What Do You Need to Do When Expenses Exceed Income?

What if you're still not making any business profits and you're struggling to cover the rental property's expenses? This can be both a short-term problem, in terms of how you pay the bills, and a long-term concern if your goal is to hold onto the property for a certain length of time. Here are the first steps toward dealing with the situation:

• Figure out whether the problem is short or long term. It's not uncommon to get into a temporary cash crunch, for example, because a tenant moves out unexpectedly and the place needs repainting before you rent it again. Your approach to that can involve temporary, stopgap measures, unlike situations where the monthly rent never covers monthly expenses.

• For short-term problems, look for sources of financing. Can you loan cash to the business from your personal funds? That's a rational approach, as long as you can spare the money and you keep records of the transfer. However, it may mean shifting money that's currently held in stocks, bonds, or other investments. Talk to your financial adviser about whether, given the comparative rates of return between your real estate investment and others, this shift would be wise. If not, or if you don't have any personal sources of cash to draw upon, consider a home equity loan or line of credit from a bank; you'll be able to deduct the interest at tax time. Use credit cards only for minor expenses or as a last resort, due to their high-interest rates.

• Look at your largest outflows for areas to cut. For example, can you cut expenses by refinancing your mortgage, shopping around for cheaper homeowners insurance, or (if you are paying utilities) performing energy-saving repairs like sealing cracks?

• Raise the rent. You cannot raise the rent every time you are short of cash. If there is a lease between you and the tenant, you must abide by its terms until it expires (though you could offer to buy the tenant out). And you'll have to comply with State and local laws governing rent increases, not to mention local market conditions.

• Prioritize your debts. Put off paying your bills until close to their expiration date, and talk to creditors about accepting even later payments where possible. But whatever you do, do not miss a mortgage payment.

• For long-term problems, reexamine the numbers. Reconsider whether the property is likely to sufficiently appreciate in value to make your current losses worthwhile. Also, talk to your tax or financial adviser about whether the losses will help you shelter other income (a complex area requiring individual advice).