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4+ Ways to Fix Negative Cash Flow (and When to Sell Instead) (Rookie Reply)

Real Estate Rookie

Published: Fri Feb 07 2025

Does your rental property have negative cash flow? This doesn’t necessarily mean you bought a bad deal, though losing money probably isn’t what you signed up for. But not to worry—in today’s episode, we’ll share a few changes that could get you back in positive territory in no time! Welcome back to another Rookie Reply! Today, we’re answering more questions from the BiggerPockets Forums. First up, we’ll get into house hacking—the easiest way for a new investor to build a real estate portfolio—and show you how to use this strategy to keep buying properties with low money down. Next, should you invest in Columbus, Ohio in 2025? This investing hotspot is drawing plenty of attention, but we’ll show you how to find other markets just like it! Finally, is your Airbnb giving you little or no cash flow? Tune in to learn how to plug the holes in your business, when to hold for appreciation, and when it might be wise to sell! Looking to invest? Need answers? Ask your question here!

Summary

Podcast Summary: Real Estate Rookie – Episode: 4+ Ways to Fix Negative Cash Flow (and When to Sell Instead)
Release Date: February 7, 2025
Hosts: Ashley Kehr & Tony J Robinson
Produced by: BiggerPockets

Introduction

In this episode of the Real Estate Rookie podcast, hosts Ashley Kehr and Tony J Robinson tackle a critical issue faced by many new real estate investors: negative cash flow in short-term rentals like Airbnb. The duo provides actionable strategies to optimize property performance, manage expenses, and decide when it might be time to sell.

Listener Question 1: House Hacking Strategies and Investment Decisions

Timestamp: [00:41]

A listener reaches out with a complex scenario involving house hacking a property with an ADU (Accessory Dwelling Unit) and deciding between purchasing an out-of-state multifamily property versus another local multifamily property. The concerns revolve around maintaining a favorable interest rate, avoiding mortgage issues, and evaluating landlord-friendly laws.

Key Points Discussed:

  • Understanding House Hacking:
    Tony explains house hacking as living in one part of a property while renting out another, utilizing various property types like duplexes, triplexes, or single-family homes with additional units.
    “A house hack is basically you buy a property much like the person who asked this question, and you live in one portion of that property and you rent out another portion.” [01:27]

  • Mortgage Considerations:
    Ashley reassures that typically, after a year of living in the property, investors can convert it to a rental without losing the locked-in interest rate or facing mortgage penalties.
    “Usually there's some kind of timeframe that you have to live in the property and be your primary, then you can leave and keep the same financing on the property.” [02:15]

  • Out-of-State vs. Local Investments:
    The hosts weigh the pros and cons of investing out-of-state, highlighting benefits like lower capital requirements and landlord-friendly laws versus the challenges of managing properties remotely.
    “The biggest thing that comes down to is like your personal preference. Do you want to keep living where you're living or do you want to get another primary residence?” [03:23]

  • Financial Analysis:
    Emphasis is placed on running the numbers for both scenarios, considering factors like down payments, equity growth, cash flow, and operational costs.
    “A great starting point is the capital that you have available... running the numbers on both situations.” [05:00]

  • Scaling Through House Hacking:
    Tony advocates for replicating successful house hacks to build a robust portfolio over time with minimal out-of-pocket expenses.
    “My suggestion would be to replicate what you've already done successfully and do it again and then do it again...” [06:36]

Notable Quote:
“House hacking is one of the best ways both from a financial perspective and just from like an ease perspective to get into real estate investing.” – Tony J Robinson [09:14]

Listener Question 2: Investing in Columbus, Ohio

Timestamp: [13:03]

A listener is considering purchasing a duplex in Columbus, Ohio, as a first-time investor. They seek recommendations for real estate agents and general advice for investing in a new market.

Key Points Discussed:

  • Finding Investor-Friendly Agents:
    Tony recommends using BiggerPockets' Agent Finder to connect with realtors experienced in working with investors.
    “The first resource is the BiggerPockets agent finder... they are the quote unquote investor friendly agents.” [13:03]

  • Market Analysis for Columbus, Ohio:
    Ashley and Tony delve into Columbus' real estate market, highlighting its median home price ($344,000), rent-to-price ratio (0.54%), income levels, population growth, and major economic developments like Amazon's $10 billion data center and Intel's chip manufacturing plant.
    “Median home price... rent to price ratio is 0.54%... Amazon is spending $10 billion to build a data center.” [15:52]

  • Neighborhood Focus:
    Emphasis on analyzing specific neighborhoods within Columbus, such as New Albany, which is attracting tech companies and benefiting from proximity to Ohio State University.
    “Always niche down to your neighborhoods and New Albany is actually the neighborhood where all the tech companies are going.” [16:47]

  • Short-Term Rental Potential:
    Tony discusses the potential for short-term rentals in mid-sized markets like Columbus, which may offer better opportunities compared to oversaturated vacation destinations.
    “I've seen some opportunity there... it's not like these big well known vacation destinations.” [20:13]

  • Long-Distance Investment Tips:
    Advice includes building relationships with local lenders and agents, utilizing BiggerPockets resources, and conducting thorough market research to ensure informed investment decisions.
    “Your lender, your agent, two people to really focus on building relationships with as you go into that market.” [21:00]

Notable Quote:
“The goal is to find the city that satisfies your investment requirements.” – Tony J Robinson [18:48]

Listener Question 3: Improving Short-Term Rental Performance

Timestamp: [28:08]

A listener is struggling with negative cash flow in their short-term rental business and seeks advice on bridging an $11,000 annual deficit. They present their financials and ask specific questions aimed at increasing profitability.

Key Points Discussed:

  1. Bedroom Counts and Property Listings:

    • Question: Are two-bedroom properties more desirable or do they typically have longer average stays compared to three-bedroom properties?
    • Discussion:
      • Tony suggests that more bedrooms generally perform better but emphasizes the importance of market-specific data.
      • “It’s extremely market dependent... you would want to dig into the data for your specific market.” [31:21]

  2. Cleaning Fee Management:

    • Question: Can encouraging longer stays help reduce cleaning fees?
    • Discussion:
      • Emphasizes charging fair and reasonable cleaning fees based on actual costs to avoid absorbing these expenses.
      • “At worst, you should be breaking even on your cleaning fee.” [32:43]
      • Suggests shopping for competitive cleaning services and possibly incorporating cleaning costs into nightly rates strategically.

  3. Enhancing Property Amenities for Higher ROI:

    • Question: What strategies can increase ROI in the second year?
    • Discussion:
      • Tony shares personal experiences of reinvesting in property amenities, such as adding a pool, to boost revenue.
      • “Add some things... like an in-ground pool... our property has done incredibly well in comparison.” [38:42]
      • Encourages competitive research to identify high-performing amenities specific to the market.

  4. Exit Strategy and Long-Term Appreciation:

    • Question: Should the investor absorb the loss or focus on long-term appreciation?
    • Discussion:
      • Suggests evaluating the potential for property appreciation against ongoing losses.
      • Discusses options like 1031 exchanges and tax considerations to mitigate financial impact.
      • “Use this spreadsheet to gauge what's the average across the country.” [45:04]

Notable Quotes:

  • “If your cleaner charges you $200, maybe you can charge the guests 225... that extra $25 can help bridge that gap.” – Tony J Robinson [33:00]
  • “Don’t be afraid to shop for new cleaners... you’re in a better position now because we found a better long-term partner.” – Tony J Robinson [34:39]

Strategies to Fix Negative Cash Flow

  1. Optimize Bedroom Configuration:
    Tailoring bedroom counts based on market demand can enhance occupancy rates and revenue. Testing different configurations may reveal optimal setups for specific properties.

  2. Manage Cleaning Fees Effectively:
    Charging appropriate cleaning fees aligned with actual costs ensures that operational expenses are covered without eating into profits. Utilizing dedicated short-term rental cleaners can maintain high standards and guest satisfaction.

  3. Invest in High-ROI Amenities:
    Strategic reinvestment in property amenities, such as pools or modernized interiors, can differentiate listings and justify higher rental rates, thereby increasing overall profitability.

  4. Leverage Market-Specific Data:
    Conducting thorough market research using resources like BiggerPockets’ market analysis spreadsheets helps in making informed decisions about property improvements and pricing strategies.

  5. Consider Long-Term Appreciation:
    Balancing short-term cash flow challenges with the potential for long-term property value appreciation can guide decisions on whether to hold or sell underperforming assets.

  6. Utilize 1031 Exchanges and Tax Benefits:
    Implementing tax strategies can offset losses and enhance overall investment returns, making it viable to hold onto properties that are currently underperforming but have strong appreciation potential.

Conclusion

Ashley and Tony provide a comprehensive guide to tackling negative cash flow in short-term rentals. By addressing listener questions with practical advice and sharing their own investment experiences, they equip rookie investors with the tools and strategies needed to optimize their real estate portfolios. Whether it's refining house hacking strategies, selecting the right markets, managing operational costs, or enhancing property amenities, the hosts emphasize the importance of informed, data-driven decision-making to achieve financial freedom through real estate investing.

Final Notable Quote:
“Real estate investing is a journey towards financial freedom, and making informed decisions is key to building a successful portfolio.” – Ashley Kehr [47:12]

Additional Resources Mentioned:

No transcript available.