Does it make sense to get a rental that won't cashflow?
Ryan BlakePro Member
Lender · TX · Member since 2018 · 936 posts · 713 votesI have been investing for awhile but have only recently started picking up properties that I know will not cashflow because of the prices in the area I invest (Dallas/Fort Worth) and the higher rates.
I am still picking them up because it will still pay down debt and provide me with depreciation that I can use to offset my flipping and lending income. It is also a little bit of speculation on my part that 1) home values will continue to appreciate at or above the inflation rate and 2) that eventually rates may drop 1 - 2% (I am at 7.5% on my most recent refinance) and will be able to do a cashout refi in 2 - 5 years.
What are other's thoughts on this? The first 10 years of my investing I would have completely suggested against doing what I am doing now. I thought of banking on appreciation and rate drops as pure speculation and akin to gambling. The only thing I can do to help justify it is that now with income in the highest tax bracket, I am saving 37% on any depreciation I can get.
Will someone either wake me up to my new found delusions or encourage me that I am still on the right track.
Not all properties will cash flow, especially in some areas. One of my earlier rentals didn't cash flow at first, but after a few years, rents went up and now it does. Plus the tenants have almost paid off my mortgage and as house prices went up, there is even more equity in the home. For me it is about long term planning and I am fine with slow and steady of buy and hold. While I sold my first rental, all of the others have been bought (and I sold one this year) within the last 9 years. I was able to take advantage of lower interest rates and home prices. I never would have thought prices would increase as much as they have, but I'm happy I bought when I did even if not all of them cash flowed.
I also have properties in two very different markets. Looking at cash flow, the best is on area 1, but house prices have not changed a lot. Area 2 has lower cash flow (one still doesn't cash flow), but house prices have more than doubled. All of my current rentals cost about the same to purchase ($215-265K), but cash flow is so different and current house prices are as well ($325-600K)...and the one I spent the most for and cash flows the most, is now the one worth the least (still worth more than I paid for it 3 years ago).
Not all properties will cash flow, especially in some areas. One of my earlier rentals didn't cash flow at first, but after a few years, rents went up and now it does. Plus the tenants have almost paid off my mortgage and as house prices went up, there is even more equity in the home. For me it is about long term planning and I am fine with slow and steady of buy and hold. While I sold my first rental, all of the others have been bought (and I sold one this year) within the last 9 years. I was able to take advantage of lower interest rates and home prices. I never would have thought prices would increase as much as they have, but I'm happy I bought when I did even if not all of them cash flowed.
I also have properties in two very different markets. Looking at cash flow, the best is on area 1, but house prices have not changed a lot. Area 2 has lower cash flow (one still doesn't cash flow), but house prices have more than doubled. All of my current rentals cost about the same to purchase ($215-265K), but cash flow is so different and current house prices are as well ($325-600K)...and the one I spent the most for and cash flows the most, is now the one worth the least (still worth more than I paid for it 3 years ago).
Blake:
Disclosure - When I was buying SF rentals years ago, I was a Longhorn client.
The real test is your staying-power though a bad market. The people that get killed in every down cycle are those that were banking on the future and did not have enough cash to get through the bad times.
So, if you were just starting out and trying to build your net worth, I would say you are crazy to buy anything with negative cashflow. You get laid off for a few months and you can lose everything. In your situation, you are getting a tax savings, which could theoretically be added to cashflow as a negative expense.
As a flipper, I would be very concerned about the credit markets. It seems that every decade or so we hit a patch where financing gets tough and sales stall for a while because people are having trouble processing mortgages. That is the time when flippers go out of business in droves because it is hard to sell. I would want to have enough cash to handle both a hiccup in the credit markets and carry the negative cash flow.
@Greg Scott Thanks for supporting Longhorn. I have been with them for 6 years and have had a great time working for them.
So I am not using this to build my net worth per se. I have a few other rentals already and have been consistently earning well between all my investments, my job and my wife's job. This is more setting up for tax strategies, which is the advice I was given, and for future returns. I have no desire to quit or shift my focus any time soon but want to start preparing better for post-active working days. I don't think I will ever fully retire but I plan to be doing less active work in the future, i.e. not focusing on writing new loans and not flipping.
I am lucky that I can easily handle a down turn and be just fine if things soften even for an extended time but I still hope that doesn't happen. Flipping isn't too worrisome for me because I know in times like these I just need to make sure my quality is there and that my pricing is a little more aggressive to keep the project moving.
It's a gamble, you're assuming that rents and property values will continue to appreciate. Will they? Most likely. I haven't bought anything in the past 1.5 years because I haven't found anything that both cash flows now, and will continue to appreciate. I get 10% on my money private lending, so making less than 10% while also having the risk and work of owning a rental... doesn't make sense to me.