What to Do When Rental Expenses Exceed Rental Income

You’ve invested in what seemed like the perfect rental property, with a prime location and top-notch amenities. The profit potential appeared to be endless. But as the months roll by, you notice something unsettling. Your rental expenses are steadily creeping above your rental income. What happened to that promise of cash flow and passive income?

No investor ever signed up to lose money, but landlords sometimes end up in a situation where their outgoings are higher than their income. The good news is that you don’t have to stay stuck. In this article, we’ll explore the possible reasons why this happens, and offer practical tips and strategies to help. We’ll also uncover one situation where low or even negative cash flow, may not be as bad as you might think.

Let’s dive in and find ways to turn these setbacks into opportunities for growth.

5 Common Signs That Expenses Exceed Rental Income

Rental expenses that constantly exceed your rental income undermine the profitability of your rental unit. If this imbalance continues, it hurts more than just your monthly cash flow. It can take a toll on your rental portfolio’s growth and long-term sustainability.

Here are some warning signs to be on the lookout for:

1. Frequent Negative Cash Flow

If you’re finding that the rent collected isn’t enough to cover your mortgage, property taxes, and maintenance costs, or you’re constantly dipping into your personal savings to keep up, it could be a warning sign.

2. Increasing Debt

Do you immediately turn to your credit card to pay for a new roof after a storm, or take out a personal loan to cover an unexpected plumbing disaster? If you’re piling on debt to manage your rental’s operating expenses, it could be a sign that your expenses are outpacing your income.

3. Delayed Maintenance

Suppose you know the HVAC system needs an upgrade, but you keep postponing it because you can’t afford the $5,000 expense right now. Delaying necessary repairs due to insufficient funds can lead to higher costs in the long run, and signals that your current income isn’t covering your costs.

4. Rising Operating Costs

If recurring operating costs like property taxes, insurance premiums, and property management fees are climbing faster than your rental income, this could hurt your rental’s profitability.

5. High Vacancy Rates

Do you have several months a year where your unit sits empty? Are you spending on utilities, marketing to new tenants, and basic upkeep without any rental income coming in? If so, this could be a contributing factor and cause for concern.

What Can Cause Rental Income Shortfalls?

• Market Factors

Economic downturns and market trends influence rental demand, as well as tenants’ ability to pay rent. All of these can take a negative toll on rental income and occupancy rates. If your property is in a city hit by an economic downturn, locals might lose jobs and face financial strain. This could leave you lowering your rental rates to attract tenants during these challenging economic times.

• Tenant-Related Issues

Late rent payments can disrupt your financial planning, making it harder to cover mortgage payments and property upkeep on time. In some cases, it can also result in the need for an eviction. The eviction process could take time and you could be looking at weeks without rental income, and may face additional costs as well.

• Property Challenges

Properties requiring frequent repairs not only inflate expenses, it may also be difficult to charge a competitive rental rate if the rental’s condition isn’t up to par. A property in a neighborhood losing its appeal could also suffer from lower demand and lower rental prices.

• Regulatory Changes

Local rental laws and regulations dictate how you run your rental property, and certain changes could affect your rental income. Rent control measures might restrict your ability to adjust rental rates based on market demand. Increases in rental property-related taxes are another example of regulatory changes that could eat into your profits. 

• Property Management Issues

Property management mishaps like delayed maintenance, poor tenant communication, and ineffective marketing can all lead to rental income shortfalls. In some states, tenants may even have the right to withhold rent if a landlord doesn’t handle a repair promptly.

7 Strategies to Manage Rental Income Shortfalls

When your rental income isn’t quite hitting the mark, here are some practical tips on how to navigate it:

1. Review and Adjust Rental Rates

To stay ahead in the rental game, look at what similar places in the neighborhood are going for. If your rates are falling behind, a slight rent hike might be just the ticket. However, be sure to communicate with your tenants first and give them adequate notice to prepare. Typically, 30 days notice must be given to tenants, but in some states, longer notice may be required.

If you’re on-point with property management and keeping the home in top condition, rent increases may be easier to swallow. Highlight any upgrades or great amenities your tenants are enjoying, whether it’s great Wi-Fi, energy-saving appliances, or new flooring. Give tenants a comparison of current market rents for similar properties in the neighborhood so they won’t lose your trust. Lease renewal incentives or flexible lease terms might also help ease tenant resistance to the rent adjustment.

2. Screen Potential Tenants Carefully

Reliable tenants who take care of your property and pay rent on time make renting a breeze for everyone involved. When screening, remember to set clear standards and stick to them across the board. Start by verifying a potential renter’s income and job stability. Ask for references, and be sure to contact their previous landlords if the applicant has rented before. Online screening tools or services help you find the right tenant quickly, but be sure to choose a service that screens applicants fairly to avoid harmful discrimination.

Our Renters Warehouse Resident Placement Services make finding a reliable tenant a breeze with our thorough and fair screening process.

3. Preventive Maintenance

Staying ahead of maintenance issues can prevent surprise repair bills, and keep your tenants happy. Set a maintenance schedule and checklist to ensure all areas of the property are inspected. Don’t forget to document maintenance activities, including dates, repairs made, and contractor information. It’s also a good idea to encourage tenants to report issues right away to help stop small problems from becoming bigger, resulting in the need for major repairs.

4. Cost-Cutting Measures

Learning how to cut costs without cutting corners on property quality or tenant satisfaction helps maintain profitability. First up, review recurring expenses and prioritize areas for potential savings. Are some of your service providers too expensive? Try to negotiate and ask for a better deal. If you’ve been a great, long-time client, they might just say yes. When looking for new service providers, don’t settle for the first price quoted. Don’t be afraid to shop around for services like landscaping or pest control. Consider long-term contracts or seasonal agreements to lock in favorable rates and simplify budgeting.

5. Property Upgrades and Renovations

Think of areas you can upgrade to boost property value and justify higher rents. Focus on improvements that enhance tenant comfort, improve your rental’s energy efficiency, and differentiate your property in the market. Cosmetic upgrades like a fresh coat of paint or landscaping to enhance curb appeal are quick and affordable fixes that immediately give your unit a facelift. If possible, schedule renovations during vacant periods or coordinate with tenants to minimize disruption and maximize rental income potential.

Here are 8 Ways to Add Value to Your Rental Property.

6. Efficient Property Management

Is your rental in great condition, in a great location, but you’re still in the red? It could be an issue with how the rental is being managed. Poor management is a recipe for neglected property maintenance, tenant communication problems, and could even put you at risk for legal issues and fines. That said, don’t underestimate the benefits of working with a reliable property manager. A professional property manager can handle day-to-day tasks, tenant relations, and property advertising, among other things. When finding a good property manager, be sure to choose someone with local market expertise and a track record of maintaining property value and rental income stability. Review and understand the agreements and fee structure to make sure you get your money’s worth.

7. Budget Properly

A solid budget is your best friend in rental management. Keeping track of where your dollars go helps you see where your money is going, and where you’re spending more than you should. Factor in all expenses, from mortgage, taxes, insurance, and maintenance. Manage unexpected costs by allocating a percentage of rental income to a separate emergency fund to cover sudden repairs or periods of vacancy. Use budgeting tools or apps to track income and expenses accurately, and update your budget regularly to reflect changes in expenses or income. 

Read Tips to Estimate and Budget for Your Rental Property for some landlord budgeting tips.

Is Low Cash Flow Always Bad?

While low or even negative cash flow can be a warning sign, it’s important to keep in mind that it doesn’t always mean that it’s time to sell. 

One major benefit of investing in a rental property is that it helps you grow your wealth in two ways: through cash flow and property appreciation. So before throwing in the towel on a rental unit with negative cash flow, consider the potential long-term gains in capital growth you might be leaving on the table.

According to the S&P, the median return on residential properties is 10.6% per year. As a comparison, this is more than double what you can expect from a high-yield savings account, which typically offers interest rates between 4% and 5%.

To help you decide if a property is still worth holding on to, look into the property appreciation trends in your area and run the numbers. If the property shows strong appreciation, a temporary financial strain could be outweighed by substantial long-term gains. However, there are risks involved when investing primarily for appreciation, namely, you’re at the risk of market fluctuations, without cash flow to sustain you during periods of difficulty. 

Learn more about cash flow vs. appreciation with rental properties.

In Conclusion

Some landlords may be tempted to let go of their unit when the going gets tough. But despite the challenges of running a rental, mom-and-pop owners, who make up 70% of America’s landlords, are sticking with their investments. They know that rental properties are a great source of passive income and equity. With a few tweaks to your operations and management, you could get your rental investment back on track in no time and be on your way to financial freedom.

Seeking a more efficient way to manage your rental property? Check out our professional property management services. Get started with 24/7 hassle-free property management today with Renters Warehouse, and see how much you could be getting for your rental.