The Pros and Cons of Investing in Negative Cash Flow Properties

Investing in negative cash flow properties is a controversial topic among real estate investors. Some investors swear by it, while others avoid it like the plague. But what exactly is negative cash flow, and why would anyone invest in it?

Negative cash flow is when your rental income is less than your rental expenses, such as mortgage, taxes, insurance, maintenance, and vacancy. In other words, you're losing money every month on your property. This might sound like a bad idea, but some investors see it as a strategic move to achieve long-term gains.

In this article, we'll explore the pros and cons of investing in negative cash flow properties, and how to decide if it's right for you. We'll also share some tips and examples on how to invest in negative cash flow properties successfully.

The Pros of Investing in Negative Cash Flow Properties

Investing in negative cash flow properties can have some benefits, such as:

• Appreciation. Appreciation is the increase in the value of your property over time, due to market forces, inflation, or improvements. Some investors invest in negative cash flow properties because they expect them to appreciate significantly in the future, and sell them for a profit. For example, you might buy a property in an emerging market, a gentrifying neighborhood, or a high-demand area, and wait for the prices to go up.
• Tax benefits. Tax benefits are the deductions and credits that you can claim on your tax return, based on your rental income and expenses. Some investors invest in negative cash flow properties because they can use them to reduce their taxable income, and pay less taxes. For example, you might deduct your mortgage interest, depreciation, repairs, and other expenses from your rental income, and lower your tax bill.
• Leverage. Leverage is the use of borrowed money to increase your potential return on investment. Some investors invest in negative cash flow properties because they can use leverage to buy more properties, and increase their equity and cash flow. For example, you might use a 20% down payment to buy a property, and borrow the remaining 80% from a lender, and pay it back with your rental income and appreciation.

The Cons of Investing in Negative Cash Flow Properties

Investing in negative cash flow properties can also have some drawbacks, such as:

• Vacancy. Vacancy is the percentage of time that your property is unoccupied and not generating income. Vacancy can eat into your profits and cash flow, and lower your return on investment. Investing in negative cash flow properties can increase your vacancy risk, especially if your property is in a low-demand area, has a high turnover rate, or faces competition from other properties.
• Maintenance. Maintenance is the cost of keeping your property in good condition and repairing any damages or issues. Maintenance can vary depending on the age, size, type, and location of your property, but it can be a significant expense for any landlord. Investing in negative cash flow properties can increase your maintenance costs, especially if your property is old, poorly maintained, or requires major renovations.
• Debt. Debt is the amount of money that you owe to your lender, based on your mortgage, interest, and fees. Debt can be a useful tool to leverage your investment, but it can also be a burden and a risk. Investing in negative cash flow properties can increase your debt level, especially if you borrow more than you can afford, have a high interest rate, or have a variable rate that can change unexpectedly.
• Market downturns. Market downturns are the periods of time when the real estate market declines, due to economic, social, or political factors. Market downturns can affect the demand, supply, price, and value of your property, and reduce your income and equity. Investing in negative cash flow properties can increase your exposure to market downturns, especially if your property is in a volatile area, has a low occupancy rate, or has a negative equity.

How to Decide If Investing in Negative Cash Flow Properties is Right for You?

Investing in negative cash flow properties can be a profitable or disastrous decision, depending on your situation and goals. To decide if investing in negative cash flow properties is right for you, you need to consider some factors, such as:

• Your cash flow. Your cash flow is the amount of money that you have left after paying all your personal and business expenses, such as your living costs, debts, taxes, and investments. Your cash flow is a key indicator of your financial health and stability. You need to evaluate your cash flow before investing in negative cash flow properties, and make sure that you have enough money to cover the monthly losses, and still have some reserves for emergencies and opportunities.
• Your risk tolerance. Your risk tolerance is the degree of uncertainty and volatility that you can accept in your investment outcomes, and the amount of potential loss that you can afford. Your risk tolerance is influenced by your personality, goals, time horizon, and financial situation. You need to assess your risk tolerance before investing in negative cash flow properties, and make sure that you are comfortable with the possibility of losing money, facing challenges, and waiting for rewards.
• Your investment strategy. Your investment strategy is the plan and approach that you use to achieve your investment goals, based on your resources, preferences, and market conditions. Your investment strategy should be clear, realistic, and consistent. You need to define your investment strategy before investing in negative cash flow properties, and make sure that it aligns with your objectives, criteria, and exit plan.

Tips and Examples on How to Invest in Negative Cash Flow Properties Successfully

If you decide that investing in negative cash flow properties is right for you, you need to follow some tips and steps to make it a successful and smooth process. Here are some of them:

• Do your homework. Before investing in negative cash flow properties, you need to do your homework and research the market, the property, and the numbers. You need to analyze the demand, supply, rent, price, value, and growth potential of the property and the area. You also need to calculate the cash flow, ROI, cap rate, and break-even point of the property, and compare it with other properties and investments. You need to make sure that the property has a strong potential for appreciation, tax benefits, and leverage, and that the negative cash flow is temporary and manageable.
• Negotiate the deal. When investing in negative cash flow properties, you need to negotiate the deal and get the best terms and conditions possible. You need to use your research, analysis, and leverage to convince the seller, the lender, and the agent to lower the price, the interest rate, the fees, and the contingencies. You need to save as much money as possible upfront, and reduce your monthly payments and expenses.
• Manage the property. After investing in negative cash flow properties, you need to manage the property and optimize its performance and profitability. You need to improve the property's condition, appeal, and functionality, and add more features and amenities, such as a washer and dryer, a dishwasher, or a security system. You also need to market the property effectively and widely, using online platforms, such as Zillow, Trulia, and HotPads, as well as offline methods, such as signs, flyers, and referrals. You need to attract and retain quality tenants, who pay rent on time, take care of the property, follow the rules, and stay for a long time. You also need to provide excellent customer service and communication, and respond to inquiries, complaints, and requests promptly, professionally, and courteously. You need to increase your income and reduce your expenses, and turn your negative cash flow into positive cash flow as soon as possible.
• Exit the property. When investing in negative cash flow properties, you need to have an exit strategy and know when and how to sell the property. You need to monitor the market conditions, the property's value, and your cash flow, and decide when it's the best time to sell the property and cash out. You also need to prepare the property for sale, and make it look clean, attractive, and functional. You also need to enjoy the profits and benefits of selling your property, and reinvest them in other opportunities.

Conclusion

Investing in negative cash flow properties can be a risky but rewarding strategy, if you know what you’re doing and why you’re doing it. By following the tips and steps we shared in this article, you can make an informed and smart decision about investing in negative cash flow properties, and achieve your long-term goals.

If you need any help with finding, analyzing, or managing negative cash flow properties, or any other real estate investment, please contact us today. We’re happy to help you with your real estate needs.