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Negative Cash Flow
Hey guys, I'm a super noob( I literally got into this 2 days ago, but I've spent all my free time doing research). So I'm gonna pose my question through this example:
Say I buy a 100k property with 20k down. I find a tenant to occupy my property, but due to certain circumstances the amount I can rent for does not exceed mortgage and other expenses. Let's say my cash flow after cole ting rent and paying fees is -$75 per month.
Even though I'm losing $75 per month on average, eventually, the tenant will pay off my property(10yrs?), and then my property will most likely, after appreciation, be > $100k. Even if it stayed around buying cost, I now have a paid off house that I can continue to rent mortgage free, or sell.
I guess what I am tying to get across is that real estate is a ssuper solid investment that is low risk, even if you are receiving cash flow. Sure, investors desire positive cash flow, but even if you have to pay a bit out of pocket each month, in the long run you still have an asset that is valued much more than you put in to it.
Please scrutinize my thoughts. Am I thinking right about this? Any advice would be greatly accepted. Thanks!
Cash flow is for poor people or poor investors. Negative cash flow properties are so much better because the buyers for these properties are limited and poor investors are chasing cash faux. Cash flow is not profit. Non cash flow properties are profitable over time and provide great cash flow in time. Anything good is worth waiting for whether that be profit or cash flow.
Your alternative is always other investments. Is a bet on capital appreciation the best you can do?
If you have high income and excess cash then negative cash flow on properties that are likely to appreciate is a legitimate strategy. However you can not count on how much appreciation there will be. The negative cash flow is a risk factor. Also you are going to struggle to get financing for a property with negative cash flow.
Regarding Bob's comments, buying properties for positive cash flow is also a legitimate strategy. And assuming that negative cash flow means it will be more profitable over time is simply a silly assertion.
I tend to err on the conservative side when I'm evaluating deals. Buying a property and depending on appreciation to make it a profitable deal is a pretty risky strategy that may be more suited to investors with a bit more experience. I've tended to view appreciation as a happy bonus and not the basis for why I buy a property in the first place.
Cash flow is for poor people and poor investors? Not sure that's sound advice.
You make money in three ways via buy and hold: cash flow, appreciation and equity via loan pay down. They are all important and cash flow keeps the ship floating in turbulent waters while appreciation and equity happen over time
Originally posted by @Ned Carey:
Regarding Bob's comments, buying properties for positive cash flow is also a legitimate strategy. And assuming that negative chase flow means it will be more profitable over time is simply a silly assertion.
No one is assuming anything except you. The facts are that buyers for profitable properties that don't initially cash flow are limited to the players that first can purchase these properties and second can identify areas and properties that have high appreciation rates that are consistent.
The unspoken truth is that cash flow is NOT reliable or predictable. Look at the people here that try to lure novice investors to "cash faux" properties based on an erroneous use and calculation of cap rates.
The fact is that a novice investor can totally screw up the land lording part of investing and still be profitable because of appreciation but an investor that does not invest for appreciation can totally lose their *** by thinking the cash flow is reliable and not have appreciation to fall back on. Ned, how silly is that?
#4 All Forums Contributor
- Plymouth, MI
Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Bob I am not going to respond. I will let the readers decide who is more credible.
@Adam Juodis You are definitely right about having a paid off property in 30 years being a lot of cash flow at that time. I don't really invest for cash flow, although I do look for the cash flow to be positive. I'm not buying to retire early and live off my rentals. They are going to be supplements to other steams of income in my retirement. That being said, the more cash flow, the better.
I actually do prefer properties that might appreciate more and have a great tenant pool over +/-$200/month cash flow.
I agree with Joe Villeneuve , negative cash flow is not optimal. I had a negative cash flow property that I was stuck with for 5 years during the down turn. It hurt every month and could've funded both my kids college. Now I have a positive cash flow 2 unit and I can see clearly now the rain is gone......
Negative cash flow may not be good for high income earners either due to phaseout on losses. Earners from 100-150k have their losses phased out and they can't take them. They become loss carry forwards. Of course talk to your cpa and it depends on participation and if your a real estate professional.
https://www.irs.gov/pub/irs-pdf/p527.pdf#page13
My best,
let us also nor forget the time value of money. whats a dollar today worth in 10 years
Originally posted by @Ned Carey:Bob I am not going to respond. I will let the readers decide who is more credible.
Credibility is not the issue Ned. I am stating facts. Ignore them at your peril.
What fact do you not want to respond to? Why? I'll be happy to respond to any of your comments. That's kinda what the forum is about.
Wow, counting on properties to double in value over two years as your investment strategy?
Here are my three fundamentals i invest with:
1. Buy below market. I want properties 20 percent below value.
2. Buy with cash flow. The banks love cash flow. Try to finacne more properties when you have negative cash flow and you will find out how sound the banks think your strategy is, as well as the big hedge fund lenders.
3. Hope for appreciation. Appreciation is great, but there are no gaurantees in life. Sure you can claim cash flow is not guaranteed, but it is much more predictable than appreciation. You can also claim people dupe investors into false cash flow, but who's Fault is that? All numbers should be verified.
The thing about appreciation is that it is never as awesome as it seems. There are selling costs or refinance costs. Plus taxes. Yes you can do a 1031, but it is not easy. I am dealing with all that now. Not a bad problem to have, but it makes it even better with cash flow.
Originally posted by @Mark Ferguson:
Wow, counting on properties to double in value over two years as your investment strategy?
Yep, in the 70's tripled, 80's doubled, 90's doubled in two but tripled within 10 and 00's doubled.
It's all about knowing your market and their appreciation rates.
Originally posted by @Account Closed:
Originally posted by @Mark Ferguson:Wow, counting on properties to double in value over two years as your investment strategy?
Yep, in the 70's tripled, 80's doubled, 90's doubled in two but tripled within 10 and 00's doubled.
It's all about knowing your market and their appreciation rates.
In less than two years?
Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Mark Ferguson:
Wow, counting on properties to double in value over two years as your investment strategy?
Yep, in the 70's tripled, 80's doubled, 90's doubled in two but tripled within 10 and 00's doubled.
It's all about knowing your market and their appreciation rates.
In less than two years?
Yep, but I am looking for the doubling to happen in 10 so the two year is mostly that I have a knack for identifying the low just before the BOOM!
Originally posted by @Account Closed:
Originally posted by @Joe Villeneuve:Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Joe. there is too much competition for cash flow that it makes it hard to be profitable. I am able to scoop up profitable properties JUST because they don't initially cash flow. Funny that you think your cash flow is reliable and predictable but my cash flow that is calculated for a later date is not!
Also you'd be surprised how many properties you can buy when they have doubled in value in less than two years. The banks actually give you full credit for the equity whereas most cash flow is discounted by about 75%!
Banking on the future? Do you collect your rents 12 months in advance? Do you anticipate your cash flow to stay the same year in year out, slowly being eroded by inflation and capex? Sorry way to invest in my opinion and you are still speculating just with a way lower bar.
I guess it is a good thing you love being poor. That's what I see in your future.
And inflation increases Cash flow, because rents rise with inflation. it makes no sense that cash flow woud Be eroded by inflation. Capex woud make negative cash flow even worse whereas with cash flow you can absorb it.
Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Joe Villeneuve:
Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Joe. there is too much competition for cash flow that it makes it hard to be profitable. I am able to scoop up profitable properties JUST because they don't initially cash flow. Funny that you think your cash flow is reliable and predictable but my cash flow that is calculated for a later date is not!
Also you'd be surprised how many properties you can buy when they have doubled in value in less than two years. The banks actually give you full credit for the equity whereas most cash flow is discounted by about 75%!
Banking on the future? Do you collect your rents 12 months in advance? Do you anticipate your cash flow to stay the same year in year out, slowly being eroded by inflation and capex? Sorry way to invest in my opinion and you are still speculating just with a way lower bar.
I guess it is a good thing you love being poor. That's what I see in your future.
And inflation increases Cash flow, because rents rise with inflation. it makes no sense that cash flow woud Be eroded by inflation. Capex woud make negative cash flow even worse whereas with cash flow you can absorb it.
Nope. I got Vegas property bought in 1994 that has similar rents 20 years later. My CA and Hono properties have rent growth of 6%+. Indy cash faux properties that sell for $60,000 were worth about $60,000 10,15,20 years ago. Rents are mostly the same. That's how inflation and CapEx erode the cash flow.
Originally posted by @Account Closed:
Originally posted by @Mark Ferguson:Originally posted by @Account Closed:
Originally posted by @Mark Ferguson:Wow, counting on properties to double in value over two years as your investment strategy?
Yep, in the 70's tripled, 80's doubled, 90's doubled in two but tripled within 10 and 00's doubled.
It's all about knowing your market and their appreciation rates.
In less than two years?
Yep, but I am looking for the doubling to happen in 10 so the two year is mostly that I have a knack for identifying the low just before the BOOM!
I am truly trying to figure out your reasoning, not bashing you. How many properties have you bought in the last 40 years that didn't double or triple in value. Are we just looking at best case scenarios?
Lets say a house does double in value in two years. Buy for 100k, 2 years its worth 200k. But you have 200 a month negative cash flow. That is $24,000 over 10 years. Then you have selling costs of 10 percent or so, that is another $20,000. You make $56,000 over 10 years or $5,600 a year. I make that with cash flow, plus I get the appreciation.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Account Closed:
Originally posted by @Mark Ferguson:Originally posted by @Account Closed:
Originally posted by @Joe Villeneuve:Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Joe. there is too much competition for cash flow that it makes it hard to be profitable. I am able to scoop up profitable properties JUST because they don't initially cash flow. Funny that you think your cash flow is reliable and predictable but my cash flow that is calculated for a later date is not!
Also you'd be surprised how many properties you can buy when they have doubled in value in less than two years. The banks actually give you full credit for the equity whereas most cash flow is discounted by about 75%!
Banking on the future? Do you collect your rents 12 months in advance? Do you anticipate your cash flow to stay the same year in year out, slowly being eroded by inflation and capex? Sorry way to invest in my opinion and you are still speculating just with a way lower bar.
I guess it is a good thing you love being poor. That's what I see in your future.
And inflation increases Cash flow, because rents rise with inflation. it makes no sense that cash flow woud Be eroded by inflation. Capex woud make negative cash flow even worse whereas with cash flow you can absorb it.
Nope. I got Vegas property bought in 1994 that has similar rents 20 years later. My CA and Hono properties have rent growth of 6%+. Indy cash faux properties that sell for $60,000 were worth about $60,000 10,15,20 years ago. Rents are mostly the same. That's how inflation and CapEx erode the cash flow.
How does one spend equity?...and when?
Originally posted by @Account Closed:Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Joe Villeneuve:
Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Joe. there is too much competition for cash flow that it makes it hard to be profitable. I am able to scoop up profitable properties JUST because they don't initially cash flow. Funny that you think your cash flow is reliable and predictable but my cash flow that is calculated for a later date is not!
Also you'd be surprised how many properties you can buy when they have doubled in value in less than two years. The banks actually give you full credit for the equity whereas most cash flow is discounted by about 75%!
Banking on the future? Do you collect your rents 12 months in advance? Do you anticipate your cash flow to stay the same year in year out, slowly being eroded by inflation and capex? Sorry way to invest in my opinion and you are still speculating just with a way lower bar.
I guess it is a good thing you love being poor. That's what I see in your future.
And inflation increases Cash flow, because rents rise with inflation. it makes no sense that cash flow woud Be eroded by inflation. Capex woud make negative cash flow even worse whereas with cash flow you can absorb it.
Nope. I got Vegas property bought in 1994 that has similar rents 20 years later. My CA and Hono properties have rent growth of 6%+. Indy cash faux properties that sell for $60,000 were worth about $60,000 10,15,20 years ago. Rents are mostly the same. That's how inflation and CapEx erode the cash flow.
You can use extreme examples all you want. What do the averages say? Average rent 1995 was $650 and in 2014 it was $1250. Source http://www.statista.com/statistics/200223/median-apartment-rent-in-the-us-since-1980/
@Adam Juodis, sorry it looks like your thread has been hijacked. Here is my take on on your investment. First what about the property you have bought or are thinking about buying makes you want to buy it? Is it because you think the value will go up? Because it looks cool? Because you need to buy a property now and cannot wait?
I have bought several properties with negative cash flow intentionally. I had a specific reason for buying them. You first need to get the actual numbers ran. Did you use a 30 year amortization or a 10 year? You mentioned a 10 year sort of. If you can do a 10 year loan and pay the property off by adding $75 per month I say great. If you pay $75 per month and it is on a 30 year note I say very bad. Yes you can still come out money ahead by buying and adding $75 per month because of negative cash flow, but why not buy a property that does have positive cash flow? I know some exist in your market. The reason I bought knowing I was going to have negative cash flow is that I got a much nicer house than any of my other rentals, and I did for no money down. I used a 15 year amortization, and the sellers financed my down payment for 5 years on a balloon payment. Since I did not have the $20K plus to put up for down payment it enabled me to buy a nice house for no money down. For $6K made in payments over 5 years, I still used less money than if I made the down payment in cash at closing. I would have to refinance at the end of 5 years and pull the equity I built up to pay off the 5 year balloon payment to the sellers. While I like all of the houses I have bought this way it has a danger. Too many will kill your business. Truth be told I have found higher class rentals like B to be much less work than C class properties. However B class properties make much less per unit than C class properties. there is a trade off. You need to run real and actual numbers past us in order to give you good advice. I hope that helps.
Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Mark Ferguson:
Wow, counting on properties to double in value over two years as your investment strategy?
Yep, in the 70's tripled, 80's doubled, 90's doubled in two but tripled within 10 and 00's doubled.
It's all about knowing your market and their appreciation rates.
In less than two years?
Yep, but I am looking for the doubling to happen in 10 so the two year is mostly that I have a knack for identifying the low just before the BOOM!
I am truly trying to figure out your reasoning, not bashing you. How many properties have you bought in the last 40 years that didn't double or triple in value. Are we just looking at best case scenarios?
Lets say a house does double in value in two years. Buy for 100k, 2 years its worth 200k. But you have 200 a month negative cash flow. That is $24,000 over 10 years. Then you have selling costs of 10 percent or so, that is another $20,000. You make $56,000 over 10 years or $5,600 a year. I make that with cash flow, plus I get the appreciation.
You are not counting the 6%+ rent growth. Negative cash flow is usually for only a few years. A 100K property in the 90's probably was negative only about a $100.
Originally posted by @Mark Ferguson:Originally posted by @Account Closed:Originally posted by @Mark Ferguson:
Originally posted by @Account Closed:Originally posted by @Joe Villeneuve:
Never buy for negative cash flow. That means you are paying down the mortgage...not your tenant.
As far as cash flow not being profits, that's ludicrous.
Banking on events in the future that you have no control over is speculative, and risky. Banking on current positive cash flow is not.
Oh, and here's the big one. How many negative cash flow properties can you afford at the same time? How many positive cash flow properties can you afford at the same time? How many additional properties can you buy using the negative cash flow from the negative cash flow properties? How many additional properties can you buy using the positive cash flow from the positive cash flow properties?
One more thing. If you are buying correctly, that positive cash flow property should have as much future gain as the negative one. Which would you rather have.
OK, I guess two more things. "Cash flow is for poor people and poor investors". I buy for cash flow. WOW. I love being "poor".
Joe. there is too much competition for cash flow that it makes it hard to be profitable. I am able to scoop up profitable properties JUST because they don't initially cash flow. Funny that you think your cash flow is reliable and predictable but my cash flow that is calculated for a later date is not!
Also you'd be surprised how many properties you can buy when they have doubled in value in less than two years. The banks actually give you full credit for the equity whereas most cash flow is discounted by about 75%!
Banking on the future? Do you collect your rents 12 months in advance? Do you anticipate your cash flow to stay the same year in year out, slowly being eroded by inflation and capex? Sorry way to invest in my opinion and you are still speculating just with a way lower bar.
I guess it is a good thing you love being poor. That's what I see in your future.
And inflation increases Cash flow, because rents rise with inflation. it makes no sense that cash flow woud Be eroded by inflation. Capex woud make negative cash flow even worse whereas with cash flow you can absorb it.
Nope. I got Vegas property bought in 1994 that has similar rents 20 years later. My CA and Hono properties have rent growth of 6%+. Indy cash faux properties that sell for $60,000 were worth about $60,000 10,15,20 years ago. Rents are mostly the same. That's how inflation and CapEx erode the cash flow.
You can use extreme examples all you want. What do the averages say? Average rent 1995 was $650 and in 2014 it was $1250. Source http://www.statista.com/statistics/200223/median-a...
Nationwide real estate statistics are for poor investors. I rent a 300sf HONO studio for close to $1250. No heater, not kitchen, no vacancy! Extreme examples? No, just the ability to research markets and target the profitable ones without having the constraint of "cash faux"!
In my market and investing style, I view short term positive cash flow more as an insurance policy than a means to make most of my profit. Positive cash flow allows you to hold indefinitely, through the market troughs, and never be forced to sell under duress. Cash flow (like house insurance) is an important thing, but it is not the only thing ...
Buying below market and forcing appreciation through savvy and efficient renovation is not speculative. I flipped every property I've ever purchased, I just flipped them to the rental market, not the sales market. In so doing, I have some unrealized profits early on, still have positive cash flow day one (for insurance, not profit, on a property that wouldn't normally be cash flow positive and therefore attracts rational, responsible, and high quality tenants), and can hold for long term from a position of strength for rent and price appreciation ... and, low and behold, that market appreciation has consistently appeared. In this way I pick up the quick nickle (forced appreciation), the slow dime (cash flow), and the really slow dollar (market appreciation) with minimal taxes and minimal management headaches all along the way. I don't depend on luck, but I consistently, systematically, and conservatively put myself in luck's path ... as result, I'm a very lucky guy :)
I'm not knocking those who invest purely for cash flow and live in markets that justify such a strategy, but it is not the only way possible to consistently make money, I do not live in such a market, don't wish to move to such a market, got my behind handed to me attempting to invest remotely in such a market, and since I have my strategy wired locally there is no reason for me to stray from home as there is a ton of opportunity to make great profit in my own backyard. I wish everyone the kind of luck that I have had.