negative cash flow, but not really an investment

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negative cash flow, but not really an investment

Edward Debbs
Philadelphia, PA · Member since 2015 · 45 posts · 15 votes

Hi all-

I have a rental in New Jersey which I've rented out steady for 3 years now to the same family.  We actually hadn't intended to rent it out, but we had to move quickly and it was faster than selling it.  

We have a low interest rate on the mortgage, but we net $400 less than we pay on it every month.  

We are interested in eventually buying more properties and renting them out, particularly since we have some experience on this one.

So I've gotten conflicting feedback from others about whether or not something like this is worth it.  One of my friends tells me "that's like handing somebody off the street $400 bucks a month to go live on your dime."  My sentiment is, yeah, kinda not really.  That assumes the house I'm paying off is worth $0.  I figure as long as my rent check covers all taxes and insurance and eats part of my principal every month, I'm still making money.  Plus I depreciate on taxes and get money back that way.

Would I buy this house today as an investment property?  No.  But the issue here is that this is a house we would like to keep for our future use (due to its unique location).  

Is there reason to what I'm saying or do I just pull the plug on this place, save my 400 bucks a month and put it toward a positive cash flow property, then buy a similar house later in life?

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Royce Talbo
Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
11y

@Edward Debbs

 Ok I disagree with most here because they missed the key fact that you said that you are planning on using this place for your future use.  If it is a property that you love because of the location and got a deal on it and dont think you can get another deal in that location and you have the money to pay the $400/month then negative cashflow doesnt matter.  It is for your future use, it is not an investment.  Look at it as a house that you are away from on a long vacation and someone is looking after it for you.  The $400 is not lost, it is going into a savings called your personal future residence.  I guarantee none of these guys are  cash flowing on their personal residence,  if they are, they are living in a multi.  If you are not planning on living in it in the future, dump it and follow what everyone else is thinking as this is a bad investment unless you have crazy appreciation.  I had a condo in hawaii where I was negative cash flow, but in 5-6 years I made $150k when I sold. so negative cashflow is not always bad just depends on your market and if the other legs of the chair can keep your numbers up.

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  • Erik Pedersen
    Bayonne, NJ · Member since 2013 · 90 posts · 27 votes
    11y

    Are you charging market rent?  Probably not if the family has been there for all those years.  If youre losing money every month its not a good investment.  I'd give the family a pretty big window but tell them due financial issues I need to raise the rent to market rent. Emphasize MARKET RENT - theyve been paying below market rent for all these years so youre actually doing them a huge favor this whole time.  Hopefully they understand.

    I would get this house in order before doing anything.  Positive cashflow puts you in a much much better position for moving forward.

    0Reply
  • AJ S.
    Investor · Columbus, OH · Member since 2015 · 99 posts · 35 votes
    11y

    raise rents

    value ad like put in washer/dryer and charge extra

    rent each room

    re-finance the property if possible

    see tax advisor about depreciating the asset 

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  • Carl C.
    Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes
    11y

    Negative cashflow really doesn't make sense. You should definitely do some research into what market rates are for you area and put yours in line. As for future purchases, there are lots of factors but you want to find properties that will cover your costs plus give you some profit at the end of the month. Everyone has different strategies but do some reading here and get a feel for what other folks are doing and then decide how you are comfortable moving forward. 

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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    11y

    I would never do negative cash flow! On the other hand our houses don't have to make huge amounts especially when we purchase them at 0% down. Are goal is with my sweat equity of managing them to have someone else pay off the houses!

    Are you charging market rate? That's the first thing I would do. If you are $400 below market than get it up now! While that means you might lose your tenant you want someone paying market at least I do!

    Do you have extra expenses? I have found lawn service, property management, pest control, etc aren't needed at my houses. That I can offer a competite rate and have te tenant pick up these costs. While they won't pay "more" for them they have no trouble paying for them on their own. This helped me cut down the costs.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    Rationalization is the most expensive word in the REI vocabulary. There is never a good reason for negative cash flow. All you need to ask yourself is how many of these would you like?

    0Reply
  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Thanks for all the rapid and helpful replies. One issue we have with the house is we are still paying PMI, which will come off next year so that will put me $150 closer to my goal.

    When we were initially renting the house, I saw the applicants.  There were a great deal of people I wouldn't want to rent to.  One of the great things about this tenant is that he pays every month on time and takes care of maintenance around the property.  He's replaced the water heater, sump pump and fixed the dishwasher as well as done a lot of extra clean up after storms etc.  So there's value added there too, but difficult to quantify.  Long story short, I'd like to keep this renter.  

    Maybe my strategy should be rather than giving him a big hit on rent, move it up incrementally.  Also, I see other places on Zillow and what they're asking for rent, and I do think I could charge more.  That said, its difficult to find what people are actually getting.  Any thoughts on that?

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    You're guesing too much...and rationalizing way too much.  Those items your tenant payed for are minimal compared to what you are losing every month.

    You said you don't want to lose this tenant. Then put them into a different house...that cash flows.  I bet the tenant doesn't want to lose you more than you don't want to lose them.

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  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    I was afraid of that.  Thanks Joe, I'm going to retool my thoughts on this and focus on making some money.

    0Reply
  • Kevin Delaney
    Investor · Feasterville Trevose, PA · Member since 2015 · 107 posts · 31 votes
    11y

    I have a property in a similar situation, though I'm only negative 100/mth.  The refi idea is the best in my opinion.  I could easily positive cash flow with a refi.  The only problem I'm having is that the lenders will only refi 70% of the appraisal and I'm not quite there yet.  If you are, I'd definitely look into it.

    0Reply
  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    11y

    I disagree with most, I think there are plenty of smart reasons to buy or have negative cash flow especially if you have lots of positive cash flow income, big cash reserves or extremely strong employment income.  

    On the other hand I am not sure your reason is smart.  You didn't give us enough information.

    1. What is the house worth, what do you owe on what terms?

    Say it's worth 400k, you owe 200k.  The situation is worse.  You could be earning a far better return with your equity.

    Here are some reasons I would take negative cash flow:

    1. The property has a large parcel of land that is undervalued at the time or in the path of progress.

    2. It allows me to control a really good mortgage on a nice house. I assumed one loan at 3.5% with 20k down.  I just do worse than break-even but I also pay down $500/month on the loan.    

    3. On a private note, I am making large principle payments.  I agreed on one house to pay it off in 5-years.  I happily taking a loss on that one.    

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Steve L.:

    I disagree with most, I think there are plenty of smart reasons to buy or have negative cash flow especially if you have lots of positive cash flow income, big cash reserves or extremely strong employment income.  

    On the other hand I am not sure your reason is smart.  You didn't give us enough information.

    1. What is the house worth, what do you owe on what terms?

    Say it's worth 400k, you owe 200k.  The situation is worse.  You could be earning a far better return with your equity.

    Here are some reasons I would take negative cash flow:

    1. The property has a large parcel of land that is undervalued at the time or in the path of progress.

    2. It allows me to control a really good mortgage on a nice house. I assumed one loan at 3.5% with 20k down.  I just do worse than break-even but I also pay down $500/month on the loan.    

    3. On a private note, I am making large principle payments.  I agreed on one house to pay it off in 5-years.  I happily taking a loss on that one.    

     Those are three reasons alright...don't see a good one among them.  In all cases you're losing money...just in different forms.

    1 - Speculation is not investing...unless you have a buyer already lined up.

    2 - Basic math:  You start out $20k in the hole  (DP), then you get equity (virtual money, not real money until you access it) at $6k/year...so it will take you over 3 years to break even...but not really since you're started out $20k out of pocket...and have negative cash flow every month adding (or subtracting) to it.

    3 - So, you're happy with 100% equity...from funds out of pocket.  The property (if it were living) would be thrilled that you are giving it all your cash. 

    0Reply
  • Jason Clark
    Real Estate Investor · Lake Forest, CA · Member since 2015 · 17 posts · 8 votes
    11y

    Great Post - enjoy reading everyones response, and think Steve is completely right.  Let's not forget there are four ways to make money in RE, those are:

    1. Cash Flow

    2. Appreciation

    3. Loan Amortization

    4. Tax shelter

    Ok, so you're losing (investing) $4,800 in cash-flow annually, but what's the other three areas of opportunity look like? Just looking at appreciation alone at a conservative assumption of matching inflation on $250K investment would be way more than $5K.

    Don't forget why your in RE, it's more an cash flow.  If you're not maximizing all four (ways to make money), maybe it's not for you.  In short term circumstances I'd trade $4,800 for $5-10K any day of the week.

    3Reply
  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Jason-

    That's basically the thesis of my original question: does negative cash flow necessarily mean you're losing money?  I'm trying to parse out if it's worth it to have negative cash flow every month even though it's probable that my portfolio is increasing due to my ownership of this property.  Tough to say, but I do understand Joe's message of: you can't make a living writing checks to keep properties under your ownership.

    What I've gotten out of this thread so far has been really valuable.  My take home messages are: make sure you're optimizing the amount of cash flow you can from the property and do some research on values and real rents around my area.  Also, take a closer look into the total amount of annual dollars in vs. appreciation.  A break-even situation is not profit either, and I understand that.  But if it's not costing me money and has the potential to make money soon due to market trends, then I'll have a decision on my hands.

    I think the crux of the issue is I've gotten comfortable renting this property and need to take a more honest look about where I'm at on this place and spend some time optimizing it or consider deep-sixing it.

    1Reply
  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    11y

    @Joe Villeneuve I struggle with your response.  

    Why don't we see if you would take on negative cash flow to buy a property like this?

    Say you buy a 10-acre property in a 75% developed area for $100,0000 with 1 house on it that achieves $800/month in rental income.  You may or may not loose money, but 1 house that requires 8,000 sq ft is carrying the costs of 10 acres.   You could immediately develop this property and get the gain associated with it.  

    If you really want to call that speculation, you can, but I you will be hard pressed to hit any home runs if you cannot think outside of the box a little bit.  

    0Reply
  • Karen Schimpf
    Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes
    11y

    @Edward Debbs Your are loosing more than $400 in month in rent.  Don't forget that when tenants have items break down from their use, you are the one that pays for the repair or replacement.  Also your time is worth something.  Most tenant and landlord relationship takes monthly interaction.  Investing is a business.  Would you buy a business if it wasn't cash flowing?

    --

    Wishing You the Best,

    1Reply
  • JoJo Diego
    Dallas, TX · Member since 2014 · 57 posts · 15 votes
    11y

    Hi @Edward Debbs

    I hear what you're saying and I'm no pro by any means, but what I see is that someone else is aiding in paying your mortgage plain and simple. Your intention wasn't to have it as a rental so this is why you're not so bent on making positive cash flow BUT since you're not in it why not have someone else help pay for it. I personally wouldn't mind doing something like that if I wanted to keep the home and it had potential to earn more with time. I'd rather be paying $400 rather than (let's just say) $900 for the mortgage. I don't see this being different than living in a house where I had roommates to  help me pay the mortgage.

    2Reply
  • Royce Talbo
    Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
    11y

    @Edward Debbs

     Ok I disagree with most here because they missed the key fact that you said that you are planning on using this place for your future use.  If it is a property that you love because of the location and got a deal on it and dont think you can get another deal in that location and you have the money to pay the $400/month then negative cashflow doesnt matter.  It is for your future use, it is not an investment.  Look at it as a house that you are away from on a long vacation and someone is looking after it for you.  The $400 is not lost, it is going into a savings called your personal future residence.  I guarantee none of these guys are  cash flowing on their personal residence,  if they are, they are living in a multi.  If you are not planning on living in it in the future, dump it and follow what everyone else is thinking as this is a bad investment unless you have crazy appreciation.  I had a condo in hawaii where I was negative cash flow, but in 5-6 years I made $150k when I sold. so negative cashflow is not always bad just depends on your market and if the other legs of the chair can keep your numbers up.

    5Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Steve L.:

    @Joe Villeneuve I struggle with your response.  

    Why don't we see if you would take on negative cash flow to buy a property like this?

    Say you buy a 10-acre property in a 75% developed area for $100,0000 with 1 house on it that achieves $800/month in rental income.  You may or may not loose money, but 1 house that requires 8,000 sq ft is carrying the costs of 10 acres.   You could immediately develop this property and get the gain associated with it.  

    If you really want to call that speculation, you can, but I you will be hard pressed to hit any home runs if you cannot think outside of the box a little bit.  

     First, I don't "invest" in anything that "may or may not lose money".  Either it does or it doesn't.  You just defined speculation. 

    Second, I've owned my own Architectural firm for over 35 years, so the idea of development is 2nd nature to me...and developers don't speculate.

    Third, vacant land is just that...vacant.  It only makes money when you develop it.  You realize that developers don't actually buy property and sit on it losing money while they wait for the possibility that might occur down the road?  They will tie up vacant land with options, but never actually buy it until they have a plan in place, ready to "push the button"..and buying that land happens when they push the button.  

    So, the answer is "no" to the question of whether I would buy that 75% developed land for $100k and lose money.

    Oh, and if you knew me, you would never question if I thought outside the box...I just don't act outside it.

    0Reply
  • Jason Clark
    Real Estate Investor · Lake Forest, CA · Member since 2015 · 17 posts · 8 votes
    11y

    @Karen Schimpf Amazon wasn't cashflow positive for the first six years after going public, and rarely is today but investors were patient.  Now the company has in excess of $50B in yearly revenue and a market cap of $202B.  

    Why did investors, invest in a negative cash flowing business? Because they were betting on the future.  And it paid off, it should be no different in RE.

    5Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Jason Clark:

    @Karen Schimpf Amazon wasn't cashflow positive for the first six years after going public, and rarely is today but investors were patient.  Now the company has in excess of $50B in yearly revenue and a market cap of $202B.  

    Why did investors, invest in a negative cash flowing business? Because they were betting on the future.  And it paid off, it should be no different in RE.

    The most important word you used was "betting"...and no, you should never bet in REI. REI is not the same as betting on global companies to make it. REI is very small market investing...as in the property doesn't move. You can't rely on the global market to bail you out of a bad REI deal. Amazon's market was/is the world. A RE Property's market is just a wee bit smaller than that.

    2Reply
  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Karen,

    I think you're right, I would not buy a business that wasn't cash flowing.  And I don't think I would buy this place for its investment potential.  But what do you do about a place that you have that isn't cash flowing, regardless of whether or not you want to be in it as an investment?

    I think the investment truth on this property lies somewhere in the middle of all of these posts.  Yes, I do think I should do as well on it as I can, and if it's dogging my portfolio I should think about canning it.  But since I didn't buy it to make money I need to rethink how I can get it to do so.  I think I just need to get in contact with an experienced realtor in the area and have them talk to me about what my options are for a rent increase.  They'll know what things are going for up there.  That said I have not had a great experience with realtors being strait about prices up front, so I'll need to dig into the comps and see where I really think the numbers fall.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    What are the terms of the current loan?  Years, int rate, monthly payment, etc..

    What are all of your other monthly expenses on this property.  It's really hard for anyone to give you any specific advise on how to clean up this property financially without all the facts.

    0Reply
  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Joe-

    We bought in 2008 for about 300k.  The house was already down from 340, but continued to slide.  It's probably worth ~280 right now.  I owe 260 on it.  We're at 3.5% interest.  I pay 2250 a month right now, its normally 2200 but we're catching up on escrow (insurance went up).  We collect 1850 in rent.

    0Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    11y

    Interesting thread.  My first thought was also, if you want to keep it for the future, and you can afford to pay $400 towards that, and someone else is otherwise keeping it up and helping you pay for it - why not?

    It's easy to get sucked into buzz words, etc.  Nobody here bought a brand new car because it was going to make them money.  It's not always about profit.  If you have a good reason to keep the house, and you look at it like someone above mentioned - that you basically have caregivers in it, and you're getting a write-off on the loss, it's up to you if that's good enough for you.

    And if the location is great, it's entirely possible, as someone else mentioned (sorry, I am hopeless at the hashtag thing lol), that it will still make you money in the long run.

    You can also - in case you aren't already - write off a portion of your home (where you live now) as a business expense for home office for managing that rental.  If your home office is 1/5 of the square footage of your home, you can deduct that percentage of the cost of that home - including security systems, electricity, rent/mortgage payment, insurance...it's substantial.  There are a lot of tax benefits for keeping it, and even at a loss.  The IRS will allow you to lose money on it for 5 years, I believe, and take the appropriate loss on your taxes.

    As far as raising the rent - unless you're WAY under market, I would not do this.  The tenant you have is golden, with a capital G.  Tenants who repair things?  Who keep up the yard? Who don't do damage?  Who pay on time?  Who has already stayed several years and intends to stay longer?  Are you kidding me?  Hang on to this guy!

    If you ended up with a turnover every year, that normally cost one month's rent, so far that would have been 3 months rent if you had another tenant.  How much does that add up to?  

    Now add up what the extra rent you could get is, if you raise the rent - did you make money?  Probably not.

    Turnovers cost, normally 1 month's rent PLUS paint, cleaning, repairs, upgrades..... they're very expensive.

    My vote is you leave it alone.  I think you have a good thing going on - provided your reason for keeping the place is a good one, even if it's just because you hope to move back into it one day, or you hope and reasonably expect it to appreciate in value.

    In my ever-so-humble opinion :-)

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Edward Debbs:

    Joe-

    We bought in 2008 for about 300k.  The house was already down from 340, but continued to slide.  It's probably worth ~280 right now.  I owe 260 on it.  We're at 3.5% interest.  I pay 2250 a month right now, its normally 2200 but we're catching up on escrow (insurance went up).  We collect 1850 in rent.

     30 year mortgage?

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