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.
Download Your FREE copy of ‘How to Rent Your House!
Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.
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.
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.
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.
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.