Negative Cash Flow Rental a Bad Idea?

Question

I am completely new to the concept of investments and investment property (and new to this site). I've done research on rental properties and negative cash flow but am unclear how to actually measure if something is a good investment. Plus most examples consider buying a house and don't assume you already own the house and paid closing, down payment, etc.

I currently have a 15 year loan (14 yrs left) on a new build house I purchased for 274K with 10% down near the Austin, Tx area.

I am moving across the country to a home probably 100-150k 30 year loan and don't know if I should rent out my current house or sell it (the realtor thinks I can sell for for 290K and cover realtor costs to get what I paid last year).

I'm also currently around 60K in debt (student loans, car, and credit card).

Everyone I know says to sell it because I have debt working against me and it would be a negative cash flow, but from what I've read the Austin area is appreciating 5% and in 14 years, at most, I could have a paid off home bringing in a significant amount of money or sell for a significant amount.

The mortgage is $2500, rent would be around $1900, and a rental management company would be about $250 a month. About $1100 goes to equity each month of the mortgage right now, $600 to taxes, and the rest to interest.

Could someone guide me on how to get started in investment property and measuring if something is a good or bad idea (all recommendations I've received are from people who do not invest in rentals).

The way I see it is that I may have expenses of average 1K a month and, over 14 years, pay less than 200k. But  then could sell the house for 300k+ or have a passive income.

Ray Johnson · Answer

@Caleb Curry Look at it this way, Are you in a position to pay someone to live in your Austin, TX property? That's what you're suggesting, subsidizing your tenant by paying extra money out of your pocket so someone else could live in your property.

The property should be on a 30 year mortgage, Will it cashflow if you refinanced it into a 30 year mortgage before moving? That may help you keep the property as a rental if you can get the mortgage below what it cost to rent plus expenses.

Yusef Griffin · Answer

Asset>Liability, this property would become a liability. I would recommend to sell it and put that money into a performing asset. Cash flow will make you financially free, a property you have to pour money into will not. Also, the opportunity cost of the money held in this property could is working against you.

Frank Wong · Answer

$60k in debt and a house with an $850 negative cash flow.  No Brainer sell it. I do see that you are paying $1100 down on the equity each month.  That sounds great in theory but the reality is you are losing $850 a month out of your real life bank account.  That $850 can be better utilized by paying down the $60k of debt.

Corby Goade · Answer

If you want to get started in REI and you don't have deep pockets, you need to get rid of debt. Student loans, car payments, etc. Your limiting factor as you try to grow will be DTI.

In order to directly answer your question- while the appreciation in Austin is nice, there's good appreciation basically everywhere right now. I don't think you'll miss out on much by moving that equity somewhere else, and you could do so in a way that won't be robbing you of cash flow each month. I like to look at situations such as this one in this way; could I move that equity somewhere else and acquire a new or additional property and either maintain or increase my cash flow? If so, that's what you do. By moving that equity you could actually have a positive turn in cash flow rather than have it suck the lifeblood out of you.

Good luck!

Kenneth Garrett · Answer

@Caleb Curry

I understand your logic about in 14 years the home will be paid for and then will cash flow.  It seems to be a big hit to fund a negative cash flowing project. Can you handle the negative cash flow?  Keeping a negative cash flowing property goes against all typical concepts.  If you follow the teachings of Richard Kiyosaki (Cash Flow Quadrant or Rich Dad Poor Dad) you have a liability instead of an asset.  Never count on appreciation as part of your cash flow calculation.  Historically an economic adjustment is coming.  Be careful.

Good Luck.

Jay Hinrichs · Answer

at this point in the cycle don't think that one would work long term.. if you were coming right out of the GFC and bought say in San Fran peninsula then this would be a no brainer to do.. as those homes went up 500k to 1mil in 5 years.

but I don't see that happening in Texas were you have such an ability to sprawl and build new.. I am sure there are high dollar areas of Austin that did well too.. but maybe yours is more of a track type home.. ???

Anthony Wick · Answer

@Caleb Curry

It sounds like the best case scenario you’d be looking at is negative $850 cash per month. And then there’s vacancy, maintenance, capex, PM fee to find tenants. When people discuss of negative cash flow is ok, they don’t mean these high of numbers. These are terrible numbers. The choice to sell seems very easy to me. Sometimes, starting over is not the worst thing in life. Buy a 2-4 plex in your new area and house hack a while and let others pay your new mortgage.

Dennis M. · Answer

@Caleb Curry

If there’s a negative sign before the number in the cash flow box - its a bad idea

Sam Shueh · Answer

If you have that much debt. Getting another mortgage in another state can be difficult.  Unless you are in very high tax bracket. Unload the place. Think this way, what do you do if the place can not be rented for a few months?  Reserve for 6 month if you are out of a job and have no tenant?

Bjorn Ahlblad · Answer

@Caleb Curry I would vote for 'sell' and sooner rather than later. Prices are in decline in lots of places including Austin. This is not a time to put up with negative cash flowing properties. More than likely there is more price erosion to follow. Now is a good time to educate yourself on what is a liability and what is an assett and what is the difference. Good news is you came to the right place. There are podcasts, lists of books and lots of threads about valuing properties, knowing expenses and creating cash flow. All the best!

Negative Cash Flow Rental a Bad Idea?

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