Negative Cash Flow for capital appreciation?

[Ryan L.]

Hello BP community,

I am looking to purchase my first rental property in SD, but am finding the prices to be very high in relation to potential rent prices, to the point that I may have to take negative cash flow for possibly up to 15 years before it becomes neutral / positive with the current down payment that I have.

The upside to this is that the projected appreciation in San Diego is quite high and the rate of return (IRR) could be positive in as early as 5 years and reach up to 6.5% in 20 - 30 years. Of course, these are all based on current projections / assumptions and could change down the line.

My question is, do you think it's a good idea to get a property with negative cash flow in exchange for higher capital appreciation?

The alternative would be to invest in a much cheaper rental in another state, where I could use my current down payment to get a property outright in cash and start to have positive cash flow right away. However, the projected appreciation would be much lower in this case.

Thanks so much for any insight you can provide!

Best Regards,

Ryan

[Michael Ealy]

Originally posted by @Ryan L.:

Hello BP community,

I am looking to purchase my first rental property in SD, but am finding the prices to be very high in relation to potential rent prices, to the point that I may have to take negative cash flow for possibly up to 15 years before it becomes neutral / positive with the current down payment that I have.

The upside to this is that the projected appreciation in San Diego is quite high and the rate of return (IRR) could be positive in as early as 5 years and reach up to 6.5% in 20 - 30 years. Of course, these are all based on current projections / assumptions and could change down the line.

My question is, do you think it's a good idea to get a property with negative cash flow in exchange for higher capital appreciation?

The alternative would be to invest in a much cheaper rental in another state, where I could use my current down payment to get a property outright in cash and start to have positive cash flow right away. However, the projected appreciation would be much lower in this case.

Thanks so much for any insight you can provide!

Best Regards,

Ryan

Ryan,

I would try to stay away from negative cashflow specially in your first deal.

I understand you get more appreciation but how many deals can you do if each of them are negative cashflow? If that was my thinking, I would never have acquired over 1,000 apartment units.

If I were you, here's what I am going to do.

1. Look for properties that you can add value - properties that need repairs, right in San Diego. Most newbie investors and owner occupants won't touch these houses so you're not competing and paying market value.

Since these properties need work, they will most likely, sell at a discount. Once you renovate the property, you can rent them for POSITIVE cashflow since you bought them below market.

2. To make this happen, you need 3 things:

a. Real estate agent who is investor-friendly and will look for houses listed below market and have not sold for more than 30 days

b. Hard money lender so you can acquire properties that need repairs

c. General Contractor - who works with real estate investors, specially landlords

Makes sense?