Investments are made to get return, no one in his right mind would invest in something he knows is going in loss in the future. However there may be businesses or investment who in their current position are going in loss but with the right changes can make good profit in the future. Some properties might look very good but they don’t give constant or proper returns in the future based on the structure of the building, climate change or any other political or environmental factor. On the other hand you might find a building which in its current state is giving negative cash but might give good returns in future. Cash flow in case of rental property means the amount of money the generated from the property.
There may be many reason as to why a rental property might be giving negative cash flows. Some of the reasons are as follows:
- The property requires maintenance but the current owner doesn’t have enough money to further invest in the building.
- The management of the rental property is not doing a good job thus people don’t want to use the property.
- The property doesn’t have proper utilities i.e. electricity or heating.
- People living in the property are not paying their rent on time.
- The property was hit by a natural calamity and people are afraid to use it.
Unless there is something that can’t be fixed, there will always be a way to convert negative cash flows into positive. There are some ways a property giving negative cash flows may lead to winning situation in the future.
Determining cash flows
Cash flows can be either positive or negative. Positive cash flows from a rental property means when your earning is more than the expenses you occur each month. In simple words when you are getting profits. Negative cash flow means when you spend more in the property then you earn. There may be two reasons why properties giving negative cash can end up giving you profit, these are:
- Long term gain
Appreciation is the increase in net worth of the property. This is associated with a lot of factors. Appreciation in the value of the property can be due to increased demand of such properties in the area or when more people are looking to get a property and there are limited properties available on sale. Changes in interest rates and inflation also cause the rise in the value of the property.
The appreciation in the value of the property is different in every area. Some states and regions have higher rate of appreciation in terms of values.
Long term gain
There are certain area where people don’t easily vacate a property, if you find a property in such an area it’s a good choice to buy it because currently it might be giving negative cash flows but in the longer run when people will be interested in getting a property in that area you will have the option to sell / rent the property when other wont. Similarly some properties currently might not have a good value but with the development going around that area it might become the center of attention due to its location therefore giving the positive return in the longer run.
The question still persists that is buying a property that is giving a negative cash flow ok? I say yes! It is ok but only if you make careful decisions taking into account the broader picture of appreciation and long term gain and only if you have enough to stay afloat and are able to wait. However if you looking for a very short term benefit or if you don’t have bigger pockets then it is not a good idea. For futher consulation, you may contact point breeze Real Estate to get more specific advice to deal with your real estate situation.