a rent-to-own model to your tenants. They’ll pay more in rent (helping make up for your losses if not putting you back in the black), and in 1-5 years, be able to purchase the property from you — maybe. In some parts of the country, this is a strategy that works because the tenant actually buys the property. In others, it is a band-aid because they never close!

It’ll help your tenants out, particularly if they’ve been vying for homeownership but have trouble getting approved for mortgages.

Tackling a property that suffers from negative cash flow isn’t easy, and we certainly don’t encourage investors to seek out those kinds of properties — but it’s not impossible. There’s always something you can do to try and turn it around.

Have you ever handled a property with negative cash flow?

Share what you did in the comments.