One of the risks of real estate investing is that without proper financial planning, it is hard to see steady profit. When an investor decides to enter the world of real estate and purchase a cash flow property, the first step should be to craft a detailed business plan. Unfortunately, with the excitement and frenzy of investing, it can be easy to make a poorly outlined business plan or even not to make one at all. We’ve outline everything you need to know to make sure you don’t end up in financial ruin. Here are 4 factors that can result in a negative cash flow property.
What is negative cash flow in real estate?
First thing’s first: let’s understand exactly what a negative cash flow is. Negative cash flow can be best described as making overall losses from your investment. That means that the costs you are paying are exceed your profit. Remember when you sold lemonade as a kid, made 25$ in sales but spent 30$ on lemons? That’s a negative cash flow.
This is the case not just for a cash flow property but all areas of business and investment. The real estate market contains less risk of a risk, however, thanks to the stability of the market as a whole. In other areas of investment, many factors can go against you; in real estate the only thing that can go against you is lack of knowledge. It can be lack of knowledge about market prices, managing real estate, taxation and tenants even. It’s a good thing you’re taking the time to read this.
4 Factors that Cause Negative Cash Flow
1. Out of Range Property
The goal of a cash flow property is to generate cash. So, it makes no sense to buy a property that’s more than you can afford and keep up with; you certainly won’t make money and will probably lose it. The fee itself will be hard to claim back unless you decide to resell the property–chances are it won’t sell. Buyers would be reluctant to buy. Add to that the possibility of huge mortgage fees for years and you already have a negative cash flow.
Avoiding this mistake is simple: make an outline for the property you are planning to purchase. That means studying the property’s price compared to the market prices. Researching the location is important because it will show you whether there is demand for rental properties or not. Inquiring about the potential expenses of the property (mortgages, taxes and utilities) will also help you make a detailed and accurate business plan. A business plan that shows positive cash flow is the one you want.
2. Understanding Demand and Vacancies
One of the biggest reasons investors lose money money is a vacant house with no tenants. If you have purchased a property in a location that can be rented for three or four months then in all likelihood you’ll see a negative cash flow. Location is vital to reduce vacancy periods for your property. Another reason for vacancies is not having enough channels to market your property for tenants to rent it year round. Without advertising your property, it can be impossible for it to get noticed by potential tenants.
To minimize vacancies it is vital to invest in an in-demand location for your property to guarantee demand and to take advantage of the peak seasons. It is also advisable to hire a real estate agent as they are experts in advertising and facilitating agreements between tenants and owners.
3. Excessive Upkeep
You can’t expect your investment to be a positive cash flow property if you’re spending too much on utilities, furnishing or renovations. The money you generate from rent should be split between maintaining the property and profit. Many people make the mistake of starting to spend too much on their property to make it more appealing for tenants. It is unnecessary to start treating the property as a dream house, because in the end tenants are not expecting something so luxurious. On the other hand, paying too little can make your property unattractive for potential tenants. While tenants are not looking for the most luxurious place to rent, they also want to get something in return for money they pay.
The trick to maintain upkeep is to find the right balance by checking your rent and how much profit you are planning to make. It is all about the business plan you make again; a property with a naturally high upkeep cost will be a property worth avoiding if your purpose is profit. Find the balance in maintaining a comfortable and updated property and avoid a negative cash flow.
4. Flawed Rental Pricing
Many people have no idea how the real estate market prices are going at the moment. Economics plays a role in determining the best renting price. Asking for too little might give you higher demand, but after paying your expenses it can put you in a negative cash flow spiral. Asking for too much rent compared to the market will make your property over-priced and undesirable.
The best way to avoid this situation is to understand the market and to ask professionals who are already in the business. Finding a rent price that will suit both your financial constraints and tenants’ budgets will give you a stable demand for your property and a positive cash flow.
Without the proper planning you might as well forget about making money in real estate. You can search Mashvisor to find positive cash-flow properties. Studying the market, understanding numbers,and evaluating costs and profits is the best way to prepare you for what lies ahead. In a market like real estate where possibilities of profit are high, the least you can do is be prepared.