Negative Cash Flow

[Bryan L.]

Just wondering. How many of you out there have rental properties (or had rental properties) with negative cash-flow? I do. And I see so many newbies on here with a goal to be a buy-and-hold investor and I think that many of them have no clue that you can actually lose money as an investor.

[Jeff Pollack]

@Amy Meza,

Do your due diligence and learn, but try to avoid paralysis by analysis. Making the wrong decision is better than making no decision. If you make a mistake you can always adjust and fix it. Nothing is cast in stone. With real estate you can't control everything but you do have many leavers you can pull if need be. And remember that buy and hold real estate investing is a marathon, not a sprint. It is get wealthy slowly, not get rich quick. Big cash flow is great and you certainly don't want to bleed money, but the real money comes over time from appreciation on a leveraged asset and from your tenant paying off your mortgage. Not to mention a fixed rate mortgage that get's cheaper every year as you pay it off with devalued money due to inflation. There are times all your properties will be rented, you'll have a run of several months with little or no maintenance, and money will roll in. The next moment half your properties will be vacant, and you'll have two roofs and an HVAC to replace. Be ready for the lean times. You have the benefit right now of being in the midst of a very forgiving market. Interest rates are ridiculously low by historical standards and prices are going up. Mistakes will be more easily forgiven in this kind of market.

If you're looking out of state for turn key properties make sure the numbers they give you are realistic. Vet the provider, but more importantly vet the property manager. The numbers can look great, but if the PM is lousy you'll never hit those numbers. It is better to have great management and a mediocre property, than to have lousy management and a great property. Ask the PM for at least 3 references for out of state investors who have multiple properties and have worked with that property manager for more than a year. Be aware of fees that can eat up your cash flow and don't sign on with a PM that charges termination fees if you fire them while a house is tenanted. And always remember, the PM works for you, not vice-versa. If they are doing a lousy job fire them and get a new one.

In terms of areas, look for markets with solid emigration and avoid places that people are leaving. High emigration means people are moving there for work. Look at local unemployment numbers and be sure the trend is in the right direction. A recent census or the chamber of commerce will have this info, but a quick and dirty way of gauging this is to look at the cost of a one-way truck rental from Penske or U-haul. Look at one-way rates between various cities. If you consistently see that a one way trip to a particular city or metropolitan area costs more than the return trip from that city/area you'll find out where people are going.

In terms of cash flow, don't just go with the highest on paper. If you do you'll find yourself in the hood. The cash flow looks great, but good luck hitting those numbers. Try to get a house with schools people want their kids in either because they are good academically or have great sports programs. Lousy schools are okay, too, as long as you're in the new, hip area where the young professionals with no kids want to live.