what are the pros and cons of buying a property that is not cash flow positive?

Question

Hello,

I am new to the site and starting my research for buying the first investment property. I am looking for hands-off approach to buying a rental property. I looked at RoofStock and mynd. I found that some markets are not cash flow positive e.g. Austin Texas. While other e.g. Georgia is cash flow positive.

This brought me to the question: what are the pros and cons of buying a property that is not cash flow positive? I hope that experts here will be able to share their wisdom  and unique perspectives.

Jacob LeBar · Answer

Hey Ashish, there are positives to buying a non-cash flowing property, it all comes down to strategy. 1st is appreciation, certain areas like Austin fir example in the immediate city it is difficult to cash flow, but the properties value will appreciate over time. This is a long term view to investing in rental properties and a way that I've seen some of my most successful investors grow their portfolio.

Another positive is Tax benefits, even if your property does not cash flow positive, all the expenses can be deducted from your taxes, this is probably your biggest value. This can include, mortgage interest, property taxes, upkeep expenses and if it's negative cash flowing you can report it as a net loss of income.

Greg Kurzner · Answer

Because of negative leverage, it is increasingly difficult to get sufficient cash flow without more cash down or sacrificing areas with higher price to rent but that are solid appreciation markets.  Agree with above that it isn't ideal to feed a negatively-cash flowing property in hopes it will appreciate quickly but lowering cash flow expectations and buying at prices that provide some positive flow are the important things to focus on and where you will enjoy solid appreciation (like Metro Atlanta) but where you will be able to also likely increase cash flow both by refinancing when rates moderate and with lowering your LTV because of appreciation.

Jordan Moorhead · Answer

@Ashish Gupta

Pros can be big if you buy in an area that's appreciating quickly and you don't run into any large capital expenses or you have the money to cover them

Cons can also be big when you buy in an area hoping on appreciation and don't have any cashflow. Maybe prices don't go up and then you also have large capital expenses that you need to cover out of pocket.

Investing for cashflow only can also not be great. Lots of people (myself included) have bought in areas where the numbers look great on paper but the reality of operating the property is you barely make any cashflow and deal with continuous headaches.

Randall Alan · Answer

@Ashish Gupta

There is essentially nothing positive about buying something that is not cash flow positive. That is not to say someone can’t justify it by saying they can make it cash flow positive later through rent appreciation (ie. Raising rents), or forced appreciation where maybe they convert it to have more bedrooms, or make other improvements, or hold out for future market appreciation, etc).
But at the end of the day you have to own the property and pay its bills… the mortgage, the insurance, the taxes, the repairs, the capital improvements, etc. and unless you are a well to do person who doesn’t mind bleeding cash every month in the short term for the later pay-off… don’t buy something that doesn’t make money.

It’s somewhat like a house buyer buying a property they can’t afford… you are short every month. It’s just not the smartest move in my opinion.

There can be an argument on why you do it… but it is pretty narrow, and if you are limited in your reserves, a risky move.

All the best!

Randy

Basit Siddiqi · Answer

People invest to make a money on their return.There are normally two cash-inflow opportunities real estate investors receive.A) On a monthly basis through rental incomeB) At the time of saleIf you are not getting money on a monthly basis, you are likely banking on the opportunity that there will be a big-pay day at the time of sale.As an investor, I normally try to get both a cash flowing property that also has an opportunity to appreciate.My target is 8% cash on cash and 4% appreciation which equals 12%Best of luck.

Joseph Palmiero · Answer

Here are a few questions to consider. How much do you have to feed it each month?  Do you have the income and/or savings to fund the difference?  How long are you willing and able to do that? How secure is your other income to feed it?  What is the appreciation potential?

The bottom line is this would be extremely risky unless you personally have great income and a strong balance sheet.

Josh Bowser · Answer

Hey Ashish - buying a cash flow negative property is speculation that either prices will appreciate or net income will increase over time. Some folks will do this with the intention of developing the land for a higher and better use in the future, or will do this simply if they expect the property to go up in value. There is a time and place for it, but you probably should not do this unless you have significant income coming in from other investments/income streams to cover the difference.

What is your ultimate goal for your first investment property?

Dan H. · Answer

I am often the contrarian.

No one knows what property will produce the better cash flow over the hold, but if I were to have to bet I would predict the property with the worse initial cash flow to have the better cash flow over a long hold.  Why?   Because RE markets are efficient.  Properties with the best initial cash flow typically have the best initial cash flow because they have poor appreciation outlook.  Rent increases have a correlation with the property appreciation.  The average rent increase of a 3 BR SFH in my market in the past year is $700/month.  A property with poor initial cash flow can quickly change to great cash flow.

In general, the markets with best appreciation over the long term had poor initial cash flow.  I challenge you to find a city that neighborhoodscout.COM has ranked 10 out of 10 nationally for this century (since 2000) that had above average cash flow in 2000.  What this tells me is if I had made the above bet in the year 2000, I would have won the wager virtually every time.

The reality is initial cash flow has a poor correlation to actual cash flow over a long hold.  Historically the poor initial cash flow property will have better cash flow than the great initial cash flow property over a long hold. good luck

Bud Gaffney · Answer

@Ashish Gupta no pros. Move on to find a deal that is CF+

Eliott Elias · Answer

There are no benefits to buying a property that negative cash flows, unless you have tremendous equity. More expensive markets like Austin will not allow you to cash flow. There are markets close to Austin like Killeen and Temple, Texas, where cash flow can be found.

what are the pros and cons of buying a property that is not cash flow positive?

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