Advice appreciated! - Negative cashflow but positive equity?

[Daniel Walker]

Hi Folks,

I am new to buying real estate for investment purposes, but have held a rental in which I used to live since 2014. With equity I've extracted from the first house I am looking at a 2-bed town house which has the following numbers:

Monthly Income: $1095	Monthly Cash Flow (income minus expenses): $-310.25
Monthly Expenses...	Cash on Cash Return...
Principal & Interest	$800.00	Down payment	$51,125.00
Tax	$80.00	Closing costs	$3,000.00
Insurance	$56.00	Washer dryer	$560.00
HOA	$205.00	Paint	$1,000.00
Utilities	$0.00
Vacancy	$54.75
Repairs	$50.00
Capital Expenditures	$50.00	Total investment	$55,685.00
Prop Mgmt	$109.50	Annual cash flow	-$3,723.00
Total Expenses	$1,405.25	% ROI	-6.69%

However if I factor in the equity that will be built because the mortgage is slowly being paid off then the ROI becomes positive. Should I not touch this deal with a barge pole? Or are there any of you who have gone ahead with such a purchase based solely on the equity gains?

I should add that I'm in the process of building a local network of acquaintances and contacts through this website and also face-to-face meetup groups. I know that this is a great way to become exposed to more ideas and options.

Advice / criticism / comments most appreciated!

Daniel

p.s. the formatting of the table above was not preserved when pasting into this forum. Hopefully it still somewhat makes sense.

[Joe Villeneuve]

Originally posted by @Daniel Walker:

> My question is why would you go into a deal knowing that you will lose money every month?

@Scott Trench  Thanks for the reply! Yes, that is basically my question. The only possible reason I can see is: that the renter is buying the house for you. So the cash flow lost each month would have to be weighed against the equity gained. Let's assume for argument's sake that there is an equity gain of $800/month, then subtracting the negative cash flow of $-310.25 still leaves a positive $489.75 every month ($5877 per year).

Do investors simply not include the equity gains when calculating ROI?

 You have just fallen victim to the Investor's Most expensive word..."rationalization".

First, the tenant isn't buying the house for you if you have negative cash flow...you are...and, you're paying your tenant to live in your house at the same time.

What are (were) your plans for the cash coming out of your pocket to cover that negative cash flow...that is if you didn't have to give it to your tenant to cover their "under payment"?  See, that negative cash flow money you are spending (and losing), probably had a different use in mind.  Now if you still have to have cash to use for that "other" use of those funds, you have to use alternative cash for that too.  That means your actual cost here is 2 times that negative cash flow.  Once, for the tenant, and the 2nd time to cover your expenses that those "tenant" funds were supposed to be covering.

Now the big one...no that wasn't it.  What are you going to do with all that equity you are building up?  It's pretty useless until you tap into it...and you can't tap into it by refinancing, or you get more negative cash flow.  By the way, ask anyone banking on equity how they did in 2008.  Also, where did you come up with $800/month in gained equity?  I hope it doesn't include your contributions to it.  That's not equity.  All you are doing is putting money under a mattress in the rental house.  That "equity" represents your cash...not profit, so you can't count it.  Now, if your tenant was paying for it, (i.e.Positive cash flow...), that would be different....and would be profit.

There's more...not good. What are your plans for your next property?  How are you going to pay for it?  How many more of these "gems" can you handle?