Would you negatively cashflow on a SFR?

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Would you negatively cashflow on a SFR?

Patrick Culleton
Investor · GA · Member since 2018 · 20 posts · 11 votes

Hey BP Nation!

if you could rent out your primary residence, but would negatively cashflow approx $200/mo to do so, would you do it? Is there ever a point where the cashflow loss "makes sense" for you? Specifically, I bought my home 18 months ago with 101% financing. I am in this home for less than $2500 total. I have the opportunity to rent it out for about my PITI payment, but after all said and done I would be about -$200/mo cashflow. The upside is knowing I can confidently pay the difference with my income and move on and purchase another home to live in. This next home would likely be a roommate situation where I can cover the payment as well, or a duplex with a similar outcome. I am considering if the $200 monthly loss is worth it to take a new opportunity.

So, what are your thoughts? In my position, would you allow yourself to negatively cashflow to take on new opportunities?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y

No, never...ever.

Would you work for free?

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  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    6y

    I love all the people that immediately jump on the “no” train because it doesn’t cash flow this very second.

    You’re into this property for hardly anything at all.... if you see rent rising and appreciation taking place I’d ride it out. Especially if you’re planning on keeping this thing long term. Mortgage pay down and tax advantages alone will probably more than off set the amount of money you’ll spend out of pocket yearly (2,400.00....?)

    Some of the people here have me in absolute amazement what they’ll go through to make 200 bucks a month and how the thought of “losing” 200 a month is an absolute nightmare. You’re looking to invest. It’s a long game.

    Do you not contribute to your 401k because it doesn’t pay you at the end of the month?? Run your numbers conservatively and determine your goals. If this place will be a winner in the long run then I’d keep it. If you think you’ll lose money over time... sell it. Simple as that.

    Good luck.

    13Reply
  • Noah Mccurley
    Belfast, Northern Ireland · Member since 2018 · 128 posts · 56 votes
    6y

    @Patrick Culleton

    No I would never, ever not cash flow on a rental. Cash flow would be my goal and any other money that comes from the property is just a bonus. Eg appreciation etc

    0Reply
  • David Adams
    Rental Property Investor · Lafayette, LA · Member since 2019 · 40 posts · 42 votes
    6y

    @Patrick Culleton

    I would only do a deal with minimal negative cash flow if I had short payoff . 5 years or less

    0Reply
  • Jeff Petsche
    Real Estate Broker · Yorba Linda, CA · Member since 2017 · 154 posts · 114 votes
    6y

    @Patrick Culleton looks like many have said what I'm going to post, so this will be redundant and maybe I should stop now....

    NO! 

    Not to mention you are only looking at PITI and not vacancy calculation (10% = another $220+), property management fee of 10% (even if you manage yourself because that might not be forever = $220+) and annual maintenance. All said and done I'm guessing you will be a negative $650+, so NO WAY!

    1Reply
  • Ryan Butler
    MA · Member since 2010 · 14 posts · 6 votes
    6y

    @Patrick Culleton I think @Anthony Rosa and @Jeff Petsche hit the nail on the head. Sounds like you're just taking the PITI expense into consideration, but not all the other expenses that come from owning the home. Just the basic maintenance alone could average a few thousand dollars a year.

    0Reply
  • Sherif Lyons
    Property Manager · seattle · Member since 2018 · 27 posts · 42 votes
    6y
    Originally posted by @Tanner Marsey:

    I love all the people that immediately jump on the “no” train because it doesn’t cash flow this very second.

    You’re into this property for hardly anything at all.... if you see rent rising and appreciation taking place I’d ride it out. Especially if you’re planning on keeping this thing long term. Mortgage pay down and tax advantages alone will probably more than off set the amount of money you’ll spend out of pocket yearly (2,400.00....?)

    Some of the people here have me in absolute amazement what they’ll go through to make 200 bucks a month and how the thought of “losing” 200 a month is an absolute nightmare. You’re looking to invest. It’s a long game.

    Do you not contribute to your 401k because it doesn’t pay you at the end of the month?? Run your numbers conservatively and determine your goals. If this place will be a winner in the long run then I’d keep it. If you think you’ll lose money over time... sell it. Simple as that.

    Good luck.

     I am 100% in agreement with the gentleman above. Its incredible to me that people are looking sideways at this. You got in with next to nothing and your tenant is paying a majority of your costs for the home. Will you refinance the loan in a few years along with annual rent increases to cashflow positive? Will you simply hold it for IRS advantages and sell down the line? What do you plan to do with the home?  I'm not at all averse to this deal but we need more data otherwise you will continue to get 90% NO answers from everyone else.

    3Reply
  • Jeff Petsche
    Real Estate Broker · Yorba Linda, CA · Member since 2017 · 154 posts · 114 votes
    6y

    @Tanner Marsey the more I think about my earlier comment on this thread, the more I think I was too fast to comment with a "NO" and feel I would need more information to say YES or NO.  

    With that said, I do feel the OP has not factored in all costs associated with a rental property and is only looking at a -$200 from just PITI. He has not factored in annual maintenance, vacancy or PM (even if he manages it himself because that may not last forever). His loss is probably more inline with -$550 or higher.

    To your point, the BIG PICTURE and end game is what matters and not sure what state he lives in, so unsure if RE appreciation is at a pace that out performs rental rates or his loss. 

    My real life example where a loss may have made sense LONG TERM:  

    I owned a property from 2012-2016 in SOCAL, and bought a home for $265K with my VA loan. If I had rented it out, my cash flow would have been -$344.80/month, which included factoring in PITI, 10% vacancy, 10% PM and maintenance. I sold it in 2016 I sold it for $410K. My initial capital investment was $2,500 because I used my VA loan.

    In the end, had I rented it out and took the negative cash flow loss of $344.80/month, the property would still have performed during the four year hold as follows: 

    Total Profit When Sold: $137,231.21

    IRR: 130.91% 

    COC Return: 5,489.25%

    CAP Rate: 3.66%

    So, yes you're right..it just depends on the end game and BIG PICTURE. 

    Jeff

    1Reply
  • Dominique Pradel-Lewis
    Investor · Pittsburgh PA · Member since 2018 · 102 posts · 76 votes
    6y

    @Patrick Culleton what happens when the boiler and the hot water heater or fridge go in a month, vacancy? You are in for way more than the $200 you speak of. To each his own. Good luck! You will need it!

    0Reply
  • Carl Amko
    New to Real Estate · Alexandria, VA · Member since 2019 · 7 posts · 4 votes
    6y

    To me, it sounds like you would be banking on pure appreciation, which is probably too risky (even if you live in a high-end market). All your eggs in one basket. The benefit to cashflow is that you will always have that income, even if your house tanks in value.

    That said, if you were also using it as your primary residence with a roommate, I would probably consider it. It's not the dream scenario, but paying $200/mo in rent is still way, way better than just renting outright.

    2Reply
  • Account Closed
    Member since 2019 · 3 posts · 0 votes
    6y

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    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    6y

    I love @Joe Villeneuve and on some subjects we agree 100%, and others we disagree 100%.

    I think here you need to look at the totality of your investment.  Are you losing $200 a month in cash flow, but is the value of the property going up in value say $2,000 per month?  In a situation like that, it would seem like a no brainer to keep.

    @Patrick Culleton its also important to wrap your mind around a couple of important concepts.  All occupied properties cash flow. Every single one.  When it doesnt, that has nothing to do with the property, that has to do with the risk that eminates from the use of leverage (your mortgage).  The other concept to wrap your mind around is that yield (how much the property throws off in cash, independent of your leverage, as measured against the value of the property) is a function of the risk of the asset and market.  So more than likely as an owner occupied property youve purchased a lower risk asset, and thus have a lower yield on it than a higher risk asset.  Your monthly carrying costs can always be changed with a refinance or mortgage recast.

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    7Reply
  • Jason Morris
    Member since 2019 · 40 posts · 7 votes
    6y

    I'm not a seasoned investor, but in my opinion, if you can live comfortably for $200/mo instead of $2500/mo, then I see no problem with it... short term. That frees up $2300 a month for you to invest with.

    0Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    6y
    Originally posted by @Joe Villeneuve:

    It's not a cost you need to recover. It's not a water heater that you have to amortize the cost over the next 15 years. That money isn't disappearing, it is just transforming from cash in your pocket to equity in your property. You still have that $200. 

    What am I gaining? By my willingness to transfer $200 from my pocket into the floors of my rental (a zero net change in my net worth), I'm continuing to have a tenant that is also contributing $400+ into my floors (a positive change in my net worth). So every month that I am willing to take $200 from one of my pockets and put it into another of my pockets, a renter will contribute $400+ to one of my pockets. That's a damn good ROI.

    And your cash in a bank is not free for you to use. There is an opportunity cost applied to that money. Just because it was yours and sitting in a bank account doesn't mean there isn't a cost to use it. And today, the lost opportunity cost vs the cost of acquiring new capital from a bank is not that far apart. 

    2Reply
  • William D.
    Realtor · Baltimore, MD · Member since 2016 · 39 posts · 10 votes
    6y

    @Patrick Culleton I haven’t seen anyone mention it but you could look at seller financing a sale. It’s more complicated than I could advise you on but there is a niche where you could get a substantial down payment and probably cover your nut with short term loan where they would have to refi to cash you out down the road. I would at least look into this as an option for your situation.

    0Reply
  • Jess White
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    6y

    @Tanner Marsey Best reply on here so far. The “no” people should stop and think for a second. It’s not a one size fits all answer.

    Generally, cash flow is king. However, having one or two negative cash flow properties with a plan isn’t a bad thing. Chances are, you can bring it positive within a year or two.

    Also, your 401k analogy is perfect.

    0Reply
  • Jess White
    Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
    6y

    @Jeff Petsche Great corrective response:)

    1Reply
  • Adam Mitchell
    Rental Property Investor · Richardson, TX · Member since 2019 · 120 posts · 82 votes
    6y

    @Patrick Culleton do you have any equity in the house? If its a highly appreciating area I would possibly consider renting it.

    0Reply
  • Charlotte Dunford
    Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes
    6y

    @Tanner Marsey agreed. If you could never see this property profit, then I'd say cut your losses. But if you could make it profitable in the near future or you have a plan for it to make money at the end, it's worth it.It's all about the number, I'd say calculate what you make in each scenario - sell it now, keep it for 5 years, 10 years. Then pick the most profitable option and go for it.

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    Calculate the amortization. Feel free to PM me for a calculator or your loan site likely has it. If you are paying off over $200 in principal a month then keep it. Even with negative cashflow it may still be a profitable hold and will free you up to buy a multi unit that does cashflow. Also depends on the area if it is appreciating a few percent a year it may be very profitable hold. 

    1Reply
  • Alvin Uy
    Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    6y

    @Patrick Culleton

    You’re gonna get a lot of “no” in this forum.

    But i would think it would depend on your risk tolerance and your long term investment strategy. Only you can answer that question in my opinion.

    That said, you should understand the market conditions both rental and appreciation. Each property is unique... each area is unique. Some areas appreciate faster and even higher rates than others. Same goes with rents.

    For me... Living in Los Angeles, I will tell you that 16years ago with my first house.,. $325K Financed with only 3% down i was in a similar boat with high interest loan and PMI. I decided to take the risk like this with bigger negative initial cashflow $350/mo. But i knew i can afford the loss and i knew the appreciation was pretty good in the area. I also knew that historically my property will double in value in 10yrs. Im of the mindset that equity is what truly builds my net worth compare to cashflow.

    A year later, the equity was over 20%, i was able to refi out the PMI with lower interest rate. Also i was able to raise the rent, and was cash-flowing $100/mo.

    Fast forward to today. The house just appraised for $1.5M.... cashflowing $3800/mo on the same property. Looking back, i would be kicking myself if I sold it.

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Greg M.:
    Originally posted by @Joe Villeneuve:

    It's not a cost you need to recover. It's not a water heater that you have to amortize the cost over the next 15 years. That money isn't disappearing, it is just transforming from cash in your pocket to equity in your property. You still have that $200. 

    What am I gaining? By my willingness to transfer $200 from my pocket into the floors of my rental (a zero net change in my net worth), I'm continuing to have a tenant that is also contributing $400+ into my floors (a positive change in my net worth). So every month that I am willing to take $200 from one of my pockets and put it into another of my pockets, a renter will contribute $400+ to one of my pockets. That's a damn good ROI.

    And your cash in a bank is not free for you to use. There is an opportunity cost applied to that money. Just because it was yours and sitting in a bank account doesn't mean there isn't a cost to use it. And today, the lost opportunity cost vs the cost of acquiring new capital from a bank is not that far apart. 

     It's a cost.  

    When you pay $100k for a property where the PA says $100k, your cost was $100k.

    When you pay 20% DP ($20k) on the same property, with positive CF, your cost is $20k, since the tenant is paying the rest.

    When you change your DP (increase) from 20% to 25% so you can go from negative CF to Positive CF, the cost to you is $25k.

    The only cost to you is what comes out of your pocket, if you have positive CF since the tenant is paying the rest.  If you have negative CF, add the accumulating (per year) negative CF to your cost.

    Like any business, you don't start making a profit until you recover all of your cost.

    Buying equity doesn't gain you anything...it costs you more.  You are taking cash from your bank and spending it when you transfer it to the property.  Your bank account goes down, and your cost goes up...that's a negative result...in both cases.

    1Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    6y

    @Patrick Culleton

    I say go for it. I’ve done this on a couple properties and so glad I did. It also helped me acquire more properties so it was a win-win situation. Losing a couple hundred a month or so isn’t a big deal when you look at the big picture. Plus someone else is paying down a lot more than that in your principle each month.

    1Reply
  • Matt Y.
    Member since 2019 · 20 posts · 13 votes
    6y

    @Patrick Culleton it also matters what the total value of the home is. If you’re -$200/mo on an 800k place, that’s different than the same negative on a 65k house.

    1Reply
  • Martin NealPro Member
    Rental Property Investor · Chicago, IL · Member since 2017 · 293 posts · 383 votes
    6y

    @Patrick Culleton If it doesn’t make cash day one, it doesn’t make sense. You can’t take a $200 loss every month. It’s a liability by Rich Dad definition. You either need to refinance or come up with a creative house hack method.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    6y
    Originally posted by @Greg M.:
    Originally posted by @Joe Villeneuve:

    It's not a cost you need to recover. It's not a water heater that you have to amortize the cost over the next 15 years. That money isn't disappearing, it is just transforming from cash in your pocket to equity in your property. You still have that $200. 

    What am I gaining? By my willingness to transfer $200 from my pocket into the floors of my rental (a zero net change in my net worth), I'm continuing to have a tenant that is also contributing $400+ into my floors (a positive change in my net worth). So every month that I am willing to take $200 from one of my pockets and put it into another of my pockets, a renter will contribute $400+ to one of my pockets. That's a damn good ROI.

    And your cash in a bank is not free for you to use. There is an opportunity cost applied to that money. Just because it was yours and sitting in a bank account doesn't mean there isn't a cost to use it. And today, the lost opportunity cost vs the cost of acquiring new capital from a bank is not that far apart. 

     I wouldn't know where to begin trying to explain the difference between your comments and mine with how scattered your's appear to be.  The one I will comment on is the last one.  IF you want to access the funds you moved to the "floorboards", there is an interest charge in addition to the opportunity cost...the use of cash in the bank you only have the opportunity cost.

    If you just want to use the money in the bank, you just spend it.  If you want to use the money in the floorboards, the loan you need in order to access it costs you money (interest + fees).

    2Reply
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