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6 Steps To Take When Expenses Exceed Income
In any profit-driven business, it can be just another day in the office when to see expenses exceeding income. Profits after all, are often booked into the accounts before the collection eventually take place.
However when such loss-making operations get into a prolonged period, it can be an alarming sign that the management have to take seriously.
These situations are unique when it comes to real estate investments.
This is because real estate often:
- have leases locked-in that restricts landlords from raising rentals
- have mortgage obligations to meet each month
- make increasing revenue impossible when operating at 100% capacity
- have unpredictable management, maintenance, and repair costs
Unless you are betting on capital appreciation to cover the losses (which is a rookie strategy), you need to figure out how to navigate this problem before it turns into a full blown catastrophe.
1) Investigate whether the losses are long or short term
As mentioned earlier, every business runs into difficult times where there is limited working capital, loss-making, or experiencing negative cash flow.
It’s just the way it is.
Payment terms can delay collections, rouge tenants can play hide-and-seek with you, and cash payments can be necessary to secure better value services from providers.
What is causing you to lose money? Is it long or short term?
For example, if a loss making month is caused by an unexpected vacancy, you can at least have a little peace of mind that you can start banking in rental checks as soon as you find a new tenant.
But if you have the undesired situation where your rents collected are not enough to pay for the costs of operating your real estate empire, you have bigger problems on your hands.
This will require you to restructure your strategy to keep your assets afloat.
2) Seriously consider getting credit
When you are truly facing such problems, it’s time to lose the frugal hat.
Landlords and property investors often have an innate sense of thriftiness. Paying interest and administrative fees for credit facilities is often something of least priority in financial planning.
But when survival is on the line, you need to get them… and get them fast. Because the longer you remain in a loss-making position, the less likely that banks and financial institutions will grant you loans or credit lines.
This is why you need to secure them before you get into a really bad financial position.
If following step #1, you have realized that the problematic issues are short term, a simple small business loan could be enough to tide you over until things start to normalize again.
The silver lining is that real estate is seen as prime assets by lenders. And you should be able to easily get credit with attractive interest rates as long as you are willing to pledge them as security.
Look into things like:
- Home equity loans
- Line of credit (HELOC)
- Installment loans
- Personal loans
- Credit cards
Ultimately, you can also consider giving a personal loan to your business.
3) Find the big ticket items draining your cash
The biggest expense item for real estate is often finance costs. And in most cases, the mortgage.
You’d be shocked at the number of real estate investors and homeowners who are paying more interest on their mortgage than what is available in the open market.
And you’d be super astonished to find that a lot of them know of cheaper mortgage options available, yet are too lazy to refinance their loans.
I’ve seen for myself of property owners paying more than twice the interest rates on their mortgage compared to prevailing rates.
It really boggles the mind.
Anyway, during tough financial times, it is no longer an option.
You need to refinance your loans or at least explore the savings you can make by just moving your mortgages to another lender. It makes absolutely NO SENSE at all to pay more than you have to for money.
4) Can you raise rentals?
This will depend a lot on the terms of the tenancy contract you have agreed with your tenants.
If existing tenants are indeed halfway into a lease with a long way to go, your hands are pretty much tied. However, you are always explore the option of buying out the tenant. You might just unearth a receptive tenant by just suggesting it.
Should the contract situations allow you to raise rents, do take note of local laws regarding raising rents.
If you are in the clear, go ahead and remember to include some rent increase justifications to prevent unhappy tenants.
Finally, please do some research of the market conditions before playing with rentals. You might just find that your tenants are already paying a premium compared to market rates.
5) Delay payments
Stop paying for debt obligations early. Make your creditors wait. Review payment terms and delay every payment until as close to the due date as possible.
For vendors, suppliers, and service providers, consider talking to them to try and negotiate even later payments.
A lot of times, businesses can empathize with cash flow problems especially when there is some goodwill with a debtor. The last thing they want is for a debtor to go under anyway. That would mean a total loss of their receivables.
But never pay late when it concerns a lender. Lenders have an uncanny habit of turning around and biting you on the neck just when you think they are going to leave you alone.
6) Get help
If after going through the 5 steps above, you still cannot see the light at the end of the tunnel, it could be time to talk to professionals who make it their job to work on numbers.
Who knows. They might be able to show you your accounts from a different angle which shows that you are alright after all.
And if they agree with your bad predicament, they can often point you towards avenues where you can get relief.
Experts to consider speaking to include:
- Certified public accountants (CPA)
- Licensed public accountants
- Enrolled agents
- Tax attorneys
Lastly, take note that getting into a situation where expenses exceed income is not unique to you and your business. People and companies run into such challenges everyday. And they have found their way out. It is up to you as a business owner to find the solution and take action in order to eventually prevail.