What to Do When Faced With Negative Cash Flow?
Each real estate investor who is looking to own rental real estate
has dreams in order to amass a portfolio of regularly appreciating
properties that spit out there cash on a monthly basis from dedicated,
delighted tenants who pay their rent on time and never leave. Although
this does exist, for many this is a real estate imagination land. The
reality is, property does not often appreciate, repairs and ongoing
regular maintenance is necessary and tenants do move out which create
vacancies, occasionally leading to negative cash flow.
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Negative income results when the expenses on a house exceed the amount of revenue the property is definitely generating. This sounds obvious nevertheless initially calculating the numbers for an income property purchase, some brand new investors miss the primary expense that is not documented in MLS entries or other reports; the debt service… the mortgage payment.
Some traders seem less concerned with negative cash flow, being satisfied that covering a monthly shortfall of a few 100 dollars will ultimately pay off within future appreciation. This has certainly worked well well for some people; however this is a dangerous game to play. If property ideals do not go up in accordance with expectations and the only gain is a small equity pay down, it may take much longer than anticipated for an ultimate pay off. This kind of rumours makes me nervous which is why Personally, i recommend when purchasing property with regards to a long term hold, make sure it is income positive from the get go.
Realistically speaking, landlords who have one or more single family members homes or even duplexes, triplexes or four-plexes fight with negative cash flow problems at one time or another.
Below are a few potential strategies to remedy negative cash flow to various degrees. Depending on your property or scenario, some may work while others may not be feasible due to the building structure, building size, lot size, location, zoning, collateral amount etc . Please do appropriate diligence and check with your attorney before embarking on a new strategy.
Developing a short term rent to own
A short expression rent to own could be a solution for both the owner and the tenants. A rent to own strategy is designed for buyers who don’t have the capability to qualify for a mortgage. Typically they don’t have good credit, confirmable income or the downpayment necessary for conventional mortgage qualification. In a regular rent to own, the tenant ultimately purchases the property from the owner.
Quickly explained, the tenant is required to pay a small downpayment upfront which is acknowledged back the tenant at the time of buy, usually from 1 up to five years down the road. Throughout the term, the particular tenant pays the owner market value lease as well as an agreed upon amount over the rent. This amount over the rent is also credited back to the tenant at the time of purchase.
This strategy is beneficial for both parties. The renter is given the right to purchase the home in the future at an agreed upon fixed cost or an appraised price without the amount of accumulated credits from the preliminary downpayment and amount above the particular monthly payments.
The benefit to the owner is usually three fold. They receive a basic cash injection from the downpayment; enjoy uninterrupted rent plus an amount above the rent and have significantly decreased management and maintenance obligations since the tenant is treating the house because their future home. The result is higher cash flow and virtually no maintenance costs which should remedy the negative cash flow problem.
Short term rental
Short term rental is a niche opportunity very few landlords pursue although the return can be extremely lucrative. If your property resides near a company area, a hospital or healthcare facility, an university or college, an airport terminal, a resort area or with the many areas of Canada dedicated to the production of oil or natural gas, there might be an opportunity to get higher than market value rents on a regular short term basis.
A lot of companies hire consultants on a temporary basis or transfer their employees from different areas of the country. People often prefer staying in a “homey” environment rather than a hotel. You can cost a higher rental amount for these furnished units which will still be less expensive to the company than putting their worker in a hotel. If you choose this tactic, try to secure a long term contract with all the company.
Another opportunity can be found with families that are new to your area. Lately transferred people looking to purchase a home inside a new city or town may prefer a short term rental in a home rather than a hotel as they get acquainted with their particular new surroundings prior to committing to a house purchase. These can be short term in order to mid-term rentals often commanding up to three times market rent.
Find a Joint Venture Partner
There are many professionals who make excellent incomes and are “married” for their careers. Many are interested in real estate as an investment vehicle but don’t have the time or knowledge to participate in the afternoon to day business. This person would become a joint venture partner plus used for a capital injection to eliminate the negative cash flow in exchange to get a percentage of capital gain from appreciation.
If the reason for the bad cash flow is a difficulty in keeping renters as a result of lack of maintenance (the number 1 reason for tenants moving), this capital can be used to make necessary improvements or even adjustments in creating a more appealing property, thus attracting better tenants. Rents can be adjusted upwardly.
Another reason for negative cash flow can be depending on local economics or timing from the real estate cycle. Vacancy rates may become high in an area for many reasons. As a result, tenants enjoy many more inexpensive choices, often coupled with landlord incentives. The joint venture partner’s capital can be used to keep your property expenses at “break even” until the real estate cycle moves to the next phase where appreciation plus rental increases begin again.
Rent more space
Depending on where the home is located, it may be possible to rent out rooms as opposed to apartments. If the real estate is near an university, university or health facility, you may be capable to convert the rooms into relatively more “self – contained” units. To accomplish this you will need to furnish each unit with a bed, dresser, desk and maybe a mini fridge. The tenants would share the common living region, kitchen, bathroom and parking.
Regarding student housing, have the parents indication the leases as well as the student. This keeps the parents equally liable for any kind of damages etc .
This arrangement can function for more than just students. It can be well suited for graduate students, airline stewards, healthcare professionals, teachers, employees on temporary positioning, volunteers on assignment, people on missions, or any other scenario exactly where people need housing for a number of a few months at a time. You can obviously receive a higher aggregate rental amount, which can solve the negative cash flow issue.
In any of the above cases it is recommended to incorporate a set of “house rules” which each tenant must agree to and sign. This can address such things as parking, storage space, kitchen duties, clothes washing, typical area cleaning duties, yard work, noise levels etc .
Renting separate amenities
A property may have a number of facilities included in the rent which may be charged towards the tenant or people off the premises. To increase revenue from the existing tenant(s) you could install coin operated washer/dryer, charge for the use of the garage or even basement /attic storage.
It is possible to lease space in the garage or front yard to non-tenants to store RVs, boats, jet skis, trucks or even cars. The garage could be leased to a person who does car repairs or as a storage unit for virtually any number of items. If the property is located in a downtown area, you can potentially rent the driveway for everyday or weekly parking to corporate employees. Depending on the size of the lawn or acreage you could even book an area for gardening.
You may have a large house with the potential of conversion to a 2 or 3 device building. This obviously requires a cash injection but can pay off handsomely in the long run. It is best to begin any transformation utilizing un- used or under used space such as a basement, loft, an out building, a room more than a garage or even the garage itself.
Including a small kitchen, bathroom and perhaps bed room to any of the above scenarios can see to significantly increase revenue.
Any kind of conversion requires checking with the city bylaws. Whether your suite is considered un-authorized or authorized, the package must adhere to fire regulations. Please check with your local fire department for any copy of the fire code regulations in your municipality.
Vacation rental or M & B
If your property is located in a nice area and is conducive in the physical layout, you could convert it to a bed & breakfast. Of course you must have the inclination for this type of business and a proper license to carry on such a business, but this can lead to an excellent cash flow.
Adding an addition or another house
You may be able to include square footage to the existing constructing in order to create an additional suite. This tactic must be approved by the municipality. It is possible to subdivide your lot and build another house, duplex or even triplex.
This is clearly a long term strategy which will require assistance from a joint venture partner or financing sources, but could possibly more than double your current revenue or even give you a significant capital gain if you sell the newly constructed real estate.
Changing the financing
Any homeowner usually has a list of expenses with all the debt service or mortgage payment usually being the largest. A refinance could reduce the mortgage payment by perhaps lengthening the amortization or even decreasing the interest rate. A reduced mortgage payment will increase the cash flow.
There are a number of government programs which can supply a grant or forgivable loan to convert your home in becoming conducive for impaired tenants or affordable housing for individuals on government subsidies and other government programs.