Purchasing A 4 Unit Property With Negative Cash Flow. Bad Idea?

[Steven Smith]

Hello Everyone. 

I'm in the process of closing on a 4 unit building in CA in which I will live in one of the units. I will be raising rents about 8% since the current owner hasn't raised rents in a long time. Even if I eventual move out and make it investment property, I'll still be negative CF of at least $200 to $300 a month. I know that BP has guidelines about cash flow being the driving force in buying investment property. 

Would this still be a good investment since equity would grow from rents collected? 

What are your thought?

Thanks everyone!! 

[Lindsey Iskierka]

@Steven Smith I’m in Long Beach, CA where multi family homes are expensive and finding an investment that cash flows right away is like trying to find a unicorn. I’m a realtor in the area as well so I’m really familiar with the local market. If you think of “house-hacking”, it’s where you live in the property and utilize roommates or other units on the same property to help pay your mortgage. You either live for free or for cheap! If you are living in the property and are only $200-$300 negative cash flow, I suppose that’s what you’re ultimately paying each month for your mortgage after rents. Over time, rents could appreciate and meanwhile you’re building equity, paying down your loan and living for very very cheap! Just as a personal example, my husband and I bought a triplex in Long Beach in October 2016 for $750,000. Rents were below market and units needed to be updated. Over the last two years we’ve renovated all 3 units and raised rents while the market was still appreciating. When we first moved in, we were paying about $1800/month after rents (VERY cheap for our area!). Now we pay about $1400/month and if we were to move out and rent all 3 units we would be positive cash flow about $700/month. So right away, it wasn’t a terrific deal but after renovations and increasing rents, it’s now a good deal and will continue to be a well-performing property for us. So if you are house-hacking have the expectation that you may not be cash flowing or living for free yet, but you may over time if you force the value of your property up through renovations and value-adds. I hope that helps!