Negative cash flow for 2nd rental?

[Farooq K.]

I have a very good cash flow first rental and looking for possibly adding a second rental however most homes near me are 400-500k range Gilbert Chandler area and that’s the area I most likely want to invest in. Doing 25% down most these homes are like -300 to -409 cash flow. So does this make sense or what would you suggest here put more down like 40% I know everyone says use leverage and keep expanding and scaling but how do you do that when interest rates at 7% and cash flow is clearly negative. Thoughts? Also if town homes keep you out of negative equity are those a good idea ?

[Russell Brazil]

Put a larger down payment 

[Joe Villeneuve]

Don't buy it.  Why are you putting the priority of buying another property ahead of why you are buying another property?

[Farooq K.]

Quote from @Joe Villeneuve:

Don't buy it.  Why are you putting the priority of buying another property ahead of why you are buying another property?

Cause I feel like I need to expand real estate to build wealth etc. isn’t that what we are all doing gather as much real estate as possible? Or do most people here only purchase if the cash flow is positive??

[Farooq K.]

Quote from @Russell Brazil:

Put a larger down payment 

Would you put 40% down? And is it better to be cash flow positive vs have more cash in hands ?

[Russell Brazil]

Quote from @Farooq K.:

Quote from @Russell Brazil:

Put a larger down payment 

Would you put 40% down? And is it better to be cash flow positive vs have more cash in hands ?

 I put 35% down on my last property to get to break even.

[Joe Villeneuve]

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Don't buy it.  Why are you putting the priority of buying another property ahead of why you are buying another property?

Cause I feel like I need to expand real estate to build wealth etc. isn’t that what we are all doing gather as much real estate as possible? Or do most people here only purchase if the cash flow is positive??

Arbitrarily expanding RE isn't the way to do it.  Negative CF is an added cost that defeats the purpose of buying RE.  Equity is only valuable if you can use it.  A 100% equity property is nothing more than a trophy, with the cost to buy it based on how much cash you put into it.  You own the property, but the property owns the equity.  They are not the same thing.

[Farooq K.]

Quote from @Russell Brazil:

Quote from @Farooq K.:

Quote from @Russell Brazil:

Put a larger down payment 

Would you put 40% down? And is it better to be cash flow positive vs have more cash in hands ?

 I put 35% down on my last property to get to break even.

 Okay, so then you view it as important to at least to get to break even, and if that means more capital so be it. How do you decide though if you are putting into too much downpayment , like why 35% vs 40%, how do you decide those thresholds.

[Farooq K.]

Quote from @Joe Villeneuve:

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Don't buy it.  Why are you putting the priority of buying another property ahead of why you are buying another property?

Cause I feel like I need to expand real estate to build wealth etc. isn’t that what we are all doing gather as much real estate as possible? Or do most people here only purchase if the cash flow is positive??

Arbitrarily expanding RE isn't the way to do it.  Negative CF is an added cost that defeats the purpose of buying RE.  Equity is only valuable if you can use it.  A 100% equity property is nothing more than a trophy, with the cost to buy it based on how much cash you put into it.  You own the property, but the property owns the equity.  They are not the same thing.

 Just so I understand you are saying, only expand the equity or REs if you have +'ve cash flow right?

[Scott Mac]

Quote from @Joe Villeneuve:

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Arbitrarily expanding RE isn't the way to do it.  Negative CF is an added cost that defeats the purpose of buying RE.  Equity is only valuable if you can use it.  A 100% equity property is nothing more than a trophy, with the cost to buy it based on how much cash you put into it.  You own the property, but the property owns the equity.  They are not the same thing.

 I like how you framed this out Joe.

When you look at a 100 percent owned deal you cut the bank out of the picture as far as cash flow and get to pocket everything. It also takes out the risk of losing the property to the bank.

But with the financed deal the renter pays the mortgage down allowing you to tap a percentage of the equity as a tax free loan. Providing the cash flow will support the loan payments.

The way I look at it, the main differences being risk and taxation.

[Joe Villeneuve]

Quote from @Scott Mac:

Quote from @Joe Villeneuve:

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Arbitrarily expanding RE isn't the way to do it.  Negative CF is an added cost that defeats the purpose of buying RE.  Equity is only valuable if you can use it.  A 100% equity property is nothing more than a trophy, with the cost to buy it based on how much cash you put into it.  You own the property, but the property owns the equity.  They are not the same thing.

 I like how you framed this out Joe.

When you look at a 100 percent owned deal you cut the bank out of the picture as far as cash flow and get to pocket everything. It also takes out the risk of losing the property to the bank.

But with the financed deal the renter pays the mortgage down allowing you to tap a percentage of the equity as a tax free loan. Providing the cash flow will support the loan payments.

The way I look at it, the main differences being risk and taxation.

Correct, except the more equity you have, the more you have at risk.  Just ask the bank.  It's why they don't do 100% financing.  That puts them 100% at risk.

[Joe Villeneuve]

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Quote from @Farooq K.:

Quote from @Joe Villeneuve:

Don't buy it.  Why are you putting the priority of buying another property ahead of why you are buying another property?

Cause I feel like I need to expand real estate to build wealth etc. isn’t that what we are all doing gather as much real estate as possible? Or do most people here only purchase if the cash flow is positive??

Arbitrarily expanding RE isn't the way to do it.  Negative CF is an added cost that defeats the purpose of buying RE.  Equity is only valuable if you can use it.  A 100% equity property is nothing more than a trophy, with the cost to buy it based on how much cash you put into it.  You own the property, but the property owns the equity.  They are not the same thing.

 Just so I understand you are saying, only expand the equity or REs if you have +'ve cash flow right?

Equity is cash that is controlled by the property...not you.  It's frozen.  Cash flow is cash controlled by you.  You need both.  They each have their own roles in REI.
Cash flow's main role is to recover your cost,...the cash you put in, which should be just the down payment.  The lower the DP, the less you need to recover, and the faster you should be able to recover it.
Equity's main role, is to accumulate through appreciation (not paydown...to slow, and too small),...and then cash out to move forward into larger property value.  When you buy a property at 20% DP, your cash (DP) buys you a property value worth 5 times your cost (cash = DP).  When the property appreciates, it increases the equity on a 1 to 1 basis.  This means if the equity increase equals that same 20% DP value, you just doubled your equity.  Sounds good, right.  Problem is, you lost money.  That equity is now only buying you a PV worth 3 times its face value.  
Sell that property, convert the frozen cash (equity) into liquid cash, and it coverts back to buying a property worth 5 times its face value.

[Mason Weiss]

Putting 40% down and taking on less leverage improves your cash flow and protects you with equity. If you speak with an investor friendly lender they can give you the rough numbers on what the best percentage is to put down from a conventional lending perspective. I like putting down a larger down payment right now to protect yourself with better cash flow.

[Allie Pfannenstiel]

Hey There,

If you want to chat more about over the phone, I am an investor friendly agent. 

[Joe Villeneuve]

Quote from @Mason Weiss:

Putting 40% down and taking on less leverage improves your cash flow and protects you with equity. If you speak with an investor friendly lender they can give you the rough numbers on what the best percentage is to put down from a conventional lending perspective. I like putting down a larger down payment right now to protect yourself with better cash flow.

 All putting a larger DP in does is pay for your negative CF up front.  It's an illusion.

[Maureen McCann]

Farooq...Thanks for your question. Investing in real estate is for cash flow, capital appreciation, tax savings, and amortization. Think: the renter pays all of your bills and gives you a few hundred dollars every month.  Investing in a property that provides negative cash flow is like feeding an alligator every month.  Every month that alligator needs to be fed and you don't want to be the one cutting the check. 

If you are looking for a low-interest rate or new construction and you cannot find it in your backyard, then I suggest taking a look at markets outside of your state.  I know of a few operators who are offering 4.75%-5.5% interest rates for 30-year fixed mortgages, a 20% down payment required with cash flow, good appreciation with good PM in place. If you are open to looking outside of AZ, DM me and I will give you the 411.  Cheers!

[V.G Jason]

Investing in cash flow negative is not feeding an alligator, what is this nonsense. You can go ahead and get an intrinsic property on a new build with 4.5%-5% in a place like Jacksonville, other parts of FL, SA, etc., like a lot of these mastermind groups will push but you're just jumping into the rally with 20 other investors all racing to the bottom on stock properties later in life. Feed the alligator now or get eaten by it later.

You can mitigate cash flow with more down, so yes you're paying for it up front. Or even the STR/MTR route is paying for it up front, before someone chimes in on that. The question is how is the profile of the state in regards to landlords, growth for the economy, supply of land, and is this house attractive enough on the exit to garner an aggressive bid if you were to sell in the next up market cycle in 7, 12, 15, 21 or whatever years?

That's your evaluation. Not $200/mo, $2400/year to go capture that in some worse off area and make your numbers work on year 1 & year 2 in a 10-20 year time horizon investment. You're not trading, you're investing. 

Knowing your area decently enough, I'd pursue distressed and value add. Keep enough money in the deal to be slightly OTM or cash flow neutral, and have enough cash to reserves to weather any storm and be happy with a very quality asset under your name. Getting caught up in pennies, need to focus on benjamins. 

[Mike Dymski]

Quote from @V.G Jason:

Investing in cash flow negative is not feeding an alligator, what is this nonsense. You can go ahead and get an intrinsic property on a new build with 4.5%-5% in a place like Jacksonville, other parts of FL, SA, etc., like a lot of these mastermind groups will push but you're just jumping into the rally with 20 other investors all racing to the bottom on stock properties later in life. Feed the alligator now or get eaten by it later.

You can mitigate cash flow with more down, so yes you're paying for it up front. Or even the STR/MTR route is paying for it up front, before someone chimes in on that. The question is how is the profile of the state in regards to landlords, growth for the economy, supply of land, and is this house attractive enough on the exit to garner an aggressive bid if you were to sell in the next up market cycle in 7, 12, 15, 21 or whatever years?

That's your evaluation. Not $200/mo, $2400/year to go capture that in some worse off area and make your numbers work on year 1 & year 2 in a 10-20 year time horizon investment. You're not trading, you're investing. 

Knowing your area decently enough, I'd pursue distressed and value add. Keep enough money in the deal to be slightly OTM or cash flow neutral, and have enough cash to reserves to weather any storm and be happy with a very quality asset under your name. Getting caught up in pennies, need to focus on benjamins. 

We just experienced a period of massive real estate appreciation and the forums will continue to dismiss it's importance.

“If the only tool you have is a hammer, you tend to see every problem as a nail.” -Abraham Maslow