Struggle to cash flow, buy it anyways?

Question

I think I know what the knee jerk reaction is going to be here: Absolutely not!  Hear me out...

The goal: Purchase a multifamily property as my first ever purchase with 3-4 units on an FHA loan with as little down as possible, make it cash flow and build the equity, baby. Escape the PMI within a few years with a refinance.

Problem is, I currently live in Arvada and I'm looking at the suburbs surrounding the west side of Denver, and a lot of multifamily properties are pushing a quarter to a half a million. I haven't found any that meet the 50% rule, and only handful that would eventually meet the 1% rule after updating and improving, but wouldn't cash flow for the first year or two while those improvements are being made. I could live rent free while breaking even for a while, but nothing in my pocket right away.

However, a lot of advice I've read around here on Bigger Pockets and around on other blogs and forums say that the real key to success and avoiding mistakes is to only invest in deals where the numbers meet the rules. I feel like there are very few properties in my area where the numbers are up to snuff, and those that do meet standards require somewhat tremendous rehab.

So what's the professional opinion - should I buy a 'plex even if it doesn't currently cash flow? Should I count living without rent a cash flow? Or am I just being to cautious about risk?

Richard C. · Answer

I'm a little confused.  Are you saying you could buy a 4 unit, live in one unit, and then end up with slightly negative cash flow, after all expenses?

Because to me, that is positive cash flow, by whatever the market value of your unit is.  You're just paying yourself rent.

If you have a 4 unit that cashflows $0.00, after all expenses, from 3 units while you live in the 4th, you are cash flowing.

Danae Meurer · Answer

Hi Kayla,

I would run the numbers for all the units being occupied.  If the numbers look okay then I would have no trouble buying it and counting the rent you are saving as cash flow.  Being able to use owner financing and finding a multiplex for sale right now are benefits that don't fit into a formula.

My husband and I started out buying single family homes that we wanted to live in.  Fixed them up while we lived there and then moved on turning them into rentals.  So because they had to fit our family they didn't all fit the numbers perfectly.  They all cash flow and have appreciated greatly in the past few years, but none of them are 1%.  The renters are also paying down a huge chunk of our equity.  Now that we have more ability to be choosy I am more concerned about the numbers.

Cash flow is not my only consideration when deciding on a purchase.  For instance, we like to buy properties in nicer areas.  Some times the best cash flow numbers are in the cheaper properties, but they tend to have more headaches as a landlord.  So we choose to have less cash flow, and less headaches.  However, our properties have much higher appreciation possibilities because they are all in nicer neighborhoods.

I am an investor here in Denver and would be happy to talk to you more.  I try to get to the biggerpocket meetups and you can always message me.

Don't let a less than perfect market keep you from moving forward with your goals.

Account Closed · Answer

If you cannot answer why THE MARKET is paying 100+ times the monthly rent then you should not be investing in real estate.  You should also be able to answer why THE MARKET is only paying 50 times the monthly rent in other areas.  Once you can answer both then you can make an intelligent choice.

Walt Payne · Answer

@Kayla Davis  I wouldn't do it. But that is something that is based on my current situation. It involves risks I am not in a position to take. But if there is room to turn it around and make it profitable, I probably would have done it 20 years ago. Do your due diligence and know what you are getting into. Then, if you are in a position to do it, financially and emotionally, then it may work for you.

One consideration would be if you can purchase a place that you would be comfortable living in yourself.  That may make the negative cash flow a little more negative technically, but if it cuts your overall costs it may help. Say for example you eliminate a $1200/mo rent payment to someone else and lose $900 of rent income by occupying one unit, you would save $300/month.

Also, the 50% rule involves projected costs, not returns. You may be confusing the 50% rule with the 2% rule. And both are a "rule of thumb", not inflexible rules that must always be followed blindly.

Ali Boone · Answer

You certainly aren't being too cautious! Why would you buy a property that doesn't cash flow? Profit is the whole point of investing. The only time investing will work if there isn't cash flow is if it's in a severely appreciating market (LA for example). If no appreciation, and no cash flow... it's a losing investment.

On the flip side, if you are trying to buy a house for yourself, buying into a MFR and living in part of it is probably more advantageous than buying a SFR for yourself. Although possibly not if you are talking about a half million dollars. Smaller purchase price scale, better. But you're talking nice areas, and expensive areas.

Personal advice? Refocus.

Bill S. · Answer

@Kayla Davis for me it is far better as a beginning investor to be close to your property than to have wonderful paper cash flow. I agree that living in one unit of a four-plex at break even is the same as 25% positive cash flow.

I really caution beginning investors from getting into property needing rehab. It always costs more and takes longer than you think. Unless you have a background in construction or project management I would not suggest you tackle a project needing rehab. Property needing work also tends to attract the low end tenants which have more headaches.

In Denver right now, if you are getting the tenants to help with the mortgage (so you are paying less than your "share" of the mortgage) and cover expenses for a property I would call it good. IMO it's better to be invested in this market than watching. Things will go down but you still have the tenants paying principle down. You can rinse and repeat every few years.

Curt Davis · Answer

This is why investors like yourself and others in places like California look to other markets to get the cash flow they are looking for. Something to consider.

Account Closed · Answer

@Kayla Davis

Hi Kayla -- I would not. I don't like to speculate, it's just too risky for me, and have seen too many folks get into bad deals doing this. Maybe you should start looking at markets outside of CO.

Andrew

Kayla Davis · Answer

@Suzette Parsons I understand that risk on a rental property as an asset - I also understand that if I buy a single family home for my first property, that's no longer a risk, but instead it's a personal liability with zero income, much less any cash flow. As a youth just starting out, with no assets, isn't the equity and net worth built up by a stable property value just as important, or more important at this point in my life?

@Bob Bowling The Denver & surrounding area is paying more because property values have remained very stable, even throughout the 'great recession' and because rents continue to go up, up, up. Part of the reason why I want to get out of the business of renting and into the business of owning.

@Walt Payne Would you do something like it if you were in my position? Very little net worth and no assets, plenty of working years ahead to build up a portfolio, just trying to get my foot in the door in a way that breaks even...

Given the circumstances, I would definitely be purchasing a property I'm comfortable living in, since that would be required by whatever first time buyer loan I use... Best I can tell, pretty much any multifamily would break even, allow me to live rent free... And then the money I am no longer putting into rent will continue to be paid forward into my current investment pot, along with the 50% of my income I've already been dumping there every month. The property may not cash flow, but it sure makes my day job more profitable, with the expectations that I turn those profits over into investment.

I don't think I'm confused about the 50% and 1-2% rule - I understand that one is costs and one is returns. I've been reading that the best deals will meet both rules, but I've also read that it's not so important for new investors ("Don't worry about that, just get your foot in the door"), and also read that they shouldn't be applied to multifamily properties ("Too confusing, doesn't consider all possibilities with multiple units"). This mixed advice is what I find confusing, especially when paired with my low income financial situation. I may also be confused as to where equity falls in with a buy and hold.

Thanks everyone for the answers!

Kayla

Suzette Parsons · Answer

My personal rule of thumb...I never buy anything that doesn't cash flow.  All it takes is something minor to go wrong...a vacancy, large repair, etc and you are the one writing out the checks.  Cash flow allows me to sleep at night.

Struggle to cash flow, buy it anyways?

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