Negative cash flow feels bad.
It feels like losing.
And I don’t know about you, but I don’t like to lose.
If you think you need to sell your OKC rental properties because of negative cash flow, take a minute to think through the situation.
Take a minute to consider the okc rental property expenses versus the rent.
For example, let’s say that you have a property that rents for $1,000 per month.
Let’s say that it’s a newer home, so that it doesn’t have a great deal of maintenance expense. I’d take a figure of 5% of the rent ($50 per month). For an older home, you should assume 10% of the rent for maintenance cost.
Your tax and insurance expense are both going to be roughly 10% of the rent. Taken together, those should be $200 per month.
You need to build in some money for vacancy. You can assume that vacancy is going to run about 10% of the rent, or $100 per month.
All together, you can assume the total okc rental property expenses are $350 per month.
Your net operating income is therefore $1,000 – $350 = $650 per month.
Your mortgage payment needs to come from that $650 per month positive cash flow.
The cash flow is $650 – mortgage payment.
So, if your mortgage payment is more than $650 per month, you have negative cash flow.
If you are experiencing negative cash flow, it’s very tempting to want to sell your OKC rental properties.
If you did the above calculation and you are calculating a negative cash flow, there aren’t that many things you can do.
One option is to look at the mortgage payment. Is the interest rate high compared to current market rates? Maybe you could refinance the loan to put you into a positive cash flow situation.
Now, I wouldn’t advise switching to a loan with a term that’s greater than 15 years. Please, don’t put yourself into a 30-year mortgage. That just doesn’t make good financial sense. Your goal should be to get your mortgage paid off so the property is free and clear.
If you are in a situation where even under the best of circumstances you are still going to get a negative cash flow? If that’s the case, you probably need to sell the property.
What if You Calculated a Positive Cash Flow, but you aren’t getting a positive cash flow?
It’s very common to have, in theory, a positive cash flow property, but in reality, the cash flow is negative.
That means one of the percentages mentioned above is out of whack. The first potential problem is that your maintenance costs are too high.
#1. Maintenance Costs are Too High
If the maintenance costs are too high, can you get those costs under control?
If you are dealing with an older property, it might need a bunch of updates.
For example, if it’s a frame house built in the 1940’s, it may need to have electrical, plumbing, and/or heat and air updated.
Houses of that era may need to be rewired. The breaker boxes almost always need to be updated because they were usually 50 amp capacity. A minimum capacity for a current household is usually 100 amps.
The drain plumbing in those types of homes was usually cast iron. Those cast iron lines corrode from the inside out.
You may need to replace the main sewer line in the yard. Often, those lines start to get clogged with tree roots. Those types of problems never get better because the roots keep getting bigger.
Water supply lines were typically galvanized steel. Those get lime accumulations on the inside of the pipes making the water pressure very low.
There isn’t any fixing that, they just need to be replaced when it gets to that point.
Heat and Air
And the heat and air, if original, was not even central. There wasn’t such a thing when those properties were built.
If you haven’t done those types of updates, I’ll bet you your maintenance costs are high. If you do the updates, your maintenance costs are almost always going to be less.
When you do a major replacement like this, it’s really more of a capital improvement than maintenance. That’s because it’s not an on-going cost. It’s a one time thing. It’s result should be lower maintenance costs.
If you owned a home like that, you need to decide between investing the money to make the updates, or selling your OKC properties. The person you sell it to will make the updates.
I’ll also include make ready costs into this category.
If you are getting tenants that completely destroy your property, that will definitely put you into negative cash flow. If you keep on doing expensive make ready after expensive make ready, you need to look at the property management aspect. Your property management company is putting loser tenants into your property.
Sometimes, it does take some cosmetic updated when you do your make ready to bring the property up to current standards. I consider that to be a little different because that is more of a capital improvement.
#2. Vacancy Cost is Too High
The second major variable cost is vacancy.
That is the time when your property is vacant.
A problem with vacancy also shines a bright light on your property management company.
The big driver with vacancy is turn over.
You can’t totally prevent turn over. It’s going to happen.
The ideal situation is have a property that is clean and ready to rent when the tenant hands you the keys.
For that type of property, you can start to advertise it even before it becomes vacant.
Ideally, the property management company will not put the first warm blooded people in the property who say that want to lease it.
They will do a careful job of screening so that the next time the property comes vacant it will need very little make ready.
And the cycle of one good tenant after another continues.
#3 If You have little or no Equity in Your Property.
A general rule of thumb is that if you have little equity, your mortgage payments are likely to be so high they will eat up all net operating income (rent – expenses).
The other side of that problem is that when equity is low, you are likely to be in a situation in which you will have to pay to sell the property.
So many people decide to hold onto a property until they have built up enough equity in a property to sell it without having the bring cash to the closing.
It’s when you combine the effects of debt reduction and appreciation, both of which are discussed below, that you really start wracking up equity in your property.
All the Other Reasons
Tax Write Offs
The tax benefits of owning rental property are significant.
You can write off mortgage interest, depreciation, expenses, property tax, insurance, and many other expense items.
Every month you make a mortgage payment, part of that mortgage payment goes to paying down the principal of the mortgage loan.
If that’s $200 per month, by the end of the year you have wracked up $2,400 in debt reduction.
That’s nothing to sneeze at!
The OKC Metro Rental Market is Strong
The Oklahoma City metro area economy has been held out nationally as model of success. But it certainly hasn’t always been that way. In the mid-1980’s, Oklahoma City was in the midst of an oil bust. People were streaming out the city because there were no jobs. This was the time of the notorious Penn Square Bank failure. The local economy was somewhat like that of current day Detroit.
A friend of mine who got started in real estate investing at this time bought up as many houses as he could, because he was able to buy them for $5,000. He now owns almost 400 single-family homes.
The economy limped along through the early 1990’s. It was in 1993 that the City of OKC embarked on the first of its Metropolitan Area Projects (MAPs). These were projects with the goal of raising the quality of life in the Oklahoma City area. MAPs is widely seen as the catalyst for the revitalization of Oklahoma City.
Since the 1980’s, the economy of Oklahoma City has become less dependent upon oil and gas. Oklahoma City has one of the lowest unemployment rates in the US. Here are some of the highlights:
• A growing biomedical technology campus at the Oklahoma University Health Science Center,
• Several major US oil and gas companies are headquartered here, including Devon, Chesapeake, and Sandridge,
• A large number of state and federal offices,
• Some manufacturing and fabrication facilities,
• Some corporate offices, such as Sonic Corporation, Express Personnel, etc.,
• Tinker Air Force Base,
• An NBA franchise (Oklahoma City Thunder),
• And many others.
These businesses keep the economy moving forward.
Rents have gone up, and keep going up. With the tight credit for home buyers, most people can’t buy a home because they don’t qualify to get a mortgage. That has pushed up rents.
On average, every year real estate becomes a little more valuable.
Real estate is a good hedge against inflation.
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