Spending money consistently on a cash flow negative rental isn't smart. It might be time to change your strategy.

Vacation rentals are a great way to make extra income from your property investments. Short term rental provider, HomeAway https://www.homeaway.com/info/getting-started/income reports that the run-of-the-mill vacation rental property owner nets $11,000 a year.

But if you consistently have to spend rental profits on roof repairs, vacancies, regular maintenance, bad tenants etc, you probably have a cash flow negative property on your hand. And there are two approaches to dealing with this problem. You can either wait it out and hope things will somehow change or kickstart an exit strategy to move on.

While cash flow doesn't have to be a decisive factor, especially when you have a vacation rental property in an up and coming neighborhood with strong potential appreciation rates. Many times, you might be spending more than you bargained for with your rental. And the faster you discover this, the better.

This article outlines five signs of negative cash flow vacation rentals but before we proceed let's see a simple formula for measuring cash flow on an investment property:

Cash Flow = Total Income (Application fees, Rent, etc.) - Total Expenses (Monthly mortgage (if applicable); General Maintenance, Electricity, HOA, Property Management, vacancies etc.)

As a rule of thumb when buying an investment property, it is wise to set aside an emergency fund to cover at least first six months of expenses. So let's dive right in and see some of the signs to watch for.

1. High vacancy/Low occupancy rate in a location: What's the occupancy rate for your neighborhood? An important sign of a cash flow negative property is high vacancy rate in the neighborhood. According to Turnkey VR https://blog.turnkeyvr.com/much-money-can-make-vacation-rental/ specializing in the management of turnkey vacation rental homes, "Occupancy rates for vacation rentals can be all over the map. For instance, a vacation rental home in a big city might create more demand than a rental property at a seasonal location like the beach". Location is key when buying real estate, especially for investment. Hence it's wise to spend time researching a neighborhood before taking the plunge.

2. High Maintenance property: Are you doling out high monthly fees for property maintenance? Then you might be dealing with a cash flow negative property. A 30-year-old property might offer a great deal but when you have to spend considerable time and money on maintenance and fixes monthly, you have to ask yourself if it's worth it.

3. Declining Rental Property Market: How strong is the rental property market? There is a strong correlation between a thriving property market and low vacancy rates. Many times a declining rental market is a sign of underlying economic issues, most times accompanied by high unemployment rates and slow growth. Sticking around in such a neighborhood would be unwise. Unless you're confident about a significant development in the neighborhood in coming years.

4. High Property Taxes: Did property taxes go up? Taxes can get tricky, especially when you're buying as a foreigner. However, when sudden tax changes are eating up your income, then you have a negative cash flow property.

5. Problem Tenants: Are problem tenants eating up your profits? You have two options, regarding managing your rental property. You can either hire a property management company, which means more expenses but better management. Or you can just ride it solo. While this offers you the chance to take an active role with your property, dealing with problem tenants (tenants who break things, tenants refusing to pay rent or pay promptly, tenants causing disturbance etc.) is a major headache and can eat into your profits.

Hence the importance of having a screening process that's hard to bypass. However, if you deal with problem tenants a lot, it might be time to consider setting an exit strategy in motion.

You can take advantage of short-term rental cash flow with sites like HomeAway and AirBnb. While tenant turnover rates can be high in the short term, short term rentals can be profitable, especially in a popular destination such as a ski resort or beach community.

What’s the crucial thing when making an investment? Simple! Protect your investment. Whether you’re buying stocks or putting money down on real estate? Whether you are buying property abroad or locally? Whether you are buying overseas property for investment or just looking to relocate? You need to recognize that there are risks. Heck, buying property abroad is like running a hurdle. You’re crossing hurdles like investment restriction laws, taxation, paperwork, exchange rate changes etc. Real estate investing comes at a risk, especially when you are going into relatively uncharted territories. You need to ask yourself some crucial questions.

1.     WHY AM I BUYING THE PROPERTY?

Any decision you take subsequently will depend on this to an extent. Are you buying just to relocate or as an investor. You need to make up your mind. Your choice of mortgage, your budget and the type of insurance you go for would depend on this.

It’s easy to say I’ll move into the property for some time, get a feel of the place for a while then I’ll sell out when the market is steamy. Seems like a good strategy but guess what? Your guess may be wrong? You may have to stay with a property you don’t like for years or just bear the big loss. Hence you need to make up your mind beforehand. Am I relocating or investing?

2.     HOW WILL I GET FINANCING?

Financing is a big deal when it comes to buying property abroad. You can’t just carry cash around, you need to select a reputable bank in your destination to deal with. If mortgages are available by the destination bank, you need to ascertain what types of mortgages are available and what contingencies. In a case where a deposit is required by your seller, make sure that an ‘opt out clause’ is signed to make sure your deposit will be returned in case the mortgage falls through.

3.     SHOULD I BUY A NEW BUILD PROPERTY?

If you are buying a new construction or an off-plan property, be sure to choose the developer carefully. Ask a lot of questions. Initially, focus these questions on the agent or company itself, not the properties. Ask about customer testimonials and check what is included in their service. Ask for details in writing. You might be tempted to make a deposit on an attractive new-build property right away. Cool down and think before you leap.

4.     WHAT ABOUT RENTAL YIELDS?

Property specialists caution against getting sucked in by claims of developers. ‘There is huge capital growth’, ‘rental yields are off the roof’ etc.  Always remember: with big returns come big risks.

Don't just think about the profit to be made. Put some effort into your calculations and note that interest rates change over time, also include the tax implications of renting out your property abroad.  You should consult a tax expert or lawyer.

5.     WHAT WOULD BE THE ADDITIONAL COSTS?

Budget for extra costs to be between 8 - 10 % of the house value. This may often be far more in a few countries. Make sure you are, therefore, alert to the costs incurred for investing in a property in your selected country.

Whether you want to relocate abroad or create a global real estate investment portfolio, it's important to keep in mind that even the best strategies occasionally fall flat. You are going to therefore need an appropriate contingency plan and exit strategy, as this will lessen any inconvenience triggered and the prospect of financial loss. Hence, for those wanting to relocate, it is important to hold on to ties in your country of origin and ideally preserve a preexisting property for a predetermined time frame. Investors will also have to keep a keen eye on the global market and prevailing economic trends, as these factors may determine the necessity to sell or change strategy.

Just like any investment where speculations are involved, there is risk with real estate investing. Investors who have gotten their fingers bit have fed us the ‘negative stories’ and have helped create many fears. Yes, there are risks, and they can make for a pretty bad fall if you don’t prepare for them. But there are also fears. Here we’ll explore five basic fears stopping you from making that real estate investing decision.

I also hope to expound on these fears to help you see that you can get past them. The best way to overcome fear is embrace it and do that which you fear. So, no matter what we say, the decision to take the plunge still lies in your hands. Will you create long-term prosperity with your real estate investment or let fear hold you back?

1.     Negative Cash Flow.

Cash flow is what remains when the operating expenses, the mortgage costs and other expenses have been deducted. The fear of negative cash flow, mostly fed by investors who have been there and done that, has held many people back. However, it is just about making the right calculations. You don’t expect to be 100% accurate about the possibility of vacancies or how much rental income you could make in a month but you can obtain past rental figures from the previous landlord, estimate possible repair expenses and still get your numbers close a notch.

2.     Right Timing.

You’ve always heard ‘you’ve got to time the market’. The problem with that is this: you might never find the right time. If you’re afraid that the market might just not be ripe for real estate investing, I say that’s FEAR. As long as you can comfortably buy a property without putting any strain on your family’s budget and the country in which you’re investing isn’t in a pothole, go right on. The time is right.

3.     Chasing the positive cash flows.

Some real estate agents who have tried and fumbled will tell you that you can’t cash flow positively on duplexes, condos, office complexes etc. With discouraging tales of despair, you catch the FEAR. This is actually an opportunity to learn from their mistakes. They failed because they went in with the wrong PLANS. Learn, attend seminars, buy DVDs and EBooks and develop a fail-proof strategy and you’ll get the positive cash flows.

4.     The hassles of management.

Chasing renters for each month’s rent and dolling out money on property repairs are all reasons to run far from real estate investing. What if you had a troublesome tenant giving you problems? The hassles could keep you awake at night. You however do not need to go through the stress of managing your property yourself. You can hire professional property managers or management companies to do the job and do it well.

5.     Lack of experience.

Yes, you do lack experience. All the seminars and courses do not make up for firsthand experience. So, if you lack the experience, why not work with a realtor who is a local expert and leverage their experience. (Check out the importance of a local realtor).

In conclusion, it’s not certain that investing in real estate will make you an overnight millionaire but if you do your homework and work with the right people, you’ll do just fine.