Invest in a negative cash flow property for appreciation?

[Yuki K.]

Hi, for the experts who are investing for appreciation, will you invest in a negative cash flow property if the appreciation is almost certain? The property I am thinking about is a ~1.3M purchase, no rehab necessary, at a monthly negative cash flow of ~$1,700, and the conservative appreciation projection is 6-7% per year.  Why or why not?  What else should I factor in other than purely numbers?  This is a SF Bay Area property, B building condition in a A neighborhood of a A town. 

[Stephen Stokes]

@Yuki K. Only reason I would ever invest in a negative cash flow property is if I am putting little to nothing down to acquire ownership. For example, taking subject to existing mortgage or owner financing with 0-5% down. CASH FLOW IS KING. Without cash flow you are not investing you are speculating.

[Jay Hinrichs]

Originally posted by @Stephen Stokes:

@Yuki K. Only reason I would ever invest in a negative cash flow property is if I am putting little to nothing down to acquire ownership. For example, taking subject to existing mortgage or owner financing with 0-5% down. CASH FLOW IS KING. Without cash flow you are not investing you are speculating.

there is speculation and then there is knowledge of market trends and where path of progress is going..  the big money with passive investing is made in the path of progress..  some of the biggest hits in real estate are the farmers who make no money for years then sell for millions.

so figure out where development is going and get ahead of it.  cash flow is irrelevant and there is no speculation its having a deep dive into the area you want to invest in and knowing more than the average investor who whole sum of investing is just looking at a spread sheet and wants 100 a month or 200 a month in cash flow while tying up thousands on credit and cash..   Texas I am sure is a prime example of those buying in the path of progress..  Now this does not work in other parts of the country were their is old housing stock or very limited to no new development going on.. in those markets then the ONLY reason to buy is cash flow..  so really it all depends right ?

I bought a property Just north of San Francisco in 96 bare land paid 27k for it let it sit.. 2020 sold for 2 mil.  that kind of thing But when i bought they had just put a freeway interchange in and a brand new home depot. Even though I was out of the city limits .. my developer brain said its just a matter of time..  So I dont know maybe a 27k rental in the mid west might have cash flowed better over the years but its probably only worth 70k today.. right ?

[Henry Lazerow]

Find something with atleast some positive cashflow.

[David Dachtera]

Originally posted by @Yuki K.:

Hi, for the experts who are investing for appreciation, will you invest in a negative cash flow property if the appreciation is almost certain? The property I am thinking about is a ~1.3M purchase, no rehab necessary, at a monthly negative cash flow of ~$1,700, and the conservative appreciation projection is 6-7% per year.  Why or why not?  What else should I factor in other than purely numbers?  This is a SF Bay Area property, B building condition in a A neighborhood of a A town. 

"Investing" for appreciation is not investing - it's speculating (gambling).

"No rehab necessary", but if you did, could you ask more in rent ("forced appreciation")? 

Could you negotiate a better deal?

[Darius Ogloza]

Purchasing a third-rate property for a price less than half of its re-build cost in a stagnant or dying corner of the country because it generates a couple hundred bucks in year 1 on paper is not a good strategy.  

By year 10 or 15, your asset will likely become a liability.  This is not investing.  Nor is it speculating.  This is throwing your money down a rathole.    

[Steve Vaughan]

Originally posted by @Yuki K.:

Hi, for the experts who are investing for appreciation, will you invest in a negative cash flow property if the appreciation is almost certain? The property I am thinking about is a ~1.3M purchase, no rehab necessary, 

 Only if it is made certain by capturing equity at the buy.  Top shelf area /assets must be purchased below market value.

I bought one last year that was also worth about $1.3M, but I purchased it off market directly from the owner for $930k.  

Best values are usually found dealing with long-time lamdlords, not Jack and Jill homeowners. Don't pay retail. 

[Matt R.]

I like deals that make money day 1 as in could sell for profit as is. This would be my is it affordable cut off. Negative 1700 a month idk personally and I guess in theory it could pencil out still with some sort of corp rental airbnb type plan. Good luck!

[Shiva Bhaskar]

Hi Yuki. Like you, we invest in a very expensive market which is appreciation heavy (Los Angeles). I lived in San Francisco as well, so I am somewhat familiar with the market up north. I would never buy a property that does not cash flow, and have good rental upside. 

I believe you can find such properties in the Bay Area as well, but it will require work to find. Also, significant upgrading will be needed. The Bay Area is a market where you can do very well with value add deals, if you're able to get your hands on them. I think a C or worse property in an A area can be a decent investment, but your best bet is a C property in a B to B- area, and you focus on improving it. That approach can work well in your area. 

[Matt Lyons]

@Yuki K.

Personally I like cash flow ans would only buy a negative cash flow deal for two reasons:

1. I was buying undervalued and could flip quick, I would take a short term loss if the upside was appreciation and fair market value

2. If it was part of my entire portfolio and took some profit (saved some taxes) from some gains one year to trade off the next

Again, I have to have a reason to take a cash flow hit and that reason cannot be just: I lose 5% a year but it SHOULD appreciate 10%

[Tony Kim]

Originally posted by @Yuki K.:

Hi, for the experts who are investing for appreciation, will you invest in a negative cash flow property if the appreciation is almost certain? The property I am thinking about is a ~1.3M purchase, no rehab necessary, at a monthly negative cash flow of ~$1,700, and the conservative appreciation projection is 6-7% per year.  Why or why not?  What else should I factor in other than purely numbers?  This is a SF Bay Area property, B building condition in a A neighborhood of a A town. 

Hi Yuki, a lot of this will depend on your specific situation. Do you need cash flow? Or are you the type of investor that already has a good amount of other things going on and negative 1,700 cash flow monthly will hardly be felt? 

Also, I would only do this if you are in fact purchasing at a sizeable discount compared to comps... and I have a very difficult time believing that in this market, you have actually found a prime property in a prime SF location that doesn't need capital repairs at a discount. If anything, the seller is probably comparing between his/her 50 offers right now and is trying to make a decision on which offer to select. If I'm wrong about this, then I would seriously consider why there hasn't been a crazy amount of offers like every other property that's been going on the market? Since you have specified 20% down and not 25% down, this sounds like an SFR, so you should be competing against owner occupied buyers and these are the folks that are inflating home prices right now.

If you're the second type of investor I mentioned above and allocating more funds to this acquisition won't affect your portfolio's total consolidated cash flow too much and if by chance you really have found a discounted property few others in CA seems to know about, then I would jump on it. 

[Jim Spatzenfeld]

I always see appreciation as a bonus. I would not take a job where I don’t get paid (and even have to put my own money in), only in hopes of maybe getting a bonus sometime later on...

[Nick Robinson]

@Yuki K.

Do not invest in a property with negative cash flow.  Also I would stay as far away as possible from places that are not landlord friendly.  

[Bill B.]

I agree with most of the posts above. Buying for cashflow IS gambling. Think about how many landlords have had non-paying tenants for the last 6-12 months with negative cashflow. MOST of them are going to be bailed out by appreciation as their properties have gone up in value more than the rent they didn’t get and will never collect. 

Unless the cashflow is over $500-$1000/mo MINIMUM, you’re going to have negative cashflow years because fo expensive turnover, blown ac units, etc.  So, if you NEED that cashflow, real estate ain’t your thing. You can expect it, especially once you get to 6-10 properties. But at 1-3, you better not need it. 

[Maria Amaro]

I see Chinese investors do this in SoCal, even from overseas without looking at the property. There's one in Brea(867 Oak Knoll) that rented for 3700 a month and the owner purchased for over 910k( I think it could have rented for more as is, even more if they would have replaced the flooring).   20% down and 3.15% would be a 4250 a month payment. Much of the time, though, they pay in cash, so it cash flows, and it's just a place to park their money for a long time. I guess it makes sense that way, but it's risky if you are putting 20% down and get one of the professional tenants out there that doesn't pay rent for a year and then destroys your house when they finally leave. They exist in nicer areas also. 

[Justin Thorpe]

@Bruce Lynn

Typical CA / SF BA bashing post by folks who don’t invest in this market or understand it well enough.