should I be paying out of pocket monthly just to cover mortgage?

Question

I am looking at a duplex with a monthly mortgage higher than the rent being received. One tenant has a lease until next July, and the owner wants a 6 month lease after selling with a set price, and none of that is including the utilities. My Real estate agent told me that its normal for an investor to pay out of pocket to operate an investment property. To me that sounds upside down, thoughts?

Steve Vaughan · Answer

I have a couple I have to feed $100-200/ month but they have a lot of equity and are on short loan terms.

I need 5:1 paydown to neg cf ratio. For example, my -$100 cf pays the loan down $500/mo.  The -$200 cf pays down $1100. The -$300 doesn't matter much as a portfolio %.

I am talking about cash-flow, not gross rent minus mortgage.  If your gross rents are less than your payment, your cf will be hugely negative. You haven't accounted for op expenses, cap ex or vacancy & collection losses yet.

Your agent doesn't sound like an investor.  Most aren't.  Find one that is vs just listening to someone that took a simple test mostly about marketing.

Anthony Wick · Answer

How is it an investment property if your rents do not cover expenses? It's a bill,  not an investment. What could your goals be, to lose money?

Bob B. · Answer

@Deven Wolfe It's ok to be under water if  you are buying the property at a huge discount, have plenty of disposable income to pay the shortfall, and have significant reserves for repairs.  Basically your agent's trying to make a commission and I'd find another agent.

Kathy Henley · Answer

It depends @Deven Wolfe Are you in California where market appreciation might make up for today's pain? If not, you might look for another agent who is understanding of the principle of a property paying for itself; one who also owns investment properties.

I use the 1% rule before looking closer at a property, because my area fits this test: the monthly rents have to be 1% of the list price. If the listing is $140,000, the combined rents for the building need to be $1,400. Create a criteria for yourself.

Also, are you looking at a 30 year mortgage with a 25% down payment? This is also part of my property analyzer.

Chace Fraser · Answer

Hi @Deven Wolfe In regards to house hacking if you are using a low down payment, it's not really realistic to expect to be cash flow positive.  When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment.  Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

Russell Brazil · Answer

If you are using a VA loan at zero percent down...then yes you should absolutely expect to be cash flow negative.  Investors who buy for positive cash flow are putting 20-30% down on a property.

John Barrett · Answer

@Deven Wolfe, while everyone's investment strategy differ, but I would not be looking at a property that has negative cashflow unless you are planning to house hack the property.  Properties are starting to sit on the market longer and it appears that the market is starting to turn.  As such, I would advise to wait and find a property that cash flows.

Best of luck.

Craig Sloan · Answer

@Deven Wolfe

Is it an option to look in more affordable markets?  That may mean being an out of state investor.  I don't know if that is possible/desirable for you.  Either way you need a new agent.  A quick and simple evaluation tool is this.  Ask yourself; "If I could do this deal 10 times would I?"  If you did 10 deals like this you would be way in the hole my friend.  Keep looking for a new agent and a new property.  Hang in there, you'll find the right one!

should I be paying out of pocket monthly just to cover mortgage?

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