If you fix and flip houses, there will inevitably come a time when an investment doesn't pan out the way you intended. Maybe the market took a dive right when you listed the property for sale, your contractor took the money and ran, there were expensive unforeseen repairs, or the property ended up being worth less than you anticipated after repairs.
Whatever the cause, hope doesn't have to be lost -- there are ways to turn a failed flip into a profitable rental property. If you're currently experiencing a failed flip, see if you can turn the investment property from failure to success.
1. Run your numbers
Most fix-and-flip real estate investors buy a property solely looking at the current market value, repair costs, and after repair value. These numbers factor into the model for a rehabbing, but not necessary for a rental property.
An experienced investor will always run numbers for a property as both a fix-and-flip and a rental, knowing that in a worst-case scenario, they can at least profit by holding the property long term as a rental.
But if you didn't plan ahead and aren't sure whether the property will be a successful rental investment, you'll need to determine what the property could rent for and if it will make sense as a long-term rental. To do this, you'll want to figure out the property's fair market rent, then run a cash flow analysis by calculating the income and expenses for the property. Hopefully, the cash flow analysis will determine that the property will have more income than expenses and will result in positive cash flow each month, even after paying for debt service.
You may find, however, that with your current financing, you need to reduce your debt burden in order to earn positive cash flow.
2. Get cheaper money
While it may not be the case for every deal, most failed flips will involve costly private money or hard money loans that are made to be short-term loans paid off at the sale of the property. If you can't sell for the desired amount, you have to find alternative long-term financing, which could include getting a mortgage from a traditional lender or non-bank lender or getting a less expensive long-term rental loan in the private lending market.
Very few rental properties will make sense or have a positive cash flow with a high-interest loan. Explore what options you have for getting a 10-year loan or, if possible, a longer loan, which will typically have much lower mortgage rates.
3. Learn how to be a good landlord
The last thing you need to do is educate yourself on how to be a good landlord and what is involved with successfully owning and managing a rental property. Determine whether you want to manage the rental yourself or hire a property manager. Review the process for advertising and screening tenants. Develop a well-written lease using the advice or help of a licensed professional to ensure you're following the right rules and laws for your state.
I personally have had several deals go wrong that I later turned into rental properties. It may not have been my original intention when buying the investments, but in the long run, the properties provide positive cash flow and bring the added tax benefits related to owning a rental property. Hopefully this technique of having to turn a failed flip into a positive rental won't be an ongoing trend, but this strategy can be helpful for certain circumstances.