{"id":76411,"date":"2016-01-10T05:00:52","date_gmt":"2016-01-10T12:00:52","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=76411"},"modified":"2024-02-19T07:59:28","modified_gmt":"2024-02-19T14:59:28","slug":"2016-01-10-4-tips-turn-negative-cash-flow-property","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2016-01-10-4-tips-turn-negative-cash-flow-property","title":{"rendered":"4 Tips to Turn a Negatively Cash-Flowing Property Around"},"content":{"rendered":"

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\u2019s it. Yet does that mean that negative cash flow properties are all bad? Not even close.<\/span><\/p>\n

If you find one of your properties needs to turn negative into positive cash flow, you\u2019ve got challenging work ahead of you. <\/span>Challenging, <\/span><\/em>but not impossible. While we don\u2019t recommend buying a property that\u2019s already in the red, we don\u2019t necessarily believe you have to throw in the towel, either.
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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.<\/p>\n

4 Tips to Fight for Positive Cash Flow<\/h2>\n

Work with generous buffers.<\/h3>\n

We all know that numbers are important for any investment property. While we usually <\/span>want <\/span><\/em>to be optimistic about our properties, the best path to a positive outcome (and positive cash flow) is through being realistic. Whether you\u2019re buying or adjusting your strategy for an existing investment, be sure to use the right figures for your calculations. Don\u2019t underestimate your costs or even be <\/span>conservative <\/span>with them. Overestimate. Expect more. Plan for more from the beginning. That way, you\u2019ll either be pleasantly surprised or you\u2019ll have the resources prepared to anticipated hiccups and hidden costs.<\/span>\u00a0<\/strong><\/p>\n

If you spend time trying to talk yourself into a bad deal by justifying numbers that simply don\u2019t add up, you\u2019re 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.<\/span>\u00a0<\/strong><\/p>\n

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Related:<\/strong> 4 Essential Strategies for Taking on a Negative Cash Flow Property<\/a><\/em><\/p>\n

Don\u2019t buy in hopes of appreciation.<\/h3>\n

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\u2019ll be able to compensate for the loss. This is <\/span>rarely <\/span>true for inexperienced real estate investors. Wouldn\u2019t it be smarter to use buy and hold on something that will make you money <\/span>right now<\/span>? Appreciation is great, but it shouldn\u2019t be at the foundation of your strategy if you\u2019re in the market for positive cash flow and reliable passive income.<\/span><\/p>\n

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.<\/p>\n

The keyword from this section is\u00a0<\/span>reliable. <\/span><\/em>Don\u2019t invest in things that are built solely on hypotheticals and hopes. You\u2019ll be disappointed in the end.<\/span><\/p>\n

Pinpoint the “why”\u00a0behind negative cash flow.<\/h3>\n

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\u2019re 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\u2019s 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\u2019t fix something when you don\u2019t 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 <\/span>something.<\/span><\/em><\/p>\n

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 <\/span>aren\u2019t <\/span><\/em>necessarily something you can control or fix. In many cases, these are anomalies that may disappear.<\/span><\/p>\n

Related:<\/strong> 4 Non-Negotiable Rules For Buying a Negative Cash-Flow Property<\/a><\/em><\/p>\n

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.<\/p>\n

You can best handle these months by ensuring that you set aside some of your cash flow into an emergency fund to compensate.<\/span><\/p>\n

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Know when to cut your losses.<\/h3>\n

There are times when you\u2019ve just got to throw in the towel. Don\u2019t let pride force you into keeping ahold of an investment property that isn\u2019t working. Even if you have to sell at a loss, it\u2019s probably better than losing month after month. You can move on to new, better opportunities. Just live and learn.<\/span><\/p>\n

If you don\u2019t want to sell, consider offering a rent-to-own model to your tenants. They\u2019ll 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!<\/span><\/p>\n

It\u2019ll help your tenants out, particularly if they\u2019ve been vying for homeownership but have trouble getting approved for mortgages.<\/span><\/p>\n

Tackling a property that suffers from negative cash flow isn\u2019t easy, and we certainly don\u2019t encourage investors to seek out those kinds of properties — but it\u2019s not impossible. There\u2019s always something you can do to try and turn it around.<\/span><\/p>\n

Have you ever handled a property with negative cash flow? <\/span><\/em><\/p>\n

Share what you did in the comments.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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