Is negative cash flow really always a bad deal?

[Flavius Alecu]

Hi all,

First, I just wanted to say thank you to everyone who contributes to this forum. I'm learning tons here and all you fine folk make this a great resource!

Now, I'm curious what people think about (minor) negative cash flow for buy and hold rentals. Everywhere I read about it the consensus seems to be it's an instant no-deal. What about in high appreciation areas with low cap rates like larger SoCal cities? I know there's much better deals to be found with some patience, and that negative cash flow makes the property a liability. But, if you can afford to subsidize the rental income for the foreseeable future and can tolerate repairs, and you have the majority of your PITI being paid by the rent, does it not make it an ok investment anyway due to the loan payment and potential appreciation? On the other hand, it does seem like we're nearing the peak of the appreciation cycle, but even then, if the property can be held for the long term to me this still sounds like a good investment.

[Bryan O.]

@Flavius Alecu I think that is a bad idea. First, I believe that we're close to the top of the cycle, so you're buying at as high a time as has ever existed, and with negative cash flow, your only hope is appreciation. So you already start from below ground 0. If the market had crashed in the cyclic area and you were buying, then I would recommend buying it... but of course if the market had crashed it would probably not be negative income to begin with.

The most important thought is opportunity cost. You can buy 1 property for -$100/month (and I'm guessing that does not include vacancy, capex, maintenance, and management), or you could likely buy 4-5 properties with total of over +$1,000/month (after calculating all the other costs) in other markets. So while your investment may work in 10 years after we come back from the next crash, you prevent yourself from any current benefit or growth in the interim as well as expose other risks (i.e. losing your job, having an emergency that causes you to sell in the down market, etc.).

Some people swear by appreciation, but I bought at the height with a negative cash flow property and it stopped me from expanding after everything crashed. I could be in a doubly-better place than I am now because I thought, "Oh well, it's sort of like saving for retirement." The property is worth more now and cash flows just fine, but that's because I had to sit on it for ~6 years to start breaking even, and another 4 to get decent cash flow. Swimming with a large rock in my pocket...