Renting at a Negative Cash Flow vs. Selling for a Loss
Life has a way of throwing us all sorts of curveballs, and when a house is involved, there are a lot of decisions to make.
The housing market is in constant flux as well, so considering whether to rent a property with the risk of a negative cash flow or sell a property for a loss is a situation a lot of homeowners face.
At the end of the day, the decision is up to you and your particular financial and life situations. Below, we are going to discuss what it means to rent a house at a negative cash flow vs. selling a house for a loss from an owner’s perspective.
Renting a House at a Negative Cash Flow
When a homeowner decides to put a house up for rent, the monthly rental amount is usually 1%–2% of the total purchase price. For example, if a house was purchased for $180,000, a reasonable monthly rental price could be around $1,800. This is a ballpark figure, and other factors like insurance, utilities, and competitive pricing come into play. Ultimately though, the idea with monthly rent is that it covers the amount the owner is paying plus a little extra, and this is known as a positive cash flow.
A negative cash flow is when the owner has to set the rent at a lower amount to attract a renter in the first place, and that lower amount is not enough to cover the monthly expenses. This means that the owner has to pay out of pocket to cover the difference. Owners dealing with renting at a negative cash flow will also have additional expenses out of pocket like year-end taxes and any emergency repairs.
Although renting a house at a negative cash flow is operating at a loss, there is still a solid amount of money coming in monthly to supplement. This means the owner is not solely responsible for the monthly cost, and for some owners that might be OK. Depending on the rental agreement, monthly rental costs do not have to be locked in and can be adjusted. This might mean that even though a rental property is operating at a negative cash flow now, it will not be the same situation in a year or two.
Renting a house at a negative cash flow is an option for homeowners who are not quite sure whether they want to sell just yet or whether they need additional help covering expenses. There’s another factor too. Even though the owner is paying part of the mortgage out of pocket, that money is going into real estate equity, so it’s not necessarily lost.
You also never know when the housing market is going to shift, so waiting could mean more money potential in the future.
Selling a House for a Loss
If a homeowner is in a situation where they need to sell a house quickly or do not have the monthly cash flow able to pay for their house expenses, selling a house for a loss might be an option.
Selling a house for a loss means that what you end up selling for is actually less than what you still owe on the property.
An oversimplified example is that a house was purchased for $210,000, and an owner took out a mortgage with a bank lender for $190,000. At this point, the owner still owes $160,000 and needs out, so they list it for sale. Because of the current market and valuation of the property, the selling price of the house is only set to $150,000. This is at least a $10,000 loss for the owner and does not include a realtor’s percentage, interest, lawyer fees, improvements needed, or taxes.
This is a main option for sellers risking foreclosure, as the bank will potentially accept this payment even if it is not the full amount borrowed. Avoiding foreclosure helps prevent larger credit issues, so this option definitely helps owners who are overwhelmed with or have even missed monthly payments.
In a situation where the housing market might continue to dip, deciding to sell for a loss now might end up being the solution instead of risking more debt in the long run. This is also a good situation if the owner cannot or does not want to become a landlord, needs to relocate immediately, or is in a difficult situation like a divorce.
We Buy Houses in Salt Lake City
If you are located in the Salt Lake City area and need to sell your house fast, let We Buy Salt Lake City Houses help. We are more than happy to discuss your specific situation, so contact us or stop by our location in Millcreek.