Negative Cash Flow — still rent it?

[Michael Pitsos]

Hi I have a unique situation on my hands. I have the opportunity to buy another home in the same communiting area with a VA Loan with 0% down. The current home I live in carries a 15 year mortgage that runs $1550 per month. I think I could rent the property for $1400 per month. The 15-year note is nice because every month about $1000 goes directly to principal with the downside being the high cost. I have about $20k in equity in the house now. I could sell it and take the equity or rent it for the loan pay down and just deal with the negative cash flow. Has anyone ever had this problem?

Would you sell it or rent it even though it will cash flow negatively? 

[Nathan Gesner]

Do the math.

The negative cash flow will cost you $150 a month or $1,800 a year. It would take 11 years of losses to equal the $20,000 in equity so that doesn't sound to bad. But it's not the whole picture.

Even in a healthy market, homes tend to have a vacancy rate of 5% which means half a month's rent lost every year. What happens if the market turns and the home sits vacant for two months? Can you even afford $3,500 (mortgage, utilities, lawn care, etc.) during that time?

What if you have a bad tenant that causes $3,000 in damages, plus he skips on the last month's rent, plus it takes you another month to turn it around and get another renter. In one fell swoop you have to pay around $6,000.

Keeping a home with negative cash flow is a fool's errand unless you have a financial reserve of 3-6 months saved up. Even then, it's risky. You should cash out and move on.