Negative Cash Flow in Rental Real Estate vs. Selling for a Loss
Negative Cash Flow | Passive income | Photo from Freepik
Passive income is one of the best reasons to have real estate properties. People buy houses in Pittsburgh for positive cash flow and to turn the property into a rental. Yes, real estate is a sure way to create passive income. Having multiple real estate properties can make a person wealthy over time. Don’t let it fool you as it’s not really passive due to the operational maintenance needed.
However, because you have multiple real estate properties, you might not face many problems. As a real estate investor it is your job to ensure that your properties are in good condition. Unfortunately, there are reasons why a property that once produced cash flow can produce a lot less going forward.
Once your real estate property produces negative cash flow, you can either upgrade rents or sell the property to recoup some of the costs. This article will discuss which options are better.
What is negative real estate cash flow?
Negative real estate cash flow | Photo from Freepik
Negative cash flow is an overall loss from your investment and costs exceeding your overall payment. If you rent your Pittsburgh house for $1,500 every month and it takes $2,000 to cover expenses, maintenance costs of the property, taxes, debt, etc that would then be negative cash flow. If you operate real estate properties, this is called operating at a loss each month.
What causes negative cash flow?
What causes negative real estate cash flow | Photo from Freepik
One of the reasons why negative real estate cash flow happens is because investors are buying properties that are out of their financial range. The goal of buying real estate and turning it into a rental property is to have good cash flow generally. Buying a property too high won’t make money, and there is a possibility that you will lose money on the property. Some landlords will cover expenses by increasing rent, but they might not be able to increase due to the condition of the property. Delayed repairs and updates will drive rents down very low due to the condition of the unit.
Another reason why properties generate negative real estate cash flow is because their house has no tenants. If you bought a home in a place where you can rent it out for three or four months, you would have a negative cash flow. Location is critical if you want to rent out your property more quickly. The only way to solve this problem is through better marketing, advertising, and updates.
The money you generate from your real estate cash flow should be divided between profit and property maintenance. Many real estate owners try to upgrade and make the property as luxurious as possible for a market segment. In the end, the property gets less rents or no one in the area would be willing to buy the property.
Many people need to learn how the prices of homes are currently going. The best price to rent is based on economics. If you ask for too little, you might get more renters, but after you pay your bills, you might have less money (negative cash flow).. If you charge more than the market, your home will be overpriced and hard to rent.
Rent is based on maintenance, the overall price of the property, and real estate market conditions. If a property owner needs to learn how to keep up with these things, there is a big chance that they will have negative real estate cash flow.
People want to have positive cash flow on their real estate property. However, let’s say that you are in this situation. One option would be renting your property, knowing you could have negative cash flow. The other option involves selling your real estate property at a lower price and maybe at close to a loss to remove the burden quickly.
Renting Real Estate with Negative Cash Flow vs. Selling for a Loss: Which is better?
Renting | Photo from Freepik
There are Always Possibilities for Growth
There are situations where real estate owners have no better option for renting their property and accepting negative cash flow. One of these situations is if there is a possibility for growth. If you think you can slightly increase the rent for your real estate property, you should refrain from selling a property that brings negative cash flow.
You can tell the occupants of the property that you will be increasing the rent due to the economics underway. In this case, the economics are negative cash flow which you need to get out of quickly. Most occupants would understand this increase as long as the rent is comparable to the area. You also don’t need to make significant rent increases as a small increase might turn the property profitable. Some reasons why rent is increasing would be inflation, shortage of construction labor and materials, increase in utilities, and rising interest rates. If your neighborhood is developing and changing for the better, rent might also increase.
When increasing rent, you should tell the tenants of your property that rent prices will increase in advance before the lease changes. That way, they will have some time to prepare. This would always occur with a new lease renewal.
There are typically always renters for well run real estate
If your property is generating negative cash flow you might not want to sell it if you can turn it around. If you are sure that your tenants are willing to rent your property at a higher amount to create positive cash flow situation. Tenants will give you money per month at a higher amount if that market segment is worth it and the property is being well maintained.
If you live in a neighborhood with a lot of demand, you can increase prices without fear. Once your tenants decide to leave your property, others will be willing to occupy it.
The negative cash flow is temporary
Yes, you are losing money right now. But will it still be the same tomorrow? Everything can change, so if you think your property might go up in value, it’s best to keep renting it out and wait and see. It would be best if you kept in mind that there are no properties that always go up in value and never go down.
Temporary negative cash flow is typical for real estate. Don’t panic just yet. You’re in the right direction as long as you know where you are headed.
Selling Real Estate Property for a Loss
Selling real estate \ Photo from Freepik
The property has high monthly costs for upkeep
There are always a lot of costs that come with owning a home, such as mortgage payments, insurance, utilities, repairs, and more. You are losing money if your monthly expenses are more than what you pay in rent. Also, remember that your monthly costs, especially your maintenance and property taxes, are likely to go up.
When this happens, it’s better to sell your property at a loss. That way, you won’t lose more money trying to operate it while negative cash flow is underway.
You cannot produce enough money for repairs
Repairs are one of the main expenses that can cause negative cash flow to go down the drain. Sometimes, natural disasters hit, and older properties get damaged. If your property is highly damaged, it’s better to sell what’s left if you can’t pay for repairs. Repairing your house after a large disaster or just delayed rehab will be very expensive.
Rental Income Is Not Always Guaranteed
Another cause of negative cash flow is there are no guaranteed tenants for a property. A property has no guaranteed tenants in an area because the rent is too high for the specific market segment, the property is unattractive to tenants, or the location has a small population. If the rental market is unstable, selling your property is better than having negative real estate cash flow.
Selling your house to a cash house buyer
The best reason to sell your property for a loss is if you don’t want to have the burden of having that property. The best way to sell your property for loss is by selling it fast to a cash house buyer. A cash house buyer will buy your Pittsburgh house as is, and you don’t have to wait for a lengthy process. After the sale, a cash house buyer will either give you cash payments or wire the amount to your account.
Sometimes, it’s better to take a loss and start again than cling to the chance a property has in making you more money. The real estate business can be harsh, but luckily, cash house buyers can help out to remove the negative cash flow situation.
The best cash house buyer in Pittsburgh
If you want to sell your house quickly in Pittsburgh, you don’t have to look any further. Buys Houses will buy your home fast in Pittsburgh. If you have more questions about our company, ways to sell your property in Pittsburgh, the buyer market in Pennsylvania, or how to sell your property, you can ask them on our Contact Us page on Facebook.
If you want to sell your house quickly today, call us at 412-561-9833.