Break even cash flow, why or why not?

Question

I've brought this topic up elsewhere, but would love to hear more input from seasoned but and hold investors. Let's assume only the givens to making money exist on these, meaning no appreciation or rental increase. If you were to invest in good neighborhoods with great schools and community, would you be making a good investment with say less than 100 or even zero cash flow? I really hope to get a good discussion because it seems at first glance that cash flow is king. However, if it's not the priority, what would make this investment vehicle dangerous. Thanks so much for taking the time to participate.

David Krulac · Answer

@Scott W.

I never said I didn't want appreciation.  But in a buyer's market as a buyer I want cash flow AND appreciation, and since its a buyers market here, i get what I want.

You can't spend appreciation at the grocery, but I sure can spend cash flow.

Roy N. · Answer

While that is true, putting more cash in to achieve a viable cash-flow lowers your {cash-on-cash} return.  Unless you have lots of room to increase performance and, consequently, value, the reduction in leverage will also reduce your returns.

Alternatively, if you have a large, stable property in a class A area and are happy with a CAP of 5-6, in order to obtain the cash-flow, then this approach is fine.

Amit M. · Answer

I look at it differently than cash flow/no cash flow. Most properties will cash flow, given enough of a downpayment to reduce your monthly mortgage.  So the question then becomes, how much money do you have to put down?

Let's say you have $200,000 (a lot, I know.)  It sounds to me like many cash flow oriented investors would buy 10-15 SFH's or a larger multi unit, and get a decent cash flow. But, that is a lot of props to manage, and in most cases there isn't much appreciation in these types of markets. Or they are in heavy boom/bust cycle areas, and your values flex a lot.  I'd be more interested in buying less property, but at a much higher quality- places that you'd actually be willing to live in!  They may need 25-30% down to give you an okay return on your down payment. But, if you choose wisely and plan on holding for several years, you can make ALOT in appreciation.

This has been the case with much of costal California, and booming urban areas like Brooklyn, NY.  Unlike cash flow oriented deals, you can make a much higher return (inc. appreciation based on your leveraged DP), and need to manage a lot less units. All the better if you live nearby and can a) manage and control the props and tenants yourself b) intimately learn the neighborhoods and what is upcoming and why.  You're focusing your efforts this way and leveraging your specific market knowledge. I know many people in the SF Bay Area that made fortunes that way.

Dean Suzuki · Answer

Hi,

I'm relatively new buy and hold investor (since 2011, have a dozen+ SFH rentals) so I'd like to see what others say.  But for me, I look for positive cashflow to secure the property long term.   I would be very careful on zero cashflow since there are always emergencies.  If you don't have a positive cashflow, then you may not have built the reserves to pay for these emergencies (e.g. roof leaks, AC stolen, furnace breaks down, tree falls onto tenants car, tenant trashes the place during eviction).   [I have had a roof leak (insurance covered, but still need to pay deductible), AC stolen (insurance covered but still need to pay deductible), tree fall onto my tenants car (turns out to be an "Act of God" but still paid the gardener to cut down the tree), and a tenant trash my place during an eviction.]

If I didn't have a positive cashflow on my properties and used it to build a healthy cushion, these situations would have been more stressful.

It's also important to look at what are you including in your expenses to calculate the cashflow.  Are you including mortgage, property taxes, property management, insurance, maintenance, and vacancy?   What percentages are you using for each of these factors?  If your factors are too low, then you're actual cashflow maybe negative.

In summary, I use the cashflow to pay the expenses of the property, build a reserve so that I can hold the property over the bad times and have some passive income.  Over the long term, I'll build equity as the tenant pays down my mortgage and as rents increase/house prices increase, my cashflow and equity will improve.  A goal is not to lose the property because I didn't have enough reserves to pay for unexpected expenses.

Dustin DuFault · Answer

I think you're saying assume no appreciate on the property nor an allowance for an increase in rents, correct?

If that's the case the cash flow is everything.

In the real world though you can get equity, increasing rents, and cash flow on day 1. I tend to analyze my properties in terms of total return - the equity I believe I'm buying on day 1, plus a healthy amount of cash flow on rents.

Pete Nater · Answer

Depending on where the property is located, consider renting to travelers using  out https://www.airbnb.com/.  and http://www.hiremymom.com/ to have the property cleaned between renters

Scott W. · Answer

I've lost about $65/month the past 16 months, however, I have $400/month in principal and the home went up 17% in one year.

Now, I'm tune to sell it in a couple years cuz I think we're in a bubble (just my opinion).

Appreciation does happen sometimes guys.

David Krulac · Answer

Putting down more money does not really change the cashflow, unless you assume no return on your sizable investment.

One other aspect is that in many areas it is still a buyer's market, and therefore there are deals to be had, why waste your time on break even, or even heaven forbid negative cash flow, (which break even becomes the first time an unexpected repair happens.)  Go for the gusto, leave the break evens, the table scraps for the others.

Jeff S. · Answer

What you are talking about sounds like a bond. If you remove market fluctuations then you should remove all the risks too. Capital plus risk equals return, of which you have very little, therefore, you have a bond like investment. Maybe ok for holding some cash assuming the property is liquid enough to be sold. If not liquid, price goes down which is not the model you are talking about.

David Lee · Answer

I don't that I would invest into something that I was just going to break even on. There are to many variables that could make you go into the negative later on. Things such as you had to fix the roof or heat/ac or even nobody renting it for a long period of time. Like @Levi Forrest I could understand if it was yours and rented it out after you purchased something else. I think the big thing is that you are here to make money not let it sit in a house and see it for 30 years.

Break even cash flow, why or why not?

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