What's worse - continue renting or buy a negative cash flow?

Question

Good afternoon BP,

I have a few friends that are looking to begin their journey into real estate and are having some of the excitement and anticipation I (and many of you) had when we became ready to start.

If you were in a situation renting your home for $1000 / month and had enough cash to purchase a small multi-family property.

Would you continue renting and purchase a negative cash flowing property ?  Or would it be better to continue saving your income and hold off for a better deal.

Negative cash flowing property could be a duplex with -$200 monthly cash flow (includes R&M, CapEx, Property Mgmt, Vacancy) assuming both units rented.  Or the short term option to house hack and you pay $300 towards your mortgage plus R&M, CapEx, Property Mgmt, Vacancy.

My advice was to continue learning about analyzing deals, estimating rehab costs, gaining confidence with the real estate process, and paying rent.  Avoiding analysis paralysis and taking action is important but I think you want to hold off for a deal.  Curious on feedback from people who have done both options?  I held out and the deal came after 6 - 12 months of looking.

Thanks!

Patrick McGowen · Answer

@Andrew Schrader  Reading between the lines, a plex that is not owner occupied means they are likely putting 25% down.  to have negative cashflow with this big of a chunk, I know they are anxious to get started, but this could delay property number 2 for quite a while, what if it is bigger loss than $200/mo (first time can miss an expense or realize rents are too high), now any money you are setting aside for number 2 disappears and you are stuck with this one looser.  Single family neg-cashflow can be a little safer since you can put less down, and easier to sell (home buyers will over pay but investors who would buy duplex typically do not).  I would encourage them to make an offer low enough to make it positive cashflow, worst that happens is the offer gets rejected.  and/or look for innovative ways to reduce expenses or increase rent.  Otherwise keep looking keep making offers (that make sense even if they seem low-ball) and eventually they will find the right deal or stack up enough money to make the deal work.

Patrick McGowen · Answer

Oh yeah, remind them of the 100 10 1 rule.  look at 100 properties, make an offer (usually what feels like an embarrassingly low offer, but has to cashflow) on 10 and maybe one will get accepted.  Don't even consider negative cashflow until you have nine rejected offers.

Kerry Mertz · Answer

I would say look for a multifamily with 3-4 units and live in one unit. If a duplex has negative cash flow, then 3-4 units should cashflow better. You can live in one unit to lower your living expenses while you continue to save for the next property. Just make sure that it will cashflow as a rental property after you move out.

Mike Roy · Answer

@Andrew Schrader - If renting a house for $1,000 or house hacking a duplex with an effective rent of $200 were my ONLY options, I would buy the duplex.  However, this comes with a whole bunch of caveats others have mentioned.  Obviously, you want to buy quality assets with limited risk and foreseeable upside.

Given the universe of house hacking options though, a duplex would not be high on my list.

Frank Wong · Answer

Hi Andrew,

It really depends on the duplex you are buying and why its -$200 a month. Is it being financed through FHA? Is there an upside in value and rents?  Factor in tax benefits.  You gotta look at the entire picture.

At some point, you will need to take a dive in and make it happen even if it's negative.  You also said you "held out and it came 6-12 months of looking".  All that time and energy to be lost now?  Its always hard to say buy it or not because no one here knows how in depth your analysis is.  For me, if I analyzed and ran it through my system then I would say no but I also take into multiple factors and I am in a different position in my investing career than you. You gotta decide for yourself.

Ali Boone · Answer

You're asking about continuing to rent and buy a negative cash flow property? For what reason would you consider doing that? Did you mean to ask about continuing to rent or buying a negative cash flow property? Sounds like that's what you meant for the househack but not the duplex.

Regardless, and regardless of what situations are options, just run the numbers. Not sure where that $300 towards the mortgage came from (presumably not the duplex), but run your income and expenses on ALL properties and situations you're considering, and judge it from there.

Typically I've found that you make more in returns when you rent where you live and buy a straight investment property (a positive cash flow one, not a negative), but I'm used to high-priced markets and Montana may be very different from those, so....run the numbers.

Grant Rothenburger · Answer

@Andrew Schrader

I can only think of two reasons to purchase a negative cash flowing property:

1. You're going to raise rents and/or lower expenses and make it cash flow

2. You're betting on appreciation which is not smart IMO, especially with neg cash flow.

Okay, maybe a third too, house hacking. If that's the play then maybe, but you asked about renting AND purchase neg cash flow property so I don't think that's the case.

If you can do #1 sure, if not, no way. Just my opinion.

Why would you want to purchase this negative cash flow property?

Alexander Felice · Answer

you asked if we would continue renting AND buying a purchasing a negative cash flowing property. is that correct? if so, then I would not do that. I might rent my primary and buy a cash flow positive property, but I would not rent a place (neg cash flow) and buy a neg cash flow building. I've just never been in a big rush to lose money so that approach doesn't appeal to me personally.

if you want to rent, and use your capital to buy a cash flow positive property, then that's not such a bad idea ;)

What's worse - continue renting or buy a negative cash flow?

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