How to avoid negative cash flow?

Question

What would you do to avoid a negative cash flow?

I m planning to buy my first rental investment property in north TX and need to get a loan.

What are the strategies you would suggest to avoid negative cash flow?

I m thinking of following

1. find a smaller house in the same area, like 2 bed 2 bath around 1200 sq feet?

2. move to area that are suburb like Sherman and has cheaper properties compare to Frisco TX. I can find properties around my budget 350k but do I have a lower vacancy rate?

3. Find older houses. I found a house built in 1979 in Allen TX, I am not looking for rehab and not a guy to fix things even in my own house. So not sure of this

4. What would you suggest?

John Mathew · Answer

Hi Mahdi! Here are several steps to help avoid a negative cash flow when investing in rental property:

• Research the rental market: Look for properties in areas with high demand for rental properties, to help ensure steady rental income.
• Conduct a thorough cost analysis: Estimate the expenses associated with owning and managing the property, including mortgage payments, property taxes, insurance, and maintenance costs.
• Calculate the potential rental income: Determine the expected monthly rent for the property and compare it to the estimated expenses to ensure a positive cash flow.
• Consider property management: Hiring a professional property management company can help you collect rent, maintain the property, and handle any tenant-related issues, all of which can help avoid a negative cash flow.
• Stay diversified: Investing in multiple properties can help spread out your expenses and reduce the impact of a vacancy or unexpected expense on your overall cash flow.
• Monitor and adjust: Regularly review the performance of your rental property to ensure you're maintaining a positive cash flow, and make changes as necessary to maintain profitability.

Matt Solis · Answer

Most deals on the MLS that don’t need work and are rent ready are gonna break even at best. That’s just the reality of the DFW market right now. You either need to get creative with how you are going to rent the property (rent by the room, short or mid term rental), or you need to buy something that needs work at a discount, then add value to the property and increase rents.

Mark Ito · Answer

Some things you didn't mention; routine maintenance, holding costs, capex, and turnover costs are all things that can factor into a deal. Even though that smaller/cheaper/older house may look great for initial analysis, a deeper dive may show it's not worth it in the long run. Ultimately, find a team that works for you with the expertise in areas you're lacking (i.e. agent, inspector, GC, lender.) That is your best course of action to avoid negative cash flow. Hope this helps!

John O'Leary · Answer

Hello Mahdi,

I'd be happy to schedule a free consulting call to discuss finding a good buy as well as how to finance the project. Let me know, and GL!

Drew Sygit · Answer

@Mahdi Mike there's an old investor saying, "you make you're money when you buy".

It means you rarely can fix a bad purchase.

Buying one of the first properties off the MLS will rarely make you money.

You need to find a motivated seller that is willing to take less than their property is worth or that you can easily reposition!

Of course, most agents & lenders don't want to tell you that, as they want you to buy quickly so they get a commission with minimal work.

Most investors with less than 10 years of experience won't tell you that, because they've only operated in an increasing market and all their purchases have experienced only value & rent increases.

Best of luck!

Murad Clark · Answer

Well stated.

Simon Ashbaugh · Answer

C class areas generally have the best price to rent ratios. Usually the nicer the area the less it will cashflow as an LTR

Phillip Austin · Answer

For the vast majority of us, negative cash flow is the kiss of death.

You should have a solid plan using a detailed property analysis that avoids negative cash flow. BP has a ton of resources and tools to help you!

Matt Solis · Answer

A lot of people have that mindset and don’t mind having negative cashflow for a couple of years. If you have enough income coming in, cashflow is not a big deal to you, and you’re really just parking your money in the asset for the appreciation.

For other investors, they really can’t afford to drop large sums of money for an appreciation play, and will seek out the opportunities with a better CoC return.

Carlos Ptriawan · Answer

in our today's 4-5% MF cap rate, it only makes sense to increase downpayment to at least 40%.

How to avoid negative cash flow?

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