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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!
@Account Closed Bob, why is it that one can buy cash flow positive properties any ol time; can probably get one right now over the Internet by a turn key provider. But it's hard to buy investment props in places like San Francisco and Hawaii? You have to compete with all cash Chinese buyers, and any good deal is eyed by numerous wealthy investors and gets snapped up quickly?
I just saw three 6 unit props in San Fran (maybe same owner cashing out?) come on the market for between $2.4 and $3.6 mil each. Need at least $1 mil in cash as down payment for each! Why are all these stupid rich people tripping over themselves to buy them? I'm just wondering if those rich people became rich by buying turn key props? Or maybe, they already have properties in these markets already? But then hey, how could they afford them if they didn't make any money in these over priced, negative cash flow areas to begin with? How Bob how? My brain hurts pondering this...
Originally posted by @Joe Villeneuve:
Rent $1100
T/I 230
PM 110
DS 310 ($56k @ 5.25/30)
CF $ 450
Minus vacany, minus repairs, minus capex?....and your CF is down to the $200 a month that Bob (not me, mind you) is scoffing at......his point is that, if you were buying in growth markets (and supporting yourself in other ways, because cash flow would be non-existent), you'd be better off 10-15 years down the road.
I would usually disagree with purchasing negative cash flowing property but I can see what @Account Closed is saying. Majority of investors are picking through cash flowing property. There is potentially a much greater return when you acquire property that has little or no value and create the value and cash flow.
Franklin
Originally posted by @Robert G.:
Originally posted by @Joe Villeneuve:
At what price point? You may be the exception, not the rule. A ton of buy-and-hold investors are buying properties in low growth areas and profiting $200-$300 a month (when things go well). I'm assuming that is what Bob is speaking out against.
I get the same numbers as Joe, but at higher price points, over $100,000. I don't think you can say prices doubling every two years is the rule either, which is what Bob is using as examples. I think getting $500 a month in cash flow every month is much more predictable and doable than banking on prices doubling in two years.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Robert G.:
Originally posted by @Joe Villeneuve:
Rent $1100
T/I 230
PM 110
DS 310 ($56k @ 5.25/30)
CF $ 450
Minus vacany, minus repairs, minus capex?....and your CF is down to the $200 a month that Bob (not me, mind you) is scoffing at......his point is that, if you were buying in growth markets (and supporting yourself in other ways, because cash flow would be non-existent), you'd be better off 10-15 years down the road.
Wrong. Vacancy, repairs, capex, etc...is covered through more practical means.
It sounds like you are looking at a shorter term loan than 30 years so it is more of a financing decision that is driving the negative cash flow. It could be worth looking at it as if you were using a 30-year, 80-100% financing to see if there is positive cash flow. If there is, but you want to use a shorter (you mentioned 10 year) loan, where the larger monthly payment is what drives the negative cash flow, than that is different than solely relying on appreciation.
Originally posted by @Joe Villeneuve:
Wrong. Vacancy, repairs, capex, etc...is covered through more practical means.
No, practical though you may be, sooner or later one of your properties will need a new roof. Or a new AC. Or a new boiler (since you're up north). Those items cost money. And that expense was not factored into the CF numbers you provided earlier. And 100% occupancy, year after year, is not a realistic expectation.
I'm not saying you aren't profitable, by the way. I'm sure you're quite successful. I'm just trying to clarify Bob's point, since his tone/form of expression seemed to be making people focus on the wrong things.
Personally, I see where Bob is coming from.....but I don't think it is feasible for most investors here. Investing in negative cash flow properties (at time of purchase) is risky. AND means the investor has to have significant wealth or income aside from the RE investments. The finish line may be beautiful, but most don't have the option of losing small amounts of money for several years to try and hit a home run on appreciation. Most, wisely, stick to singles and doubles. Strike out a lot less often that way.
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Robert G.:
Originally posted by @Joe Villeneuve:
Wrong. Vacancy, repairs, capex, etc...is covered through more practical means.
No, practical though you may be, sooner or later one of your properties will need a new roof. Or a new AC. Or a new boiler (since you're up north). Those items cost money. And that expense was not factored into the CF numbers you provided earlier. And 100% occupancy, year after year, is not a realistic expectation.
I'm not saying you aren't profitable, by the way. I'm sure you're quite successful. I'm just trying to clarify Bob's point, since his tone/form of expression seemed to be making people focus on the wrong things.
Personally, I see where Bob is coming from.....but I don't think it is feasible for most investors here. Investing in negative cash flow properties (at time of purchase) is risky. AND means the investor has to have significant wealth or income aside from the RE investments. The finish line may be beautiful, but most don't have the option of losing small amounts of money for several years to try and hit a home run on appreciation. Most, wisely, stick to singles and doubles. Strike out a lot less often that way.
I don't disagree with the need to cover those items. I just do it in amore proactive/practical way. Look at it this way, if I took out 20% of my rent, about $220/month...a whopping $2600/year...will I be able to cover any of those items? I rehab the roof ahead of time in the rehab refi/financing, so that $4500 isn't a lump sum out of pocket, it's covered by the tenant in the rent paying the mortgage at an added $25/month. My furnace and HWH are covered by the utility company at $13/month and a cash reserve covers the rest if and when it's needed.
Hi @Kish D.
Agreed that passive income offset passive losses. The basis of my comment was 1. should one buy neg cash flow and 2. neg cash flow may be good for high income earners. Buying a neg cash flow property will only increase your losses on your schedule E after depreciation and other expenses. No passive gain to "offset" the loss, as you stated, until you buy a "positive cash flow" property or maybe you've depreciation another property for so long that you are starting to have passive gains. I would think a large % of Pos cash flow properties are Sch E losers factoring depreciation. Which goes back to original question. #2 If your a high income earner (above $150) why would you want to keep feeding this property until you sold in hopes to use the carry forwards. (please consult CPA ;-))
Forgive me if I'm missing something.
My best,
Hey @Alan Sweeten, you're right; it really depends on one's portfolio. If the person has already good cash-flowing properties, adding a negative cashflow property in the mix (after carefully considering other aspects such as appreciation, equity etc.) could actually help offset some of the gains, regardless of their W-2 income.
Do your numbers right, see some people say if you rich is ok if your poor you want positive cash flow, ETC @Adam Juodis
1) Negative will be for a few years.
2) any market if you do number right and get a ok deal you'll be positive even if is 20 bucks is better then no bucks
3) negative cash flow gives you a tax advantage
4) what I do and I don't need the money that much anymore if my cash flow is lets say 180 I set aside 180 towards the property because if there is repairs to be made you'll be getting more and more out of pocket.
5) go out and buy something positive and with that pay the negative and live debt free getting free money every month.
Wow, all these absolutes are scaring me! Never buy cash flow negative? Cash flow is for poor people? My answer is, like any investment it depends. Cash flow is just half the picture, property appreciation is the other half. You need to look at the market and see how much you expect the property to appreciate in the future. Is it in a state with high influx of residents? Is the area land limited or can builders just build more homes when prices go up (think SF as an extreme case of land limited)? Is there a growing industry creating jobs which will result in higher home prices? These are some of the factors you need to consider on the price appreciation front. You also need to see if the area is in a bubble or if the prices are sustainable. During the housing bubble people blindly "invested" in negative cash flow properties because they assumed it would keep going up and they all lost their shirts (and homes).
#4 All Forums Contributor
- Plymouth, MI
I think one more very important event should be added to the conversation. 2008...and any other major downturn, in the past and in the future, and its effect on REI.
My rents went up, my number of tenants on a waiting list went up. What happened to all that equity?
#2 General Landlording & Rental Properties Contributor
Adam
The idea of buying a single property having negative cash flow with the intent of supplementing your tenants rent from your own pocket is defiantly doable. Your time frame may be somewhat underestimated but if affordable for the owner still can workout as a profit at time of sale.
Some assumptions on your part may be unreliable. First real estate investing is not low risk especially in regards to income investment properties. Tenants can and do cost tens of thousands in damages, lost rent and high stress. Difficult to sustain when not making a spendable income from the property.
Timing your sale may, for personal reasons, be beyond your control as well as surprise high cost repairs. Both of which can and do eat up investors profits.
Keep in mind there is a distinct difference between buying and supplementing rental income on a single property as opposed to investing in income properties. One is a personal investment the other is a business investment.