Top 15 Negative Cash Flow Busters
Let the negative cash flow hangovers begin, but I have some antidotes for you.
Maximum negative cash flows are in store for investors who did not closely check the numbers that the seller's agent gave them. The worst I heard was one investor who had a whopping $40,000 a month negative cash flow although most investors stop their out of state property buying binge after they hit $4,000 to $5,000 a month negative cash flow. Brand new houses bought in formerly hot areas are now sitting on the listing books for longer, price reductions are commonplace, and builders are sweetening the investor pot by offering generous incentives and bonus REALTOR commissions.
Too many alligators (negative cash flows) will eat you up.
The real estate purchase party of 2006 was over for most short-term flippers who had a good roll for a while, leaving just the pros who know how to buy well below-market-value. You have got to buy really low these days to guarantee profit and not bank on appreciation (or luck) to make money. So the speculators, who thought they could sell now, have found themselves ensnared in a changing market. They are becoming unintended landlords because they must hold on to rent their overleveraged houses.
Having real estate is great because it is an asset that adds value even while you sleep, is taxed at a much lower capital gain rate and is one of the best inflation hedges ever. And sometimes you need to feed the negative cash flow beast to support the asset during hard times.
2. Improve your loan profile.
3. Enhance your income and rents to feed the negative cash flow beast.
4. Creatively sell your property in hard-to-sell markets (if that is what you want to do). I say hang on to your property if it is still as good a deal as you thought when you first bought it.
5. In the future, help you make better investment choices.
I know I am stating the obvious for most of you, and I am hopefully forewarning antsy new investors fearing they missed the boat. Never fear, better times are ahead, but besides only buying properties that carry themselves, how do we feed the negative cash flow beast?
Even if all you own is your residence, I have 15 ideas to help improve your cash flows.
Reduce your outgo (taxes and property insurance)
1. Shop your insurance premiums. Go for the lowest priced quote you can find from a reputable company
2. Raise your insurance deductibles to $1,000, $2000 for more. You may get an argumentative letter from your lender, but it is well worth a try.
3. Fine tune your coverage. I heard about one investor who trimmed volcanic damage from his policy and saved a bundle. Most people never read their insurance policy.
4. Don't over-insure. You only need insurance for the actual housing structure, not the land. I know this sounds elementary, but you would be surprised.
5. Have your property re-assessed. If your area is declining in value, call the county tax assessor, as many Californians did in the 1990's, to save a bundle.
Look closely at your financing.
6. Refinance your loan to take advantage of lower interest rates. Read my recently published book “Real Estate Debt Can Make You Rich” to find out more.
7. You can wipe hundreds of dollars off your payment if you have enough equity by re-doing your loan to a 1% to 2% starting interest rate. These negatively amortizing pay option ARMs are bad in the long term, but they may be the only thing you can do to save your house.
8. Stretch out your amortization to 40 or 50 years. There is even talk of a 60 year fixed rate mortgage.
Talk to your lender
9. Call your lender to get the loan re-cast, redone or re-characterized to get interest rates reduced or your payments lowered. They may not listen to you now, but lenders soon will be getting a lot of property back to see if you can renegotiate to make your loan assumable for the new seller.
10. Your lender may change your short-term interest-only loan to a fixed rate if you let him know you are perfectly willing to let him buy back the house at the loan balance if it makes no economic sense under the present loan arrangements.
11. Sweeten the pot by letting your lender know by agreeing to buy some of the lenders foreclosed inventory in return for easier payments.
12. Make a partial lump sum payment to your lender in exchange for a reduction in your interest rate or your payments
Increase your income
13. Strongly focus on your job or business to massively increase your income that will feed your negative cash flow properties. Real estate markets are always in flux, so those that survive to hang on and keep their quality “keeper” properties will prosper.
14. Take on a cash partner. Trade in some of your present equity or future upside (appreciation) for a cash infusion now.
15. Raise your rents to the market. Rents are going up around the country as housing becomes more expensive so call around to several different property managers to find the going rate in your area.
(Steve Dexter is the author of Real Estate Debt Can Make You Rich. He is also a loan officer licensed in AZ, CA, CO, CT, DC, FL, HI, ID, MD, MI, MN, NV, OR, UT, VA, WA.) https://amzn.to/2GDAE8w
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