In a hypothetical model, a property owner should be able to generate positive cash flow with a rental property in an attractive neighborhood. If your total monthly expenses amount to an average of $2,000 per month, you should be able to charge more than $2,000 a month in rent, ultimately making it a profitable property on a monthly basis.
But what if you start losing money on a rental property? What steps can you take to manage these losses? And when does it make sense to sell?
The Dynamics of a Property Management Loss
First, let’s address the dynamics of a property management financial loss. It’s worth noting that real estate is always a risky investment. Realistically, there’s no such thing as an investment that’s totally foolproof, as every investment comes with some risk of loss. But in the real estate world, occasional losses are somewhat normal.
Even in highly popular areas, vacancies are common. You may have an awesome property with a fair rent price, but that doesn’t mean that people are going to be clamoring to start renting it; you might be forced to deal with a vacancy for a few months, during which you’ll have mounting expenses and no income to offset them.
In this context, a temporary property management loss is completely normal – and it will quickly become irrelevant once you start making a profit again.
However, there are other types of property management losses that are more severe and require more deliberate intervention.
We can characterize many different types of property management losses.
- Cash flow losses. The most common type of loss property owners has to deal with, and probably the one that brought you to this article, is a cash flow issue. If you have a prolonged vacancy, if you’re dealing with a tenant who doesn’t pay rent consistently, or if your monthly expenses temporarily eclipse your monthly income, you have a cash flow loss. These are usually both temporary and reversible, but there are some instances where the property simply can’t support positive cash flow.
- Repairs and upgrades. You can also suffer a temporary loss after issuing repairs or upgrades for the property. For example, let’s say you’re forced to replace the roof, the hot water heater, and a handful of other significant things in the property, all within a few months. You might have positive cash flow overall, but you’ll probably end up operating at a loss for the year. Fortunately, most of these issues are temporary, and can only impact your finances on a short-term basis.
- Real estate downturns. Real estate is a significant investment, so when the market experiences a downturn, you might suffer a significant loss. The good news is that losses aren’t realized until you sell; most real estate downturns are temporary, so as long as you keep holding your property, it’s likely that you’ll eventually see a return to the previous property value.
- Bigger issues. There are some bigger issues that may affect the long-term profitability of your property. If the neighborhood is in decline, if the property has so many issues that you can’t keep up with them, or if there are demand issues preventing you from filling vacancies, you’ll need to take this problem more seriously and think about your long-term options.
How Much Is Too Much?
At what point is a loss too much? At what point do you need to reassess your real estate investment strategy?
The answers are going to look different for each individual investor. If you have ample emergency savings, a diverse portfolio, and multiple properties in your real estate portfolio, you can withstand financial losses much better than an investor with only a single property and minimal personal funds.
That said, the biggest factor you’ll need to consider is whether this loss is truly a temporary one. Every property is going to need occasional repairs, and every property is going to deal with occasional vacancies. But if you’re constantly dealing with problems at a given property, with no end in sight, you may need to take more aggressive action.
What to Do If You’re Losing Money on a Rental Property
What steps should you take if you’re actively losing money on a rental property?
- Analyze the problem. The first step is to analyze the problem. Is this disruption in profitability a temporary one, or something that could affect your portfolio for years to come? What is the root cause, and is there something you can do to address that root cause? Your approach is going to look different depending on what you find here.
- Address vacancies. Vacancies are by far the most common cause of temporary profitability issues. If your property is vacant, take action to fill it with a qualified candidate as soon as possible. Cosmetic improvements, better marketing and advertising, and streamlined tenant screening can all help you here.
- Increase cash flow. Next, consider attempting to increase your cash flow. Depending on your situation, that could mean increasing rent, offering additional services, or providing additional storage space for an additional fee. Just keep in mind that your existing tenants may not appreciate having to pay more for this property.
- Minimize spending. You may be able to minimize the financial impact of a loss by minimizing your spending, especially in the short term. Can you handle some repairs yourself, rather than hiring someone? Can you hold off on unnecessary improvements for the time being?
- Consider selling. If the property poses consistent issues, or seems unrecoverable, selling may be the best option.
- Hire a property management team. A property management team may cost you some additional money, but they can handle most of these issues on your behalf – and provide you with strategic recommendations to make your property even more profitable.
At Green Residential, we’ve managed all kinds of rental properties, from immediate breakout successes to near-total failures that have needed major overhauls to return to profitable condition. Wherever you are in the real estate investing process, and whatever you need in a real estate partner, we can help you. Contact us today for more information!