The reason real estate investors are investing in real estate is to start making, not losing money. Still, it may happen that you are dealing with a negative cash flow rental property. What are the reasons for having a negative cash flow property? Well, there might be two possible explanations. The first one is that something went wrong because the real estate investor lacked education or experience. Another possibility is that the real estate investor bought a negative cash flow property from the beginning. Intrigued to find out what possibly went wrong with income properties? Keep on reading!
#1 What Is Cash Flow?
Before rushing in and mentioning the reasons your property is considered as a negative cash flow rental property, let’s explain what cash flow actually is. As the name states, cash flow is the movement of cash or cash-equivalents into or out from the real estate investor’s bank account. Typically, you may expect that your rental property will generate either positive cash flow or negative cash flow. Interested to find out how to locate positive cash flow property? Make sure to read “Real Estate Investing 101: How to Find Positive Cash Flow Properties in the US Housing Market.”
#2 What Is Negative Cash Flow?
Well, being an owner of a negative cash flow rental property is something real estate investors tend to avoid. So, what does owning a negative cash flow rental property mean? Usually, negative cash flow appears when real estate investors are losing money from the income property. This means that the rental income you get from your investment properties cannot cover the generated expenses.
Let’s provide you with the example of owning a negative cash flow rental property. Imagine you receive a rental income of $2,000 from the duplex you own, but your expenses are $2,500. Consequently, you are $500 down each month. That means that the inflowing money is less than the outflowing money and is classified as the condition of negative cash flow. Curious to learn how to avoid real estate investments with negative cash flow? Make sure to read “How to Avoid Buying Negative Cash Flow Investment Properties.”
#3 Reasons for Having a Negative Cash Flow Rental Property
Realizing that your investment property is losing money is already a good thing as you now are ready to stop it. Your next step as a real estate investor is to understand what possibly went wrong. Below, you will find the potential reasons why your traditional rental property or Airbnb rental property is losing money instead of making money in real estate.
You Have Paid Way Too Much for the Rental Property in the Beginning
In order to maximize your profits from the beginning, you should purchase an Airbnb rental property or traditional rental property for as little as possible. If you pay a very expensive price, prepare yourself as you will be dealing with oversized mortgage payments for many years. Moreover, there will be a tiny chance to sell the investment property for a profit.
Let’s imagine for a while that you have already overpaid for the income property. What should you do? Well, there is one option at this stage: you wait until the real estate market grows up, then sell your income property. The next step is that you learn from your mistakes and start making money in real estate. The next time you plan on buying an investment property, make sure you perform real estate market analysis. Moreover, do not forget to conduct investment property analysis by checking various real estate metrics, such as cap rate and cash on cash return to make sure the property you purchase has the potential to succeed.
Wrong Rental Strategy
A possible reason for having a negative cash flow rental property is the wrongly chosen rental strategy. For instance, deciding on having Airbnb rental properties in the industrial area might be the reason your properties are generating more expenses than rental income. Consequently, your real estate investments will be considered as negative cash flow rental properties. Thus, you should consider changing your rental strategy to a traditional rental property. This is because such locations are associated with tenants seeking long term accommodation.
Choosing a bad rental strategy may lead to big financial losses. That is why it is advised to use Mashvisor’s investment property calculator. Mashvisor’s investment property calculator is a great tool that analyzes a property’s return on investment, cash flow and cash on cash return. Moreover, it shows the optimal rental strategy for all rental properties of interest.
Every beginner real estate investor desires to know “how to make money in real estate.” Well, establishing high rental prices is not the option. Many investors find it quite difficult to establish how much to charge for rent. Still, the majority want to become rich and have real estate investments with high return on investment rates.
So, where is the bottleneck? Charging too much will make your income property look undesirable. Therefore you will have high vacancy rates. Thus, this will result in you having a negative cash flow rental property. However, if you ask for too little, you will have a huge demand, but you will not be able to cover the expenses with the revenue you get from your rental properties. Once again, your property will become a negative cash flow rental property.
The best advice in such a situation is to study the market and perform analysis before choosing the rental price. You can also consult with the most successful real estate investors in the field for advice. Want to get the insights about the rent successful real estate investors charge? Make sure to read “Question of the Day: How Much Rent Should I Charge?”
Spending too Much on Upkeep
One of the main reasons for having a negative cash flow rental property is that the real estate investor is spending too much on things like utilities, furnishing, and renovation. You should understand that the money your investment property generates should be divided into two categories- one for maintenance, and one for your own pocket. Many investors make the same mistake by spending too much on a property’s look in order to attract more tenants. You should understand that tenants are not looking for such luxurious places. Most of them want a decent place in which they can settle in for a long period of time, furnish it on their own and call it home.
Spending too Little on Upkeep
One of the reasons you are losing money is that you skip investing in your own rental property. What is meant by that? The fact that you skip renovating your property as well as your unwillingness to pay for necessary upkeep automatically establishes the selling price or the amount of rent you are able to charge your tenants. It will most certainly also influence the vacancy rates of your property. Most likely, you will end up with a negatively geared investment.
Well, if you want to change this, consider implementing minor remodeling projects. Moreover, upgrade your backyard as well as renovate the bathroom. Such improvements will bring you a higher return on investment rate.
To learn more about all aspects of making money in real estate, continue reading our blog.