If you talk to many real estate investors, they will most likely warn you to steer clear of negative cash flow properties. That’s okay if you’re trying to generate a lot of cash flow quickly, without spending a fortune.
However, if you want to make capital appreciation over the long term, you might consider negative cash flow investment. This article will examine what negative cash flow properties entail and how you can turn them into a profitable investment opportunity.
What Is Negative Cash Flow?
If you’re unfamiliar with this term, you’re probably wondering, can cash flow be negative? As a real estate investor, there are various ways to make returns on your investment, such as cash flow or appreciation. It all depends on what path you take and how much you’re willing to take huge risks.
Cash flow comprises the steady income from rental properties after all outstanding bills have been paid. At the same time, appreciation means the revenue generated from the property as it increases in value over a long time. Investing in a negative cash flow property means that you’re making appreciation on your investment rather than steady cash flow.
An investment property may break even and generate positive and negative cash flow within the same financial year. This generally depends on the property’s market value and how much equity it builds up. Where a rental property generates negative cash flow, it doesn’t recover enough money to pay the rental expenses and outgoings.
This puts you, the investor, in a negative situation because all the payments for these expenses and debt services will come from your personal funds. Buying negative cash flow properties may seem illogical because it might seem like more debt. However, if you want your capital to appreciate in value over the long term, this might be your option.
Negative Cash Flow Yields High Returns, Requires Large Upfront Investment
Before purchasing a negative cash flow property, you must understand that it comes with significant risks. First, you incur more debt than you already have when you invest in a property with negative cash flow. You also have to face the reality that property will likely remain on the market long without yielding any returns.
Not all negative cash flow properties are hopeless, and you need to know what you’re getting into before spending money. Some properties suffer negative cash flow due to a lack of maintenance, poor infrastructure, and other onsite issues. These problems can be fixed with your investment and increase the property’s value quickly.
Therefore, you can end up with returns twice the money you have invested and generate the maximum value from the property. You may also try hard money lending options by using your existing home equity to fund the renovations and improvements on the negative cash flow property. Understanding what’s wrong with the property can turn those negative cash flows into profits.
Factors That May Cause A Property To Have Negative Cash Flow And Their Solutions?
Various factors can cause a property to have negative cash flow. It could be an internal problem, such as poor maintenance, or external or regional factors out of your control. We have outlined the main issues that may lead property to have negative cash flow and the effective ways to address them.
Low Occupancy Rate
Low rental income may result in negative cash flow on a residential or commercial property. One of the ways for real estate investors to make returns is by renting out the property. However, suppose your property isn’t getting a lot of tenants. In that case, you’ll likely suffer negative cash flow because the property needs to generate more value.
It would help to observe your competitors offering similar arrangements at lower rates. You may also need to remodel the property to attract tenants requiring more comfortable housing. If it’s a commercial rental property, tenants usually consider whether the location will help them get more business. Many rental owners research market trends to keep up with the needs and know what will satisfy their clientele.,
As a real investor, you need to observe the location and use of the property to determine the improvements you can make. The solution to getting more tenants is to provide value and steady cash flow from your property. You can also look out for competitors and implement fixtures and furnishings to make your property stand out in the market.
High Upkeep Costs
Many negative cash flow properties are abandoned estates that investors can buy at low rates. The problem is that these properties need to be well-maintained and lack most of the basic amenities that will give them any real value. You will have to consider the excessive costs of repairs and general maintenance.
For instance, the property may also have deferred repairs, which do not really stop the issue but only delay the need for critical repairs. However, this only builds up the management costs, so in the long run, you may pay for the expenses accumulated on deferred repairs and general property management. This increases the property’s upkeep codes and affects profitability.
The only way out may be to purchase properties that only require a little repairs and management. Consider loans from hard money lenders to offset the cost of these repairs so you can fund your investments with the extra cash on your home equity. If you don’t have any means to cover such improvements, you must try a DIY approach and manage your repairs.
Rushing Improvements On A Property
It would help if you made renovations and upgrades to increase the value of any property. Many negative cash flow properties fail to make income due to a lack of maintenance and old-fashioned amenities. The problem with many real estate investors is that they rush the process by trying to make all the renovations simultaneously.
However, rushing remodels doesn’t work well in the long run and can plunge the property into negative cash flows. It would be best if you were strategic about renovating the property by adopting a gradual process to avoid the burden of overwhelming costs. For instance, you can tackle minor repairs like a leaky tap or faulty lighting before addressing the large improvements.
In addition, you have to be selective when choosing the renovations you make to save money on remodels that do not add any real value to your property. For instance, providing amenities like extended parking may justify a rental increase over building a fountain on the property. It’s all about making investments to attract the desired tenants and buyers.
Rental Property Strategy
Negative cash flow investments are like other real estate projects; you need to have an end goal before you purchase a property. You don’t want to increase your debt without any strategy for generating returns. This means that your focus should be on securing your investment’s potential value and realizing profits over the long term.
For instance, if you’re looking to create a commercial rental property business, your tenants are most likely business owners who want to make a profit. Getting a property in a quiet, remote location that won’t cause any traffic will be a bad idea. On the other hand, getting a property in the center of town or high-population areas will attract more clients.
In addition, if your property is in a tourist center, then vacation rental properties, such as the classic Airbnb, would do the trick. You can appeal to tourists who are looking for a short-term living arrangement. Another way to turn your vacation rental property into a valuable asset is by providing enriching activities and an authentic local hospitality service to welcome tourists.
It is also essential to consider the property and state laws applicable to houses in that location. For more information you can contact an estate valuer or a property consultant to know what you need.
Get Negative Cash Flow Investment Properties With Capital Max
Now that you’ve learned all you should know about negative cash flow properties, you can contact our team at Capital Max to learn how to get started. We have designed creative solutions and hard money lending opportunities to help you fund your investment project. You can also speak to experts to learn the requirements and options available to help you minimize risks when working with negative cash properties.