What are the best real estate investments? Depending on whom you ask, you may receive different answers, like high-equity properties or appreciating properties. Still, most would say that positive cash flow properties are the best types of investments. What are the worst real estate investments? Ask any real estate expert or real estate investor and you’ll get the same answer: negative cash flowing rental properties.
A Sum Up on Negative Cash Flowing Rental Properties
Avoiding negative cash flowing rental properties is in the best interest of every single real estate investor out there. By having properties with negative cash flow, or negatively geared properties, a real estate investor does not make money. Instead, the investor loses money and receives a low return on investment. This is what negative cash flow looks like mathematically.
Negative Cash Flow: Rental Income – Rental Expenses = – $$$
So, how can you make your fate one of positive cash flow properties and not negative cash flowing ones? If you haven’t bought a property yet, all you need to do is use Mashvisor’s real estate market analysis and investment property analysis to find positive cash flow properties and learn how to avoid negative cash flowing rental properties. If you already own rental properties, you need to see if your properties fall into negative cash flow factors and fix the issues if any exist. Since this situation is more urgent, we’ll discuss it first. Here’s how to recognize negative cash flowing properties.
How to Recognize Negative Cash Flowing Rental Properties
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Many High Vacancies
Vacancies are a leading cause of negative cash flow. They completely remove rental income for a period of time, while keeping rental expenses. A vacant property does not make money, it just sits there and loses money.
If your property’s occupancies are diminishing, it may be headed towards negative cash flow. The solution is to obviously have it occupied. Before doing that, first identify the cause of high vacancies. Is it being rented out for too much? Is it in a location that does not have a wide pool of tenants? Find out what is wrong and fix it accordingly!
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Too Much Upkeep
Sometimes, having an investment property occupied could still lead to negative cash flow. While it isn’t as likely, it is still definitely possible. If an investment property costs more to rent out and operate than what it earns, it will become negatively geared.
Oftentimes, the reason for too much rental costs is a major flaw in the property. If you’ve had to fix the kitchen and bathroom sinks multiple times a month, there’s probably a problem with the drainage. The worst real estate investments have significant functionality issues, make sure your property is not one of them!
Related: When are property management fees worth it for real estate investors?
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Spending Excessively on Financing Costs
Managing costs in real estate investing could be a hassle at times. Some real estate investors may not realize it, but financing costs could be eating up their income. Two root causes likely exist in this scenario: flawed financing agreements and/or buying a property that is too expensive.
If the either cause applies to you, try to see if the terms of the deal can be changed. Use Mashvisor’s investment property calculator to sort out the expenses. If all else fails, selling the investment property should solve the problem.
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Not Charging Enough Rent
The goal of every investment property is to make money and have a high return on investment. If real estate investors realize that they are not earning enough, they should reevaluate how much rent they are asking for.
Related: How Much Rent to Charge for My Rental Property?
The first step in doing this is to find out the property’s fair market value (FMV). This requires a real estate market analysis and an investment property analysis, both of which can be performed with Mashvisor’s investment property calculator. Then, to find how much to properly charge, the investor will need to take a percentage of the property’s price. Read more about this here.
How to Avoid Negative Cash Flowing Rental Properties
To avoid dealing with negative cash flowing rental properties altogether, take these precautions to mind.
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Find a Profitable Location and Investment Property
Investing in a location and a property with high positive cash flow will certainly help avoid negative gearing. But just how can you find such a location and property? The short, and best answer, is through Mashvisor’s investment property calculator, which functions as a real estate market analysis and investment property analysis tool. Use Mashvisor’s calculator to find locations with high positive cash flow and other metrics of return on investment!
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Finance the Property Properly
A key step in avoiding negative cash flowing rental properties is to set up a secure financing plan. Of course, it doesn’t take a real estate expert to know that you should not purchase investment properties that are too expensive.
Set up a plan with your mortgage provider that you feel comfortable with. Make sure your financing credentials, such as credit score and cash reserves, are in check to obtain a better deal. To foresee how mortgage payments will affect your property, plan it all out with Mashvisor’s investment property calculator.
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Earn Enough Rental Income and Manage Expenses
Avoiding negative cash flowing rental properties requires a real estate investor to maximize on rental income and minimize expenses. Both should be done within reason. For instance, the rental price of a property should only be upticked when a new addition, such as an amenity or renovation, is in place. Such renovations could also reduce maintenance expenses by improving the property’s structure and function.
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Rent Out Through Optimal Rental Strategy
Renting a property through its optimal rental strategy will maximize its potential cash flow. Instead of renting out traditionally, try Airbnb for a while and see how that goes. Or, for a more accurate answer based on data, use Mashvisor’s investment property analysis to see what the optimal rental strategy for your property is.
Related: The Best Rental Real Estate Strategies for Beginners
Recognizing and avoiding potential negative cash flowing rental properties is a vital, and beneficial, skill for any real estate investor to have. It will help you understand the nature of real estate investing and ensure your investment property generates a lot of money. For more on avoiding the worst real estate investments and becoming a real estate expert, start your trial with Mashvisor today!