4 Tips on Turning a Negative Cash Flow Property Around

If you're a real estate investor dealing with a current or potential negative cash flow property, you're probably frantically looking for solutions to correct the course you're on! A property with negative cash flow is the complete opposite of what investors want and need in an investment property. It makes a money sink, and that’s it. 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.

4 Tips to Fighting 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.

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 okay, because the property will appreciate in the end and you’ll be able to compensate for the loss. This is rarely true. 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.

Keyword 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 resident turnover? Adjusted for demand? You can’t fix something when you don’t know why it broke in the first place. Maybe you paid too much for the property and it turned out to be a dud. Wrong location, wrong timing, wrong neighborhood, wrong something.

That’s why you should never pay more for a property than your rental parity. You don’t want to end up losing thousands of dollars each year; especially when the mistake could easily be avoided. Just because the price looks good comparatively doesn’t mean it is good.

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 resident? 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.

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.

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.