Should i move out of my primary with negative cashflow ?

Question

Hey all, i currently live in a townhouse with my partner and we both have stable jobs in tech . Started off as a house hack by renting out by room, but now we would like to have the entire house to us (families visiting, planning for marriage next year ). Our current numbers looks as follows :
Expenses (Mortgage + Reserves ) : 4800
Monthly rent : 4000-4100
Net cashflow : - 800$

We have another short term rental that nets us +500$ every month . Given prices are dropping a bit in our market, Should we wait for 1-2 more years (for rents to catch up) or move out for our next house hack with a small multi-family or SFH with ADU ?
Our short term goal is to acquire assets , and we will use HELOC to fund the same.
Pros for next house hack : Lower living expense, getting another asset
Cons for next house hack : More debt, almost no liquidity

Marshall Leipprandt · Answer

@Aditya Kohli From your description of yourself and your partner's situation, I would rent it out despite the negative cashflow and try to look to purchase another property. In my opinion, there is a rare exception for when negative cashflow is permissible and it sounds like your situation fits the bill. For this exception, there must be a dual income household in stable, well-paying industries or a large amount of savings to weather a loss of income from losing a job or having the house vacant, etc.

When the -$800 and the +$500 which nets -$300 is a drop in your proverbial bucket, I would continue ahead to purchase real estate. The other thing you need to look at is how this rental property would impact your net worth bottom line. So you net a negative cashflow, well what is the monthly principal pay-down on that mortgage? What might your average appreciation be over the next 15 years given a conservative appreciation estimate? How does this property affect your tax position in terms of depreciation, etc?

You need to make a wholistic decision on how holding this property as a rental will impact your bottom line net worth. If you are financially responsible and don't have a personal cash flow problem, you shouldn't have an issue having negative cash flow on one property. BUT, if a lack of liquidity could be a concern for a future house-hack, then I would also recommend you create a 2 year personal cash flow forecast where you add up all of the $ coming in and the $ going out on a monthly basis to try and get an idea of where you'd be.

Nathan Gesner · Answer

I follow the advice of BiggerPockets, which is common among other instructors. You want something that's going to cash flow and pay for itself, including funds set aside to cover regular maintenance, capex, vacancies, and possibly property management. If you find a property that performs well in today's market, it's very likely it will only get better as time goes on.

If you invest in a place like San Diego, you are unlikely to find anything to cash flow and will be stuck waiting for appreciation. That's a risky bet in a normal market; it's even more risky in a peak market that is starting to decline. You could buy a property for $1,000,000 today and watch it lose $100,000 value in the next year. then it may take several years for it to climb back to the price you bought it at.

Nathan Gesner · Answer

You are in a tough market. The house is losing when it comes to cashflow, but I suspect you've gained a lot of appreciation over the last couple of years. Based on current predictions, your home's value will continue dropping and it may take several years to get back to where it is today.

Pulling a line of credit doesn't make sense because you're already losing money on the house each month. I also don't know if it makes sense to sell only to purchase something else unless you are confident you can find something with a better return.

Ricardo Hidalgo · Answer

I think you will be too low on liquidity and your best option would be sell to the home if it will be producing negative cash flow. Banks do not like seeing losses when you are trying to leverage more in an economy that is losing value.

Aditya Kohli · Answer

@Matt K. The purpose of old primary is :

- will catch up on cash flow in 1-2 years

- principal down is greater than negative cash flow , so more equity

- would like to keep the house for longer term as it is close proximity to big tech companies

Me and my wife are still in growing stages of our career so cash flow is not the first goal

Aditya Kohli · Answer

@Wyatt Postal : they are in Fremont (very close to Big Tech company offices like Facebook, Tesla, etc )

Wyatt Postal · Answer

What city is the property in?

Scott Wolf · Answer

@Aditya Kohli, would you buy your house as a negative cashing flowing asset if presented on the open market to you right now?  I would not.

If you have lived in the house for more than two years, you can sell and not pay taxes on up to $250k in gain as a single person (consult with a tax professional first about your situation).

Additionally, your math of it needing two years to catch up to be a cash-flow-positive asset is a bit of a stretch.  That's 20% rent appreciation in 1-2 years, with rents flattening or dropping in most markets.  What you're proposing turns this house into a liability and a -$9,600 drain per year, without any factor for repairs or vacancy loss.

Dan H. · Answer

We have never purchased a property that our pro forma projected negative cash flow but I would not be adverse to it under the right conditions.

My buy criteria is based on total return.

Cash flow is a single source of the return from residential real estate.  It historically is a slow source of return.  Furthermore, it is taxed in the year earned.

If I perform a value add to create sweat equity and extract the added value, I do not pay the taxes when the money is extracted.  This is also true for return achieved via appreciation. If I 1031 the RE, I do not pay the taxes on this return when I sell the property.  If I die while owning the property, my heirs obtain the property on a stepped up basis and the gain is not taxed.

In my market, my return from appreciation has varied from $2.4k/month to $23k/month for each of our local properties over their hold.  No taxes has been paid on this return and I hope no taxes will ever paid on this return.

In addition to the appreciation, there is the equity pay down and tax benefits of real estate.

I would consider buying a RE with projected negative cash flow if it was priced way below market, had a great value add, or I was very confident of near term appreciation.  Note in my market, I am not currently very confident of near term appreciation and RE in my market has declined in value over the last 5 or 6 months.

Good luck

Should i move out of my primary with negative cashflow ?

Most Popular Reply