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.