The Problem For Investors
As property prices rise in many markets across the country , it is becoming increasingly difficult for investors to acquire properties with a positive cash flow . Nowadays , it is all the more important to know how to deal with negative cash flow (“ NCF ”). Here are a number of solutions .
Buy Better Quality
Dealing With Negative Cash Flow
Intelligent Property Selection
Although it should be obvious , the first step to avoiding NCF is to resolve to acquire only properties that don ’ t have it , or can be structured not to have it . Especially in strong markets , some investors adopt the position that NCF doesn ’ t matter because the market will bail them out through appreciation or rising rents . This doesn ’ t always happen ! Buy intelligently in the first place !
Increase the Units
It ’ s pretty well known in real estate investing that the more units acquired the greater the cash flow for any given price range . For example , in Silicon Valley a 7plex for $ 1.4 mil . will probably cash flow better than a $ 1.2 mil . 4plex . Generallyspeaking , for more cash flow , buy as many units as possible .
It is also well known that “ lowincome ” properties suffer from greater turnover , more vacancies , and higher maintenance expenses . They are also more managementintensive . Buy better quality whenever possible . Leave the “ war zone ” properties to the commando ’ s !
Transaction Structuring
After a qualifying property is identified , structure the transaction for success . This involves the right price , the right down payment , the right entity ( e . g ., partnership ), the right loan terms , and so on . Over the long term , proper design of the transaction is probably the most important step .