Negative Cashflow, Appreciation for First rental property?

[Alex P.]

I'm a first-time home buyer looking to purchase my first rental property. I'm wondering whether negative cashflow for appreciation is a bad move for someone starting out.

I have a strong interest in buying in Folsom, CA. Its much cheaper for newer homes than the bay area, schools are all 9+/10, city has very high ratings for safety and quality of living, and the area looks to have a lot of growth in the next few years.

Only thing is negative cash flow. I can only put down up to 10%, so total monthly (with pmi, taxes, interest etc) will be around $4k-5k. Avg rent per room in the area is $900-1200, and avg rent per house is $3.2-3.6k. I plan to hold longterm and rent by room MTR/LTR, but assuming vacancies and at least 2 rooms occupied, I'll be short $2k-3k most months until rents follow the upward trend of home prices in the area or my monthly decreases.

I understand the huge emphasis on the cashflow-focused approach on BP, and that following appreciation is a gamble. However, if you're from/familiar with Norcal/sac, I'd like your advice on this move and projections for the city. I have a decently comfortable salary, so although it'll slow the rate at which I can save for the downpayment of another property, I can manage covering the negative cashflow. Also, despite all the new developments in the area, properties are selling like wildfire (in the case of TM, even before the models are built) and the number of available homes at this lower price range are becoming scarce. So, I'd like to make a decision before it's too late, or more buyers come into the market and increase competition.

Property Info: 550-600k, 3-4 rooms, loft (can later turn into an additional 4th/5th room to add value), 1800-2200 sqft, 2 car garage, hoping for a lot size suitable for an ADU/DADU

[Nathan Gesner]

Quote from @Alex P.:

Welcome to the BiggerPockets forums!

Let's look at the numbers first. Let's say rent income is $4,000 a month. Your mortgage payment, taxes, and insurance is $4,000 a month. That's a break-even deal, right? Wrong! If the property sits vacant for a month, you lose $4,000. If a tenant trashes the carpet, you lose $10,000 for flooring plus $4,000 for the month, plus another $200 for utilities. These are common examples that happen all the time to every Landlord. When I calculate for cash flow, I include setting aside a 30% - 50% of the monthly rent to cover maintenance, vacancies, capital expenditures, taxes, insurance, and other projected costs, then I pay the mortgage and interest, then whatever is left over is considered cash flow. Your calculation doesn't account for other expenses. Even at a $400 loss per month, you would lose nearly $5,000 a year or $25,000 in five years and that's before dealing with any vacancies, maintenance, bad tenants, and other common expenses.

The other issue is betting on appreciation. Yes, property values will always go up over the long term. No, that doesn't mean they will go up over the next five years. The market had an historic rise for two years and peaked a year ago. Most housing and economic experts still believe we are facing a reckoning for all the "free" COVID money that was passed our for three years. The fact that buyers are still aggressively buying should be a warning that the correction has not happened yet. How would you feel if you bought this property with a monthly loss of $400 and then the market value dropped 10% next year? It could take you 5+ years just to break even. That's a gamble, not an investment.

Here's a guide that describes what good cash flow looks like and how to analyze a property.

https://www.biggerpockets.com/...