Are you facing a negative cash flow?
Every real estate investor looking to own rental real estate dreams of amassing a portfolio of properties that are constantly appreciating and shed cash monthly from dedicated, happy tenants who pay their rent on time and never leave. Although this exists, for many this is a real estate fantasy land. The reality is that property is not always appreciated, ongoing regular maintenance and repairs are necessary, and tenants do move, which creates vacancies, which sometimes leads to negative cash flow.
Negative cash flow occurs when a property’s expenses exceed the amount of income the property generates. This sounds obvious, but when initially crunching the numbers for an income property purchase, some new investors overlook the major expense that isn’t documented on MLS listings or other reports; debt service… mortgage payment.
Some investors seem less concerned about negative cash flow, satisfied that covering a monthly shortfall of a few hundred dollars will eventually pay off in future appreciation. This has certainly worked well for some people; however, this is a risky game to play. If property values don’t rise as expected and the only gain is a small principal payment, it can take much longer than expected for a final payment. This type of speculation makes me nervous, which is why I personally recommend that when buying a property for long-term holding, make sure it is cash flow positive from the start.
Realistically speaking, homeowners who own one or more single-family homes or even duplexes, triplexes, or quads struggle with negative cash flow issues at one point or another.
Below are some possible solutions to remedy negative cash flow to varying degrees. Depending on your property or situation, some may work while others may not be possible due to building structure, building size, lot size, location, zoning, amount of equity, etc. Please do your due diligence and consult with your attorney before embarking on any new strategy.
Create a short-term rental with option to buy
A short term lease could be a solution for both the owner and the tenants. A rent-to-own strategy is designed for buyers who do not have the ability to qualify for a mortgage. They typically don’t have good credit, verifiable income, or the down payment required to qualify for a conventional mortgage. In a standard rent-to-own, the tenant ultimately purchases the property from the landlord.
Briefly explained, the tenant is required to pay a small down payment that is credited to the tenant at the time of purchase, usually 1-5 years into the future. Over the term, the tenant pays the landlord the market value of the rent, as well as an agreed amount above the rent. This amount above the rent is also credited to the tenant at the time of purchase.
This strategy is beneficial for both parties. The tenant has the right to purchase the home in the future at an agreed-upon fixed price or appraised price less the amount of credits accrued from the down payment and the amount in excess of the monthly payments.
The benefit for the owner is triple. They receive an initial cash injection from the down payment; enjoy uninterrupted rent plus an amount above rent and have significantly reduced management and maintenance obligations as the tenant treats the house as their future home. The result is increased cash flow and virtually no maintenance costs, which should take care of your negative cash flow problem.
short term rental
Short term rental is a niche opportunity that very few landlords pursue, although the return can be extremely lucrative. If your property is located near a commercial area, a hospital or health care facility, a university or college, an airport, a tourist area, or in one of the many areas of Canada dedicated to the production of oil or natural gas, you can There may be an opportunity to obtain rentals above market value in the short term.
Many companies hire short-term consultants or relocate their employees from different parts of the country. People often prefer to stay in a “homey” environment rather than a hotel. You can charge a higher rental amount for these furnished units, which will still be less expensive for the company than putting your employee in a hotel. If you choose this strategy, try to secure a long-term contract with the company.
Another opportunity may be found with families who are new to your area. Recently relocated individuals looking to purchase a home in a new city or town may prefer a short-term rental in a home rather than a hotel, as they familiarize themselves with their new surroundings before committing to a home purchase. These can be short or medium term rentals often reaching up to three times the market rent.
Find a joint venture partner
There are many professionals who earn excellent incomes and are “married” to their careers. Many are interested in real estate as an investment vehicle, but do not have the time or knowledge to engage in day-to-day business. This person would become a partner in a joint venture and be used for a capital injection to eliminate negative cash flow in exchange for a percentage of the capital gain from appreciation.
If the reason for negative cash flow is difficulty keeping tenants as a result of lack of maintenance (the number one reason tenants move out), this capital can be used to make necessary improvements or adjustments to create a more desirable property, thereby attracting better tenants. Rents can be adjusted upwards.
Another reason for negative cash flow may be based on the local economy or the timing of the real estate cycle. Vacancy rates can become high in an area for many reasons. Consequently, renters enjoy many cheaper options, often accompanied by incentives for landlords. The joint venture partner’s capital can be used to keep property expenses at a “break-even point” until the real estate cycle moves into its next phase, where appreciation and rent increases begin again.
rent more space
Depending on where the property is located, it is possible to rent rooms instead of apartments. If the property is close to a university, college or health center, you may be able to convert the rooms into somewhat more “independent” units. To accomplish this, you’ll need to furnish each unit with a bed, dresser, desk, and perhaps a mini-fridge. The tenants would share the common room, kitchen, bathroom, and parking.
In the case of student housing, have the parents sign the leases as well as the student. This keeps parents equally responsible for any damages, etc.
This arrangement can work for more than just students. It can be ideal for graduate students, flight attendants, nurses, teachers, temporary employees, assigned volunteers, people on missions, or any other scenario where people need housing for several months at a time. Obviously, you can receive a higher added rent amount, which can solve the negative cash flow problem.
In any of the above cases, it is recommended to include a set of “house rules” that each tenant must agree to and sign. This can address things like parking, storage, cooking, laundry, common area cleaning, yard work, noise levels, etc.
Separate rental of amenities
A property may have a number of services included in the rent that may be charged to the tenant or to persons outside the premises. To increase income for existing tenants, you can install a coin-operated washer/dryer, charge for garage use, or basement/attic storage.
Garage or driveway space may be rented to non-tenants to store RVs, boats, jet skis, trucks, or cars. The garage can be rented to a car repair person or as a storage unit for any number of items. If the property is located in a downtown area, you can potentially rent the driveway for daily or weekly parking to corporate employees. Depending on the size of the garden or the surface, you could even rent an area for gardening.
conversion package
You may have a large house with the potential to become a 2 or 3 unit building. This obviously requires an injection of cash, but it can pay off in the long run. It’s best to start any conversion using an unused or underutilized space, such as a basement, attic, exterior building, room above a garage, or even the garage itself.
Adding a small kitchen, bathroom, and perhaps a bedroom to any of the above scenarios can significantly increase income.
Any conversion requires consultation with the city charter. Whether your suite is considered unauthorized or licensed, the suite must meet fire regulations. Check with your local fire department for a copy of the fire code regulations in your municipality.
Vacation rental or B&B
If your property is located in a nice area and is conducive in its physical design, you could make it a bed and breakfast. Of course, you need to have the inclination for such a business and a proper license to carry on such a business, but this can result in excellent cash flow.
Add an addition or another house
You may be able to add square footage to the existing building to create an additional suite. This strategy 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 that will require the assistance of a joint venture partner or funding sources, but one that can potentially more than double your current income or give you a significant capital gain if you sell the newly built property.
changing financing
Any landlord usually has a list of expenses, with debt service or mortgage payment being the largest. A refinance could lower your mortgage payment, perhaps by lengthening the amortization or lowering the interest rate. A reduced loan payment will increase cash flow.
government programs
There are a number of government programs that can provide a grant or forgivable loan to make your home conductive for disabled renters or affordable housing for people with government subsidies and other government programs.
The ideas above are to allow a homeowner to hold on to their property and ultimately be rescued from the perils of negative cash flow. However, in some cases, it may be better to sell the property, cut the losses, stop the bleeding, and take your bundles. Resolving situations like negative cash flow is part of the growth and success of any investor.
