Investing in real estate and maintaining rental properties is an exciting endeavor that can provide supplemental income and secure your financial future. However, investing in rental properties does come with some inherent risks, and it is likely that you will eventually find yourself mixed up in a real estate deal gone bad. What might have originally looked like a promising investment may soon turn into a nightmare if you find yourself with a rental property that has negative cash flow.
However, when you find yourself in the midst of a real estate deal gone bad, it is important that you do not let yourself become discouraged and overwhelmed, as the right perspective can help you to find the good in a bad situation. The right approach can help you to learn from this experience and find the positive in a bad real estate deal. Keep reading as we take a deeper look at what negative cash flow is, why rentals experience a negative cash flow, and steps that you can take to flip your negative real estate deal into a positive experience.
What is Cash Flow? How Do I know What Type of Cash Flow My Property Has?
If you are new to real estate investing, you may be unfamiliar with terms like negative and positive cash flow. However, in order for you to better understand and correct your current situation, it is important that you understand cash flow and the factors that can contribute to positive or negative cash flow.
What is Negative Cash Flow?
A negative cash flow rental property is a property in which the monthly rental income does not cover the expenses of the investment property. This essentially means that incoming money that you are generating each month from the property is, on average, lower than the outgoing money you are putting into the property. Instead of earning money on your investment property, a negative cash flow property will cause you to lose money, which is a scenario every real estate investor dreads.
What is Positive Cash Flow?
Alternatively, a property with positive cash flow is one in which monthly rent generates more income than the expenses of operating the rental property. This means that more money is coming in than going out during a given timeframe, which is the ideal scenario for investors, as any money that rent generates over the cost of expenses is straight income.
What Causes Negative Cash Flow?
Once you better understand cash flow, this can help you to pinpoint what has caused your real estate investment to turn sour. However, this may lead you to ask what causes negative cash flow. Understanding the root causes of negative cash flow can then help you to figure out what went wrong with your current investment, and how you can prevent a similar situation in the future. Here is a look at a few of the most common reasons that rental properties develop a negative cash flow.
Not Giving Yourself a buffer
Numbers are important when you own an investment property. In particular, it is critical that figure out from the beginning how much it will cost you to run and maintain a property. One of the most common reasons why income properties develop a negative cash flow is due to landlords underestimating how much it will cost to maintain a property. Thusly, whether you are looking to buy a new income property, or reassess the rent on your current property, it is critical that you give yourself a generous buffer that overestimates potential expenses. If you plan for more outflow than you actually have, you will have a buffer if any unexpected expenses come up, or you will be pleasantly surprised by the extra income if your calculations are correct. It is when you don't have this buffer that it can become easy to slip into a negative cash flow.
Improper Rental Rate
Of course, this highlights one of the most common problems that can lead to negative cash flow, which is setting your rent too low from the beginning. It is not uncommon for landlords to set too low of a rent rate on their property out of fear that setting their rent too high will lead to high vacancy rates. While it is true that setting rent can be tricky, as having stable occupancy rates is critical to your bottom line, you do not want to set your rent rates so low that the income coming in does not meet your expenses, as this will result in a negative cash flow. You need to find a balance when setting rent that will allow you to cover expenses and maintain a buffer while staying competitive. When trying to determine what rate to set, it is important to check what comparable properties are going for in your area.
Ultimately, one of the best ways to determine why your property has a negative cash flow is to look at your records and see what has changed since your property last saw a positive cash flow. Finding where your expenses are coming from, and determining what has changed, can help you to pinpoint the cause of your negative cash flow, allowing you to find a solution to the problem. Of course, if you are on the wrong side of a bad real estate deal, you may find that your property has had negative cash flow since the beginning. If this is the case, do not despair. There are steps that you can take to turn your situation around.
How Can I Spin a Negative Real Estate Deal Into a Positive?
Having found yourself on the wrong side of a bad real estate deal, strapped with a rental property that has a negative cash flow, it can be easy to beat yourself up and fear that nothing can be done to turn your situation around. However, it is at this point that you need to work to spin the negative-- a real estate deal gone bad-- into a positive. As Jocko discusses in his podcast "GOOD", when things are going bad isn't the time to get bummed out or frustrated. Instead, you should brush yourself off and find a way to reload and spin your bad real estate deal into a positive one. If you are strapped with an income property that has negative cash flow, here are a few steps that you can take to flip the negative into a positive.
Reduce Upkeep Costs
The first step that you should take when trying to turn your rental property around is to review your records to see if a pattern emerges that can explain your negative cash flow. After reviewing your records, you may discover that your negative cash flow is the result of high upkeep costs and an insufficient buffer to cover these costs. If this is the case, returning your property to a positive cash flow may be as simple as reducing your upkeep costs. Take a look at what you have been spending and try to determine if the money you have been spending on maintenance and improvements is really necessary. Many novice real estate investors make the mistake of putting too much money into their property from the beginning, causing them to develop a negative cash flow.
You should then see if you can cut out any planned renovations or upgrades to your property, as you may be surprised by how quickly this could improve your cash flow. Unless upgrades are necessary to secure good tenants, you should wait until you get a sense of how much income your property will generate before investing too heavily in it. Alternatively, if you are in between tenants, you could consider raising the rent on your property to account for these expenses; however, before you do so, you should check to make sure that you do not price yourself out of the neighborhood.
Manage The Property Yourself . . .
Of course, if your property has a negative cash flow and you currently pay a property manager to handle your rental, the easiest way to improve your cash flow would be to maintain the property yourself. While it can seem overwhelming at first to manage your own property on your own, doing so can help you to avoid paying too much for professional property management.
. . . But Invest in The Right Tools to do so Successfully
However, if you are going to switch to managing your properties yourself, it is important that you invest in the right tools to help you successfully oversee your properties. Rental property management software can help you to stay organized as you make the switch to self-managing your properties while still saving you money compared to professional property management. Having the right tools at your disposal will give you the best chances of turning your real estate nightmare into a success story.
Know When to Cut Your Losses
Alternatively, there will be times that you have to throw in the towel and walk away from a property. Don't let your pride get in the way, as keeping an investment property that you can't turn around will only continue to cost you more money. Even if you have to sell the property for a loss, this can still be a positive end to an unfortunate real estate deal. The fact is that most real estate investors will lose money on a property at some point, but there is likely something that you can learn from this experience, helping to create a positive takeaway. Plus, you will save money by selling the property as soon as possible.
It's All About Perspective
Ultimately, what we can learn from Jocko's podcast is the power of perspective. Just because your real estate deal did not turn out as you would have liked, this does not necessarily make it a bad deal. Instead of choosing to be upset about an unfortunate situation, you should instead work to find a way to turn your negative cash flow rental property into one that generates a positive cash flow.
Even if this is not possible and you end up having to cut your losses and walk away from the property, there are still positives to be found in this experience as you will have learned what causes a property to develop a negative cash flow, how you can more effectively manage your properties in order to generate a positive cash flow, and you will know what to look for in the future when investing in properties to avoid one that may generate a negative cash flow. You can flip your real estate deal from a negative to a positive simply by reframing your perspective and focusing on the good that came from the situation.
Contact us to learn more about how you can maintain a positive cash flow at your rental properties as well as to find out how our property management software can help you to better manage your rentals.
About the author
Matt Angerer is the Founder and President of VerticalRent. He enjoys writing on a variety of topics that help Landlords, Property Managers, and Renters across America. He is particularly interested in helping renters understand their local marketplace, pick the best places to live, and find an awesome roommate. Since 2011, VerticalRent has grown to service over 100,000 landlords and renters across America.