Properties that doesn't Cashflow

[Precious Thompson]

What reasons would a buy and hold investor buy a property that doesn't cashflow?

[Arlen Chou]

@Precious Thompson there are several reasons that a person in the REI space might make that decision However, keep in mind that a person can always convince themselves that pretty much anything is justifiable.

For some strange reason REI is the only industry where SOME people can convince themselves that taking a loss is acceptable. In no other industry would a business owner say that it is acceptable to take an open ended loss on a business. I come from the world of company start ups, angel and VC funding. The after asking about the product the next thing every investor asks is when is breakeven.

It is understood that there is an initial investment in the company and that a loss is expected during the start up phase.  However, a target to breakeven is always in the plan.  Furthermore, it is clear that many people get tripped up with believing that the building they buy IS the business.  Clearly this is not correct, the building is the product the company either makes or supplies to the market.  Everything you do AROUND that building is the actual business.

The only time a company will make and sell a product at a loss is to capture market share or for add on business. A good example of this would be Toyota when they put out the Prius. They essentially wrapped money around each car sold, so that they could capture the market. This strategy does not work for REI unless you are a really big player and buying up large numbers of properties in a concentrated area. Another example would be Microsoft making the XBox. They sell the units at a loss, so they can secure the market for the software. Both of these strategies do not apply to the normal RE investor.

With that being said, as @Gerald Harris mentioned an investor might take a loss for tax purposes.  However, it is important to understand that these losses are "paper" losses and that you are not actually loosing money out of your wallet.

There are many people who talk themselves into saying that taking a monthly loss against future appreciation is acceptable, especially in hot markets like California. But this is extremely dangerous as you have no real control over that appreciation.  Sure you can force some appreciation by upgrading the property, but that number is finite. Again as an investor in any other industry, a wise investor will not rely on the winds of the market to dictate profitability.  

With that being said, it is VERY different if you are taking an initial loss with a PLAN to get to profitability.  That also means targeting a date when you will breakeven and then start becoming profitable, and having the steps outlined on how to get to that point.  This is why you see many people referencing "business plans" in many of the posts.  Create a business plan for each property you are considering and things will become clear as to if it makes sense to move forward or not.

Hope this helps and good luck!

-Arlen