In investment properties, when cash expenses are more than cash receipts, there is negative cash flow. Most investors avoid properties where this is the situation, unless there are strong underlying economic factors that indicate the cash flow can become positive.
• One six-tenant office building was leased out several years ago. After a few years operating expenses rose sharply and exceeded the gross rental income. However, the leases on all the units will soon expire and there are no renewal provisions. That means that there will be new leases negotiated. Leases that provide for higher rentals will replace the old below-market leases. The building’s negative cash flow will soon become positive.
The underlying economic factors in this example clearly indicate that this office building can easily become a good investment. Just because it has a negative cash flow now is not a good reason to avoid considering the purchase of the property.
• Another building is leased as a light manufacturing facility. However, the “best use” of the property is determined to be as a series of small research and development offices or as a conversion to condominium apartments. The negative cash flow from the present use as a manufacturing facility can be turned into positive cash flow when the property is put to its “best use”.
The sole consideration of negative cash flow would have led an investor to avoid this property. In light of further consideration of the underlying economic factors, the underutilized property might well be an attractive investment opportunity.
• A vacant lot in the center of town generates only a small amount of income when it is used to sell Christmas trees. But the lot costs money to hold (property taxes and clean-up expenses). There is a significant negative cash flow. But it may be one of the best real estate investments. The unrealized appreciation of market value may far exceed the tax and maintenance expenses so that the investor will profit when he sells the lot, even though he has experienced “negative cash flow” all the time it was held.
Always look at the reasons why there is negative cash flow from income property before you invest. The turn-around possibilities may be readily apparent. Don’t miss out on an otherwise good investment simply because it currently isn’t making money