Newbie Question About Single Family Houses

[Shawn Mai Li]

Hello! I am a senior in high school with an interest in investing and real estate. I am very new to this so I've been reading the guides (which encouraged me to interact rather than just lurk) and taking notes. I am about 4 chapters in (I don't want to cram too much info) and have a couple questions. While reading about single family housing, I read that "in certain areas, rent from SFRs won't have positive cashflow". My question is: What benefit is there when the cashflow isn't positive? I was under the impression that positive cashflow is how you make money.

[Joe Marquardt]

@Shawn Mai Li. It is. If you buy an investment with negative cash flow you have to cover the difference. Your debt service(mortgage), taxes, insurance, maintenance (cutting lawn,marketing,legal,etc) management cost... etc are $1000 but you rent it for $800, you have to pay the $200 difference out of pocket each month.

99% of the time this means you bought a bad investment. Just imagine if your tenant moves out, you have to repaint the place for $600 and you can’t get another tenant for 2 months, that’s a lot of money out that will never be recouped.

Now I say 99% because if you are buying in a market on speculation, meaning for some reason you think rents or sale values are going to go up in the future, this investment might be worth it. An example of this would be if someone bought a property in one of the possible cities Amazon was going to move their east coast headquarters. Someone could have said, ok, I have a really good feeling Amazon is going to pick Newark NJ for their location to open a headquarters being they have a presence there already (Audible) or some other reason you think it’s going to happen. You buy a rental house that costs you $1000 a month, you know when you buy, you can rent it for $800... BUT, if amazon moves their headquarters to Newark and you were right, it then rents for $3000 a month a year later....there’s your home run of a negative cash flowing investment suddenly becoming a massive cash flowing asset.

Good luck with your learning. My advice is 1. You need money to make money in real estate, anyone who tells you otherwise is lying and trying to sell you something. You don’t need a million dollars, but you need something, so start to save and live below your means, 2. Learn from experience, it’s the best way, you can only learn so much by reading. And get creative because experience doesn’t have to be owning property right off the bat, it can choosing a job that will give you relatable experience. Like don’t work as a waiter to make a few bucks in the years to come, make the decision to work for a carpenter or electrician as a helper. Little changes can make a big difference. 3. Once you have some money saved, take little steps in the right direction, buy a fixer upper 2 family and rent one side out, or buy a house you can fix up while you live in and flip in 1-2 years. That allows you to buy with a conventional owner occupied mortgage with less $ down and better rates. House hacking is the term used on this forum.

These two examples are low risk first moves that will allow you to get your feet wet, you might not make millions of dollars on them, but you also aren’t trying to flip a house in 3 months super leveraged (meaning a lot of debt), where you could lose everything if your inexperience makes you underestimate a cost, miss a zoning law that affects your success, etc. the list goes on.