Every single real estate investor who is looking to own rental real estate has dreams to amass a portfolio of regularly appreciating properties that spit out cash on a monthly basis from dedicated, happy tenants who pay their rent on time and never leave. Although this may exist, for many this is a real estate dream land. The reality is, property does not always appreciate, repairs and ongoing regular maintenance is necessary and tenants perform move out which create vacancies, occasionally leading to negative cash flow.
Negative income results when the expenses on a property exceed the amount of revenue the property will be generating. This sounds obvious nevertheless initially calculating the numbers to have an income property purchase, some brand new investors miss the primary expense which is not documented in MLS entries or other reports; the debt services… the mortgage payment.
Some investors seem less concerned with negative cash flow, being satisfied that covering a monthly shortfall of a few 100 dollars will ultimately pay off within future appreciation. This has certainly worked well well for some people; however this is a risky game to play. If property values do not go up in accordance with expectations as well as the only gain is a small equity pay down, it may take much longer than expected for an ultimate pay off. This kind of speculation makes me nervous which is why Personally, i recommend when purchasing property with regards to a long term hold, make sure it is cash flow positive from the get go.
Realistically talking, landlords who have one or more single household homes or even duplexes, triplexes or four-plexes fight with negative cash flow complications at one time or another.
Below are a few potential solutions to remedy negative cash flow to varying degrees. Depending on your property or circumstance, some may work while others may not be achievable due to the building structure, building size, lot size, location, zoning, collateral amount etc . Please do appropriate diligence and check with your lawyer before embarking on a new strategy.
Making a short term rent to own
A short expression rent to own could be a solution for both the owner and the tenants. A rent to own strategy is designed for buyers who don’t have the capability to qualify for a home loan. Typically they don’t have good credit, confirmable income or the downpayment required for conventional mortgage qualification. In a standard rent to own, the tenant eventually purchases the property from the owner.
Quickly explained, the tenant is required to pay out a small downpayment upfront which is credited back the tenant at the time of purchase, usually from 1 up to five years down the road. Throughout the term, the tenant pays the owner market value lease as well as an agreed upon amount above the rent. This amount over the rent is also credited to the tenant at the time of purchase.
This tactic is beneficial for both parties. The renter is given the right to purchase the home in the future at an agreed upon fixed price or an appraised price minus the amount of accumulated credits from the initial downpayment and amount above the monthly payments.
The benefit to the owner is usually three fold. They receive a basic cash injection from the downpayment; appreciate uninterrupted rent plus an amount over the rent and have significantly reduced management and maintenance obligations because the tenant is treating the house because their future home. The result is higher cash flow and virtually no maintenance costs which should remedy the negative income problem.
Short term rental
Short term leasing is a niche opportunity very few property owners pursue although the return can be extremely lucrative. If your property resides near a company area, a hospital or healthcare facility, an university or college, an airport terminal, a resort area or with the many areas of Canada dedicated to the availability of oil or natural gas, there may be an opportunity to get higher than market value rental prices on a regular short term basis.
Many companies hire consultants on a short-term basis or transfer their workers from different areas of the country. People often prefer staying in a “homey” environment rather than a hotel. You can charge a higher rental amount for these equipped units which will still be less expensive to the company than putting their employee in a hotel. If you choose this tactic, try to secure a long term contract using the company.
Another opportunity can be found with families that are new to your area. Lately transferred people looking to purchase a home in a new city or town might prefer a short term rental in a home rather than a hotel as they get acquainted with their own new surroundings prior to committing to a house purchase. These can be short term in order to mid-term rentals often commanding as much as three times market rent.
Find a Partnership Partner
There are many professionals who create excellent incomes and are “married” for their careers. Many are interested in real estate being an investment vehicle but don’t have time or knowledge to participate in the morning to day business. This individual would become a joint venture partner plus used for a capital injection to get rid of the negative cash flow in exchange for any percentage of capital gain from appreciation.
If the reason for the damaging cash flow is a difficulty in keeping renters as a result of lack of maintenance (the primary reason for tenants moving), this capital can be used to make necessary improvements or even adjustments in creating a more desirable property, thus attracting better renters. Rents can be adjusted upwardly.
Another reason for negative cash flow can be based on local economics or timing of the real estate cycle. Vacancy rates can become high in an area for many reasons. Therefore, tenants enjoy many more inexpensive choices, often coupled with landlord incentives. The joint venture partner’s capital can be used to keep your property expenses at “break even” until the real estate cycle moves to the next phase where appreciation plus rental increases begin again.
Rent more space
Depending on where the home is located, it may be possible to rent rooms as opposed to apartments. If the property is near an university, college or health facility, you may be able to convert the rooms into considerably more “self – contained” units. To accomplish this you will need to furnish each unit with a bed, dresser, desk and perhaps a mini fridge. The renters would share the common living region, kitchen, bathroom and parking.
In the case of student housing, have the parents sign the leases as well as the student. This particular keeps the parents equally liable for any damages etc .
This arrangement can function for more than just students. It can be well suited for graduate students, airline stewards, nurses, teachers, employees on temporary positioning, volunteers on assignment, people upon missions, or any other scenario where people need housing for a number of months at a time. You can obviously receive a higher aggregate rental amount, which can solve the negative cash flow issue.
In different of the above cases it is recommended to incorporate a set of “house rules” which every tenant must agree to and sign.
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This can address such things as parking, storage, kitchen duties, clothes washing, common area cleaning duties, yard work, noise levels etc .
Renting individual amenities
A property may have a number of amenities included in the rent which may be charged towards the tenant or people off the property. To increase revenue from the existing tenant(s) you could install coin operated washer/dryer, charge for the use of the garage or basement /attic storage.
It is possible to rent space in the garage or entrance to non-tenants to store RVs, boats, jet skis, trucks or cars. The garage could be rented to a person who does car repairs or as a storage unit for any number of items. If the property is located in a downtown area, you can possibly rent the driveway for every day or weekly parking to corporate employees. Depending on the size of the yard or acreage you could even rent an area for gardening.
You may have a large house with the potential of conversion to a 2 or 3 unit building. This obviously requires a money injection but can pay off handsomely in the long run. It is best to begin any conversion utilizing un- used or below used space such as a basement, loft, an out building, a room over a garage or even the garage itself.
Including a small kitchen, bathroom and perhaps bed room to any of the above scenarios can see to significantly increase revenue.
Any kind of conversion requires checking with the city bylaws. Whether your suite is regarded as un-authorized or authorized, the suite must adhere to fire regulations. Please check with your local fire department for the copy of the fire code regulations in your municipality.
Vacation rental or B & B
If your property is situated in a nice area and is conducive in the physical layout, you could convert this to a bed & breakfast. Obviously you must have the inclination for this type of business and a proper license to carry on such a business, but this can lead to an excellent cash flow.
Adding an addition or another house
You may be able to add square footage to the existing creating in order to create an additional suite. This strategy must be approved by the municipality. It is possible to subdivide your lot and develop another house, duplex or even triplex.
This is clearly a long term strategy that will require assistance from a joint venture partner or financing sources, but can potentially more than double your current revenue or give you a significant capital gain if you sell the newly constructed property.
Changing the financing
Any landlord usually has a list of expenses with all the debt service or mortgage transaction usually being the largest. A refinance could reduce the mortgage payment by perhaps lengthening the amortization or even decreasing the interest rate. A reduced mortgage payment will increase the cash flow.
There are a number of government programs which can supply a grant or even forgivable loan to convert your house in becoming conducive for impaired tenants or affordable housing for people on government subsidies and other authorities programs.