Have your investment property holding costs begun to eat your lunch - and your dinner?
If you’re tired of the returns your property investment is giving you and you want to resolve your negative cash flow problem, the following strategies may help you remedy the situation - either in full or at least partly.
As a caveat, not all of these options will fit your particular situation as some of the strategies rely on property features such as location, zoning issues, amount of equity available, building structure, lot size, etc.
A due diligence check is vital to a successful property investing venture, therefore it’s highly recommended you seek qualified counsel before taking on one or more of these strategies:
1. Bed and Breakfast or Holiday Rental
If your investment property is well located, this strategy offers great cash flow potential, however this option is a bit more labour intensive - you must comply with all business requirements such as a licence to operate such a facility.
If you don’t have the inclination for such a venture, or your investment property doesn’t fit the profile, read on.
2. Short-term rental
There is security in a long term tenant, however short term tenants can offer something even better - higher rents. The market value of short-term or mid-term rents is often considerably higher than more “traditional” tenancies.
If your investment property
is located near a business area, a university or college, a hospital or other healthcare facility, a resort area or a mining area this strategy could prove to be very lucrative.
Potential tenants could include individuals such as companies whose consultants prefer to stay in a “home-like” atmosphere rather than a utilitarian hotel or even families who want to stay in the area for a brief time before committing to buying a home.
3. Split Up Your Investment Property Into Smaller Units
This strategy will depend upon where your property is located, including the area demographic.
If your investment property is located near a university or college, a medical centre or even a mining area and it is of sufficient size, you can split out rooms into mini apartments, furnishing a bed, dresser, desk or even a bar fridge.
Common internal areas such as the family room, kitchen, bathroom and external areas such as parking and patio would be shared among the tenants.
Potential tenants could include students, flight attendants, nurses, teachers, temporary employees - basically anyone in need of short term accommodations.
4. Make use of empty space
If your investment property is large enough, you may be able to convert it into a two or three unit structure. Granted, you will have renovation costs, however the increase may be worth the expense.
Convert an attic, an out building, a room over a garage or even the garage itself into a separate unit, complete with bathroom and kitchen or even build a granny flat in the yard, space - and regulations permitting.
5. Create a short-term rent to own
The following strategy should be undertaken with due caution.
If you have a willing - and suitable - tenant who wants to buy your property, yet lacks resources or is unable to qualify for financing due to bad credit or other issues, your negative cash flow problem could be as simple as establishing a rent-to-own scenario.
After submitting a small deposit, the tenant will pay the market rent PLUS a set amount above that figure. In return, you agree to sell him the house after a period of time - usually anywhere from one to five years.
The monies paid will then be credited back to the tenant (buyer) when he obtains financing.
Your benefit - You receive an injection of cash (the deposit), your tenant will be motivated to follow through with the agreement so obviously you’ll have uninterrupted rent - PLUS the additional monies - and your maintenance obligations will be substantially reduced as the tenant will treat your investment property as his home.
Your tenant’s benefit - He holds the right to purchase the property in the future at an agreed price (which may give him capital growth if conditions are right) and the monies he pays to you will be credited towards his deposit - improving his ability to obtain financing.
6. Change up your financing
As the debt service on an investment property
often reflects the bulk of expenses, contact your lender to see about refinancing your mortgage to reduce your payment by either an interest rate reduction or extending the terms of repayment.
7. Set up a joint venture
A nice influx of cash would certainly reduce - or eliminate - your negative cash flow situation. Approach one or more individuals with the proposition of becoming a partner in a joint venture. In return for their financial contribution, they will receive a share in the percentage of capital gain achieved through appreciation.
If your negative cash flow is a result of tenants leaving due to lack of maintenance, use your capital to resolve the situation and find new tenants at a higher rental rate (if the market will bear it).
If, however, the negative cash flow is a result of market conditions, simply use the capital to remain competitive in the marketplace until the real estate cycle leaves the trough and begins to climb again, at which point rents can then be increased.
No matter which method you determine to use to improve your negative cash flow situation, consult a professional who can help you determine if it fits with your particular situation.
Have you tried any of these strategies to improve your cash flow? Please share your experiences in the comments below - we’d love to hear from you!
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
Read more expert advice articles by Sam
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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