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!

[Jay Hinrichs]

well first off this being a landlord site.. and a positive cash flow site generally speaking.. most will tell you are nuts to buy this.

however if you can get the property to just about break even maybe lose 100 a month or so and you have a prime Socal asset that someone else is paying off your mortgage and you think rents can go up a little.

and you can EAISLY self manage based on quality of the unit .. incredible tight rental market.. that mitigates a lot of land lord issues.

I mean whats the alternative you go 1000 miles away to make 100 or 200 a month.. is that positive cash flow going to change your life..is 100 a month negative going to change your life.

now this is an extreme.. but i owned a home in Palo Alto that i chose to sell back in 91 because it would have been 300 a month negative.. well that negative within 36 months would have been positive.. and i sold for 500k and today that home is worth 3 million.... and once it got positive it probably would have been positive up to 2 to 3k a month coming into the 2010's.... and someone else would have paid for my home.. plus grade A tenants at all times.. being prime Palo Alto.

so thats one extreme.. its really only in low to no appreciating markets with tougher tenant bases that turn a bunch that positive cash flow becomes more acute or for those that want to one day live on their cash flow and be in the business of landlording.. thereby acquiring 50 to 100 doors.  which is what you need to come anywhere near having enough money to actually live on your positive cash flow

now again i realize i am in the VAST MINORITY on BP on my thoughts of cash low VS  appreciation... but for me personally its all been made on appreciation cash flow was is just a place setter.. to allow the appreciation to happen