Why am I ALWAYS getting negative cash flow?

Question

Why am I ALWAYS generating a negative cash flow? I already own a home I live in, and want to invest in another property nearby. However no matter which house I look at I never can seem to come out positive! This video is just one example, I don’t love this house nor do I have any commitment to it. Feel free to point out all the flaws in my “formula”.

I assume part of the reason in this example is I am putting no money down. I would finance it 100% along with the renovation budget.  Besides this fact, what else can I do to tweak my strategy and at least break even?

Steve L. · Answer

Your expenses are very high.

You are saying with 12,000/year you will have the following expenses:

$5,052 in expenses

$2,028 in property tax ($169/month in property tax)

$1,404 in insurance ($117/month in insurance)

$1,000 in vacancy

$9,484 in yearly expenses

That leaves only $2,500 for debt service.

The number that look off to me (keep in mind I'm from California):

- Insurance shouldn't be $1,404/year on a 35k/house.

- We don't pay Water/Sewer/Trash -360

- We don't pay Landscaping -600

- We don't pay pest control -460 (sometimes upon request we will send someone, but typically this is 5% of rentals once or twice per year at $50/visit)

- We don't provide a fridge -90

You are also paying list price, paying principle down at 8%.

Account Closed · Answer

Wow I am truly impressed, everyone was so helpful. I re-analyzed based on everyone’s advice and even added another property to compare and contrast. The hint about comparing apples-to-apples on CL was a great idea. I ran into one issue with the first property though, it was by far smaller than all the other comparables. How much does Sq Ft come into play- is an equal quality house with 5 bedrooms justifiably the same rent (give or take) even though one might be smaller? As much as I like the idea of building more equity than I am losing to cash flow each month I really want to shoot for a positive cash flow house. I am going to shop around for better personal loans and see how big of an impact that can make, for some odd reason I have peace of mind doing all my banking with USAA.

Ned Carey · Answer

You are paying off the short loan at $175 of principal a month. That means you are building equity at that rate.

$175 - 41= Net gain to your wealth  $134 a month. You have also figured a deal with 100% financing. That is pretty typical of net cash flow on a deal where you structure it differently.

Landscaping is something you do once as a capital expense,  then it's  the tenants responsibility to maintain it. Yes you will have some lawn cutting etc.  between tenants but that is not an ongoing monthly cost.

Assuming the rent is correct and you manage it properly this property would not have negative cash flow.   good luck - Ned

Jeff Kehl · Answer

I applaud you for being conservative but you're way over-estimating expenses. I have many sfr rentals in GA and I don't pay lawn care, pest control or any utilities on any of them.

Also you seem to be way overestimating reserves.

On a low end property like that I'd estimate maybe $700 for taxes $400 for insurance. But I also think $1000 sounds way high for rent.

There's also probably cheaper ways to finance it than a 8% personal loan.

Matt Schelberg · Answer

The shorter term of the personal loan is also skewing your numbers. The amortization period has a greater impact than the interest rate in terms of monthly cash flow.  Plug the numbers into a mortgage calculator to see the difference.  A 5 year loan can make even a great deal seem like a loser.

You also mentioned that the rent was determined by rentometer.  Be sure to comp out individual properties to ensure you are comparing apples to apples.  Craigslist is a good place for this.

Account Closed · Answer

I agree my expense are high. Naturally I tend to over exaggerate them to prepare for the worst. To help justify my thought process I offer the following:

In South insects are a huge problem, to protect the property I feel like annual pest service is a must.

I agree I will not pay water/sewer/trash. +460

Landscaping helps keep the curb appeal in between tenants?

I made an error in my taxes I believe they will be more along the lines of $300/year.

USAA quoted me a 7.99% APR on personal loans.

BTW the rent was determined on rentometer.

With these changes I see a more accurate mortgage of $340, and the same personal loan payment of $234 for a total monthly debt service of $574/month. But that still leaves me with -$41/month uhg!

Matt Devincenzo · Answer

So I'll tag along here with @Steve L. and say he pretty much got it. I do however live in CA but invest in the SE (FL) so I will say some thing are a little different in that area as he mentioned.

On the insurance it is high in the SE due to hurricanes and sink holes but not that high usually. I'd expect to pay about $700-900/yr.

If it's a SFR then the tenant should be taking care of landscaping, same for pest control. If the pest control becomes a recurring problem you need to screen for tenants differently.

I'm not sure about 'bama but in FL any of the 30-50K homes I buy the taxes are about $5-700/yr. Even on my rental in the city and its higher taxes they still only run $1600/yr so those are way high.

Those right there will probably net you about $3,000/yr in your analysis.

Why am I ALWAYS getting negative cash flow?

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