Renting at a Negative Cash Flow vs. Selling for a Loss
Rental properties don’t always make people money. Some properties are more expensive to maintain than others. And sometimes, markets bottom out, and you can’t rent the place for enough to cover your expenses. If you have a property with a negative cash flow, is it ok to sell it for a loss? Here at We Buy Houses Columbus, we go over each option in detail.
What Is Negative Cash Flow?
Negative cash flow is a term for a rental property that costs more to own and maintain than you get from rental income. Here’s a super easy example. If the mortgage is $1,500 a month, and you rent the property for $1,400 a month, that’s negative cash flow. Real calculations can get a lot more complicated, but any situation where keeping the property costs more each month than the rental price represents negative cash flow.
When Is Negative Cash Flow OK?
There are actually times when it makes sense to lose money to negative cash flow. The most common are listed below.
It’s Short Term
As a savvy investor, this is a situation that happens a lot. If you’re expecting the property to gain value soon, and you can afford a few months of negative cash flow, you’re making the better economic decision.
The best example is when you leave a unit empty to renovate it. Until you’re done, it’s an empty property and generating negative cash flow. But you’re operating under the assumption that you will be able to rent it for more when the work is done. You’re trading a short-term loss for long-term gains, and it’s a common real estate practice.
The Property Has Personal Use
The best example of this scenario is if you own a vacation property that you rent out for part of the year on Airbnb. It’s really your vacation place. The rentals are just there to ease the financial cost of keeping the property. This is a perfectly reasonable justification for maintaining negative cash flow, assuming you aren’t upside down on the mortgage.
You Can Afford It and Want It
The example above would fit into this category. There are other conceivable situations that would also fit. Say you inherited a property. You care about the property and want to keep it in the family, but you don’t have the freedom to live there or really invest in it right now. You can rent it at a loss to mitigate the financial drain. As long as you can pay your bills, this is fine, and that extends to any situation. If you want to keep the property, and you can afford the negative cash flow, it’s yours to do with as you see fit.
When Is It Better to Sell for a Loss?
If you can sell for a profit, that is pretty much universally better. It’s basically the perfect way out of a negative cash flow rental. The decision gets harder when you have to sell for a loss. How do you weigh the scales and come to the best solution?
It boils down to how much money you lose selling versus how much you lose each month. How many months of negative cash flow would it take to equate to the loss you’re taking on the sale? In that period of time, is there anything you can do to get more money out of the property?
If you could potentially refinance to lower your interest rate, would it make a difference? Maybe you could make efficient repairs or upgrades that raise the property value. You might be able to change the function of the property to generate better cash flow (like turning that Airbnb into a long-term rental). If there is any way to get more value, then don’t sell at a loss. If you can’t squeak more money out of the property in the time you have before renting is worse, then cut your losses and sell your house fast.
If you choose to sell, contact We Buy Houses Columbus. We buy houses from all homeowners in the area. We can help you get out of a negative cash flow situation quickly, and you might even find that you can turn a profit. Contact us today to get started by setting up a walkthrough and receiving a no-obligation cash offer.
