Every investor desires to deal only with the best real estate investments. To make this a reality, you need to have certain knowledge in order to invest in a positive cash flow property. Lack of education and experience results in a negative cash flow rental property thus, causing a real estate investor to be losing money. Nonetheless, if you are reading this blog, you are ready to turn your negatively geared property into a positive cash flow rental property.
What benefit will this blog bring to you? Well, we will explain what are the reasons for negative cash flow and how to improve cash flow. Moreover, we will compare what is negative cash flow to what is positive cash flow. Lastly, we will present the actions of the most successful real estate investors when dealing with a negative cash flow investment property and how to start making money in real estate. Keep on reading to find out how to turn your property into one of the best real estate investments.
#1 What Type of Cash Flow Investment Property Do You Have?
When you are a beginner real estate investor, you may wonder: “How to invest for cash flow?” However, in order to make it clear, let’s first provide you with a positive cash flow definition as well as negative cash flow definition. In order to find the answer on “How to invest for cash flow?”, make sure to read “How to Invest in Positive Cash Flow Real Estate Properties?”
What Is Negative Cash Flow?
A negative cash flow rental property is also known as a negatively geared property. The negative cash flow definition goes as follows: “A situation which occurs when the monthly rental income cannot cover the rental expenses of an investment property.” This means that the inflowing money is a lower value than the outflowing money for a specific period of time. Therefore, instead of making money in real estate, the investor is actually losing money. Whenever you are managing a negative cash flow rental property, you should ask yourself: “How to improve cash flow?”, since the idea of a real estate investing business is about making and not losing money.
What is Positive Cash Flow?
When you hear real estate investors discussing a positively geared property, you should be confident that they are talking about a positive cash flow rental property. However, what is the positive cash flow definition? A positive cash flow rental property is a property that generates more rental income than the rental expenses. Thus, the inflowing money for a specific period of time is more than the outflowing money for the same timeframe.
Let’s provide you with a positive cash flow example. Imagine, you are the owner of a long-term rental property that generates a rental income of $1,200 monthly. At the end of the month, you need to cover all the rental expenses that are reaching $900. With such results, a real estate investor can confidently state that the investment is a positively geared property as at the end of the month he/she has pocketed $300 of pure profit. Curious to find out where to find a positively geared property? Make sure to read “Where Can You Find a Positively Geared Property for Sale?”
#2 What Causes a Rental Property to Be a Negative Cash Flow Property?
There might be many reasons for negative cash flow that result in low return on investment rates, for instance. The sooner you locate the reason/s for having a negatively geared property, the better for your financial situation.
Reason for Negative Cash Flow Rental Property: Rental Strategy
A correctly chosen rental strategy plays a tremendously huge role in a real estate investor’s life. It determines whether he/she will be making money in real estate or losing money. Just imagine owning a property with a rental strategy of a long term investment in a tourist destination. Most likely, a real estate investor will end up with a poorly occupied property. Consequently, this will lead to a negative cash flow investment property.
Reason for Negative Cash Flow Rental Property: Rental Income
Another reason for having a negative cash flow rental property is an inappropriately chosen amount to charge for rent. Figuring out how much rent to charge is not easy at all. On one hand, charging too little will result in high demand for your property. However, it does not mean that with the rental income you will be able to cover all the rental expenses. Thus, your investment will fall into the category of a negative cash flow rental property. On the other hand, asking too much will result in low occupancy rates. Consequently, your property will not be considered as a positive cash flow rental property.
#3 How to Turn a Negative Cash Flow Rental Property into a Positive Cash Flow Rental Property
Turning a negative cash flow rental property into a positive cash flow rental property is not an easy task. However, you are able to do it! All you need to do is follow the suggestions of the most successful real estate investors about what makes the best real estate investments so great.
Advice Number One: Reduce the Upkeep Costs
Remember this golden rule: “You cannot expect your investment to be a positive cash flow rental property if you are spending too much on interior design.” It is understandable why many beginner investors invest a lot in renovation. The purpose is for the property to look attractive. The reason it is unnecessary is that your future tenants do not necessarily expect something luxurious. Most of the tenants actually prefer to furnish and decorate the place themselves. In order to move from the category of a negative cash flow rental property into the category of a positive cash flow rental property, consider cutting the costs and splitting the revenue only for maintenance and your profit.
Advice Number Two: Manage the Property by Yourself
Another option of turning your negative cash flow rental property into a positively geared property is by maintaining your investments by yourself. You can avoid paying too much for a professional property management company’s services and complete all necessary maintenance yourself. However, you would probably need some education in different spheres of maintenance. Nevertheless, it is one of the answers to how to improve the cash flow of your property.
Advice Number Three: Changing the Rental Strategy
One of the reasons why your investment is not qualified as a positive cash flow rental property is due to the wrongly chosen rental strategy. As it was previously mentioned, you cannot expect your investment to be a positive cash flow rental property if you do not choose the optimal rental strategy. One of the best ways to check if a real estate investor has chosen the optimal strategy is to consult with the most successful real estate investors or to use Mashvisor’s investment property analysis calculator. Interested to learn more about rental strategies? Make sure to read “Real Estate Investing: Traditional vs. Airbnb Investments.”
To learn how to invest for cash flow, continue reading our blog.