First MF purchase has negative cash flow

[Christine H.]

Hi everyone!

I'm pretty new to this community. I've been researching and studying the market in my area (Los Angeles) for a couple years now and have hesitated to make the plunge on any purchases. I finally made an offer on a property this month and am in the last days of my inspection contingency. However, now that I've got the numbers in front of me I'm realizing that the property will actually negatively cash flow. Is this a dealbreaker?

It's a 2-unit property with below-market rents in a popular rental area. One tenant just signed a lease, the other is month-to-month and has been there for almost 10 years. If I compare the rental income to the PITI payment it's actually just positive, but with other expenses (water/sewer/trash and capex, calculated by using 8% of rents), it turns into ~$500 month coming out of my pocket. Is this deal just a big red flag that I'm excusing by thinking of the appreciation? Is there a world where there are any benefits? Bringing both units to the projected market rents in area still leaves me in the red. Right now the only way I can see positive cash flow is by lowering the purchase price by almost $20k, which is plausible considering there are a few repairs that we can request.

Reading this, it sounds like a horror show. I hope that those with experience in higher priced markets like Los Angeles can chime in with their experience, as it's such a different beast than other smaller markets. Thanks so much for your feedback!