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Updated about 2 years ago, 10/16/2022
Looking beyond cash flow in Raleigh
Hello!
I am a first time investor in a particularly interesting market. I am looking to invest some savings we have from W2 income savings. While we dont depend on the cash flow, taking a negative cash flow property seems like a risk expecially in year 1. With a recession imminent, would you recommend buying a cashflow negative propoerty at 5% cap rate? I have been listening that in a high growth market, it might make sense, because you will make quicker equity, but that sounds speculative. Appreciate any advice, thanks in advance.
@Yogesh M sayanakar, investing in real estate is always a personal decision. If you were an experienced investor very knowledgeable in a local market and had intelligence of a significant change in the local market that would impact the valuation of properties in the area, then it might make sense. As a first time investor who is learning the business, it is a much riskier proposition. I have never invested in a negative cash flow property, but then I am not a developer and I am not only investing my money and my family's money, but that of other investors so I am a conservative investor. My own view is it is better to invest in properties that cash flow positively or with other investors who can help you learn the business and after gaining experience you can choose to invest in higher risk properties. But it is your decision. Good Luck!
Hi Yogesh - I agree with E.C. Everything depends on the investor and their goals, but I think you would be better off taking some time and finding a property that breaks even at the very least (after setting aside money for vacancy, cap ex, etc.). Even if you're trying to make a more speculative investment and think properties will appreciate in the area, at least you won't be paying out of pocket each and every month to keep that hope alive. It's a lot easier to hold onto a property and wait for the right time to sell if it's breaking even (or cash-flowing obviously), than to look objectively at market trends and find the right time to sell when you're paying into the property every month. Just my thoughts. I hope this helped!
Hi @Yogesh M sayanakar. That's an interesting question. Like Stony mentioned, investing is a personal decision. I work with investors that all have very different criteria from the others.
That said, if you can't at least break even on a property in some way, then that seems very risky to me and not an investment. An investment, by definition, is your money working for you. If you're putting in money every month, that doesn't make much sense to me.
Yes, appreciation is fantastic and where a lot of gains come from, not the few hundreds in cash flow per month. That said, if you're counting on that appreciation for the investment to make sense, and the market depreciates, then you're left with an asset that you're under water on, and paying every month.
Don't get me wrong, a lot of people have made a lot of money with appreciation the last few years. But the housing market is cyclical and does goes down, while overall trending up, just like the stock market. Unless you're prepared to be putting money into your investment every month indefinitely, waiting for the uptick in rent and appreciation, I think you'd be better off looking for another property.
From another newbie that got into my first property earlier this year in a Short Term Vacation Rental, I would say definitely consider your personal goals and what you want real estate do for you.
For me, I built wonderful connections at my local meetups and with those relationships I can leverage my knowledge and trust with them to work on deals. So if I were to do it all over again, I would have used my money on hand to Flip/Market for off-market leads on my own so I can use a cashflow from more active efforts to then trickle the stock pile down into STR/LTR rentals.
Even in my Cash Flowing STR, I still feel "stuck" waiting around to get into the next deal. But again, my goals are revolved around that I want real estate to be my full time grind and I wish I could have used my cash to accelerate/scale faster.
The Raleigh market has seen such appreciation. No one has a crystal ball, but if prices should fall it may be difficult to sell your investment and the negative cash flow may make it less attractive to hold onto long term.
@Yogesh M sayanakar let us know what you decide to do!
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#5 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- Austin, TX
I would not take on a negative cash flowing property in this environment, take the undeniably good deals
Quote from @Yogesh M sayanakar:
Hello!
I am a first time investor in a particularly interesting market. I am looking to invest some savings we have from W2 income savings. While we dont depend on the cash flow, taking a negative cash flow property seems like a risk expecially in year 1. With a recession imminent, would you recommend buying a cashflow negative propoerty at 5% cap rate? I have been listening that in a high growth market, it might make sense, because you will make quicker equity, but that sounds speculative. Appreciate any advice, thanks in advance.
Quote from @Nick Shri:
Quote from @Yogesh M sayanakar:
Hello!
I am a first time investor in a particularly interesting market. I am looking to invest some savings we have from W2 income savings. While we dont depend on the cash flow, taking a negative cash flow property seems like a risk expecially in year 1. With a recession imminent, would you recommend buying a cashflow negative propoerty at 5% cap rate? I have been listening that in a high growth market, it might make sense, because you will make quicker equity, but that sounds speculative. Appreciate any advice, thanks in advance.
Thank you all for Tue great insights!!!