Negative cash flow.. YAY OR NAY???

Question

I am in the process of buying my first investment property using VA loan. It will be my primary residence for about 1-2 yrs until I buy the next one therefore I am analyzing it as a rental. Property has been on the mls for 180 days, 2255sqft listed for 169,900. Similar property sold for 160k on Feb 2014. Estimated value 171k (from chase value estimator). Should I buy this property even though its creating me a negative cash flow? I am hoping I can make renovations to home to be able to raise the rent but as of right now that's what the rents run for maybe even less. Yay or nay?? Thank you all so much in advance!!!

Listing 169,900

Offer Price 150k

Closing cost 1500

30 yr Loan interest rate 4.0

Monthly P&I 716.12

Rent 1250

Expenses

vacancy (10%) 125

CapEx (5%) 62.50

Reapairs (5%) 62.50

Prop Man (8%) 100

Insurance 50

HOA 40

Taxes 100

NOI 8520

CASH FLOW -6.12

Cash on cash -4.90%

Purchase cap rate 5.68%

Pro Forma cap rate 5.62

Listing 169,900

Offer Price 150k

Closing cost 1500

30 yr Loan interest rate 4.0

Monthly P&I  716.12

Rent 1250

Expenses

vacancy (10%) 125

CapEx (5%) 62.50

Reapairs (5%) 62.50

Prop Man (8%) 100

Insurance 50

HOA  40

Taxes  100

NOI 8520

CASH FLOW -6.12

Cash on cash -4.90%

Purchase cap rate 5.68%

Pro Forma cap rate 5.62

Gabriela Gomez · Answer

Thank you all very much for your feedback. Our agent had our offer ready but after reading these post I think I'm gonna hold on it and not submit the offer. My agent told me sellers agent has been contacting him several times asking him to have us submit a reasonable offer stating all offers will be considered. So I'm  almost sure we can get it for 150k-155k at the most but again the numbers don't make sense and even though it's gonna be owner occupied I want it to make sense from the beginning.

Bill Gulley  The home is in a very nice neighborhood of surprise Arizona? The schools are great and according to zillow homes in that zip code should raise about 6.0% in value. Would you buy that home?

Edgar Collado · Answer

If your goal is to turn it into an investment property, then I would say definitely not.  What happens when you move out...now you have a property that is going to suck up cash that you could be investing elsewhere.  Now...if you think the current rent is lower than market, and that you can invest in the property to the point that when you move out it is worth more and has positive cash flow, then maybe.  But generally, I would say no.  Good luck!

Corey Demuth · Answer

It doesn't hurt to try submitting an offer at the price point where this would actually work for you.

Also, how did you come up with $1500 for closing costs? That seems insanely low, unless this is a co-op.

Gabriela Gomez · Answer

Thank you all very much. I didn't submit an offer. I knew it wasn't a good deal but I kinda liked the home. I was doing what most newbies do; ignore the numbers and fall in love with the home.

Account Closed · Answer

@Gabriela Gomez

No, never.  Make sure each investment cash flows..

If every property you buy does not, you'll soon run out of money and may eventually become bankrupt.

If every property you buy does cash flow, it will make your next purchase even easier and you'll have cash to buy bigger/better properties.

Bryan N. · Answer

@Gabriela Gomez

Nay

Cash flow should be the foundation.  Also, you should be able to pay PITI on your own without disrupting your personal lifestyle if vacant (I'm pretty conservative though).  Tax benefits and appreciation are secondary IMO.

Anna Shaver · Answer

@Gabriela Gomez   I would have your agent go over comps with you from the area showing multiple similar properties.  I ran it using a property I just had an appraisal on and it was a wide range and used property that isn't comparable.

Gabriela Gomez · Answer

@Anna Shaver the chase home value estimator is a tool that estimates how much your house is worth using comps sold within the last yr.

Bill Gulley · Answer

Scott, you're a good son, you wouldn't charge your mother market rents!  LOL

And at 50? Gee, I had a date last night with a 50 year old lady and thought I was robbing the cradle! But, I can handle it. Talk like at 50 she has one foot in the grave! LOL

Bill Gulley · Answer

IMO, I'd bump that offer up a tad, around here off the MLS I'd be offering about 159K depending on stronger comps than the internet. You can look on the MLS and see the % of asking price properties sell for, going 10% below that will usually get rejected unless there are condition issues, a property ready for the market. It sometimes ticks off a seller and they won't respond too, depends on the agent.

As to your cash flow, it's not an investment property until you move out, there is no income generated.

The question is, what is the benefit of buying that property?

Place to live, neighborhood, schools if you have kids, close to work, rate of expected appreciation, property potential for profit, tax benefits, best use of your money?????????

I've bought several properties that didn't cash flow, none lost money!

You don't have to keep every house you buy either, you can sell them!

As you learn more about RE and become more advanced, you'll find that cash flow really isn't everything, but it should be starting off for a new landlord.