7 Reasons Your Rental Property Has a Negative Cash Flow

May 21, 2015 by Michael Brown

family planning to build home
When you’re on the outside looking in, everything looks good. You have a handful of properties, they’re all occupied, and your friends assume you’re a real estate tycoon.

However, keeping tenants in your properties isn’t the whole story. Maybe you’re losing money or just breaking even. If that’s the case, you undoubtedly want to understand the common causes of under performing rental properties.

1. You paid way too much
paying rent online

As any savvy real estate investor knows, you make your money on the front end of a deal. In other words, the profit comes from spending as little as possible when you purchase the home. If you pay too much, you’ll be burdened by an oversized mortgage for years and probably make a lot less when you decide to sell.

If you’ve already overpaid for a property, there’s not much you can do at this point but wait for the market to go up, sell, and learn from your mistakes. The next time you buy a rental home, perform the due diligence and look at a handful of properties before making a purchase decision.

It can take a long time for a good deal to come along, but once you find it you’ll enjoy the savings for years to come.

2. Turnover rate is too high
handing over house keys

Tenant turnover is a major financial concern. Not only does it suggest there’s a larger underlying issue — i.e., something’s wrong with your property — but it raises your expenses.

You have to pay for cleaning services, paint touchups, marketing and advertising, and more … and you may have to forgo one or two months of rent if you’re in a slow market.

Reducing turnover is all about uncovering issues and swiftly addressing them. Every time a tenant leaves, ask him or her for some honest feedback. What caused your tenant to leave?

It could be high utility costs, lack of security, old appliances, even poor communication on your part. Be as attentive as you can to the needs of your tenants and do everything possible to keep the property clean and livable.

3. Long vacancy periods
family building a home

If your turnover rates are high, you may also experience long vacancy periods. This can cost you hundreds and even thousands of dollars, depending on how much you charge and what your monthly mortgage is.

Reducing turnover is the best way to eliminate vacancies, obviously, but there are other things you can do to alleviate the situation. This includes increasing your marketing and advertising efforts, and even reducing the rental rate.

Remember: Some rent is better than no rent. But you don’t want to get stuck in a situation where you allow a tenant to pay reduced rent for six or twelve months.

If you do decide to offer a lower rent just to get someone in the house, include an automatic escalator clause that gradually increases the monthly payment.

4. Spending too little on upkeep

It may seem counter intuitive, but you could actually be losing money as a result of not putting enough money into your rental property. In other words, your unwillingness to pay for renovations and necessary upkeep is putting a cap on how much you can reasonably charge tenants.

If you want to know which home improvement projects to take on, consider a minor kitchen remodel, new bathroom fixtures, and backyard additions. These often bring the highest ROI in rental markets.

You should also be able to recoup a large percentage of what you spend if you eventually decide to sell.

5. Spending too much on upkeep

On the other hand, it’s possible that the opposite is the case: You’re spending too much on upkeep. There’s a fine line between over- and under spending, and you don’t want to fall on this side of the line either.

While you should certainly pay for regular cleanings between tenancies, as well as touch ups and an occasional home improvement project, you can’t treat the property like it’s a million dollar house. Unless you rent luxury homes, there’s no need to invest in top-of-the-line appliances and over-the-top features.

A renter might notice and appreciate those subtle touches, but the ROI they bring usually won’t be enough to cover the expense.

6. Not adjusting rent

Much like other people, landlords get stuck in their ways and comfortable with the way things are. Many take the “if it’s not broke, don’t fix it” approach and are willing to maintain the same level of rent for years and years.

If this is you, it’s well past time to reconsider. Over the past five years, everything has gone up: taxes, insurance, utility costs, repair costs, etc. Plus, there’s been steady inflation.

If your rent is the same as it was even four or five years ago, it’s possible you’re missing out on a few hundred or thousand easy dollars per year. Talk with other local landlords and investors, search listing sites, and determine an accurate and fair price for your rentals.

Next, you’ll need to review your lease agreement to determine when you can legally adjust the rent.

7. No pricing strategy

When you marketed your property and searched for a tenant, did you have a pricing strategy? If not, don’t feel bad; you’re in the majority.

Most landlords arbitrarily choose a number that sounds good and hope for the best. However, this is not the best (or most profitable) strategy. In addition to doing your due diligence and determining the best price (as decsribed in the previous tip), you should consider how to present that price effectively.

Conventional wisdom says to avoid pricing with a number that ends in zero. So instead of pricing your apartment at $900.00, you should advertise it as $897. Over the course of a year you’re losing out on $36, but that subtle adjustment could greatly increase your chances of quickly finding a tenant, who tends to focus on the first digit.

The next time you renegotiate rent, make sure you have a strategy.

Green Residential

At Green Residential, we are committed to providing our clients with professional property management services that allow them to focus on the things that truly matter.

From tenant screening and contract negotiating to collecting rent and scheduling maintenance calls, we can handle anything and everything. Contact us today to find out why countless other Houston landlords count on us to manage their properties!

Michael Brown

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