All Forum Posts by: Bradley Shuhart

This might be controversial-- Its NOT all about the cashflow, despite the hype. ESP in a Socal Market. Assuming a loan at 2.5% is a no brainer.  Market appreciation and rental increases happen at a very very high rate. Lets work the math backwards...

what would you be paying if the property was a 7.5% interest rate? I bet its close to that $800-1000 month right? 

So, I would say do it- but plan out the math a bit more. 

What is the average market appreciation rate in your area? 

Inflation is over 7%- and you are locked in at 2.5% (win)

And rental increases are?? National average is 3%- assuming yours is higher?

tax benefits (loss on paper for taxes) WIN

And run the math and see what it looks like in 3, 5, 10 years. I am betting you will be ahead with all the things I mentioned.

Quote from @Michael V.:

It sounds like you want the deal because you can assume the lower rate 

This sounds like the main reason the OP wants to do the deal....and it's not a good one at all. Interest rates are still historically low, and to take on what is on paper a bad deal just to get something that doesn't really matter (long term) is just silly.

What I mean by 'doesn't really matter' is this: a) rates aren't really that high, b) the OP is willing to take an $1000 hit on costs, but not willing to take the same hit when it comes to the difference in mortgage payments, and c) the rate can be re-financed in a couple years anyway...

And this is HOA and MR? Lol....

It's in an area that "should" continue to appreciate. Speculating has never been my thing...ESPECIALLY when negative cashflow is in the equation. 

Quote from @Joe Villeneuve:

Quote from @Brady Mullen:

Quote from @Bill B.:

How much of the payment is lowering your principle?

The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k. 

Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it.  Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)

This is very helpful way of looking at it.  If I could buy $1,500 worth of any viable asset/investment for $1,000 month after month, I'd consider it (I didn't say I'd definitely do it, all you cash flow junkies - I just said I'd consider it).

If you could purchase a business for 33% off, wouldn't you at least think twice about it?

Cash flow is important, of course, because liquidity is a vital metric, but it's not the only thing that matters.

1 - $1500 asset for $1000/month you would consider it?  Why?  What's the rest of the story?

2 - 33% for a business.  Why?  33% off of what?  The asking price?  Again, what's the rest of the story?

3 - Cash flow isn't the only metric, but it's important enough that you shouldn't buy without it.

 If a negative cash flow of $1,000/mo is buying you $1,500 of equity through debt paydown based on where that loan is in its amortization schedule means you're purchasing $1,500 of equity every month for $1,000.  This is also where the 33% off comment comes from (1000 is a 33% discount from 1500).

I'm not saying this deal is a good deal.  It is probably not in that position.  I'm just saying that if my negative cash flow (a monthly cost to me) is buying me something worth 1.5x that amount every month, I'd entertain that.

It's easy to create a slogan about positive cash flow at all costs, but it's just not that straightforward.  Of course cash flow is important.  That's not my argument.  But if I could buy $1,500 of Apple stock for $1,000 every month (this transaction is negative cash flow for me, by the way), then I'd consider that.

@Bradley Shuhart

I would maybe say you're okay with losing some cash flow each month depending on many factors such as debt pay down and cost of property vs value of property. Each deal being unique..

However....if you're at a 2.5% rate and you're still at 800-1000/mo then I would definitely not do the deal. You're not going to refinance to a lower rate...you're already at the best rate possible. 

If the same situation was at an 8% rate, but you would cash flow at say 5%, then we can hope rates will come down in a few years and you could refi, but that's not the case here. 

It sounds like you're getting a great interest rate, but might be paying too much for the property. Perhaps the seller is offering mortgage assumption but asking a much higher price in return. Owner financing is just one part of the equation and just because you're getting a great rate doesn't make it a great deal. 

Also....I had to look up what Mello Roos was as I had never heard of it before. HAHAHHAHAHAH California doing California things!!!

Quote from @Bill B.:

When reaching out to those pm’s ask them how much they think they could collect in rent, what they charge and what you would net. Then you’re going to want them to guess at annual rent increases, is it 2%, 5% or 10%, that’s going to be a big factor. In 5 years will you be collecting 5% more rent or 50% more. Is it high end of the market where you’re going to reach an affordability problem. 

Your numbers don’t excite me. I think your personal finances will probably have to be the tie breaker. Would an extra $1,600/mo in your pocket change your lifestyle at all? (Being positive $800 vs negative $800.) Many/most people would say yes, those people probably shouldn’t take this deal. To somewhere between 5 and 20% of BP members, based on a percentage I just made up, that’s not life changing money. They can/might buy this property based on future returns or plans. 

As I’ve said elsewhere on my negative $800/mo cash flow property. It was much less than I had been putting in to my retirement accounts, which certainly didn’t cash flow. And I was treating it as a tax advantaged retirement account, not a cash flow account. I was able to do that because that $800 wasn’t life changing, because I had other properties that were cash flow accounts. 

Good luck. And let us know what you decide. 

 It seems there's more story to this. If I'm not wrong this is the typical way of home builder playing with price. 

So what OP should do is the following:
1. Measure the PSF of this new construction
2. Measure the PSF of 10 year old stock 1-2 mile apat>
3. Measure the PSF of 30 year old stock house

Compare to PSF, I would not surprise if the new construction PSF is higher 30-40% than FMV of older house in neighborhood.

In one of our area, with the same PSF, lets say 30 yo house is selling for $300K, the new construction is like $500k and lakefront is $700 ! 
It's the way they make money, even the lake is man made to hijack the price. And this is the very reason why price is negative 800 bucks even with two percent rate which seems illogical to me.

The problem with this approach is, no cash flow and future appreciation is also questionable unless you know the area. 

It's risky but quite brain simulating as well, if the area is full of tech company or located in top touristy area, I 'may' reconsider looking with 20 years investment outlook. If not, I would run away.

Sounds like you’re walking from this deal?

I didn’t see it mentioned or even asked. Another big factor is does this deal cost you anything? I forgot to consider it, but this deal is mostly acceptable if you’re walking in with a downpayment between zero and very small. If you’re taking over the deal for free I’m still kinda interested. If you’re putting down $500k, I’m waaaaay out. 

You have to consider the return your downpayment could make. In this high interest environment. Many “cash flow investors” could make more Chas flow putting their cash in the bank. They’re really banking on loan pay down and appreciation. $100k downpayment could bring in more than $400/mo in guaranteed bank interest so you can’t get in to real estate to make $200/mo. 

Let us know the cash required in your deal, that could be a killer all by itself. 

Quote from @Bill B.:

@David Dachtera

Lately I’ve been accused twice of insulting people when I ask questions, so right up front. This is not an insult, it’s a real question. 

You say: "Investing" for appreciation is NOT investing, it's speculating (read: gambling).

Are you saying almost all stock investing, which is almost entirely based on appreciation is gambling? I certainly feel that way about bitcoin and probably silver/gold, and at least a little about stocks. It’s always bothered me when people won’t invest in real estate without cash flow but they’ll GLADLY invest in stocks with NEGATIVE cash flow, praying for appreciation.

This is the exact reason I stopped investing in stocks. There was no way I could buy enough stocks to generate enough cash flow to live on. When I retired I didn’t want to “hope I died before I spent all my savings”. That and having zero control over if they went up or down each day or even over time got me to real estate and changed my life. 

Again, honest question and not aimed solely at you. I’d be happy to hear anyone’s opinion, you were just the latest to say it and I thought you might still be online. 

Very interesting take on it all! 

Stocks and real estate can both cashflow.

You can buy and sell to profit from the appreciation on either (flipping properties or stock trading). You can also cashflow (renting a property or dividend investing) regardless of the asset price.

Dividend stocks are simple. You purchase once and they don’t come with expenses but like you mentioned, a lot harder to live on a dividend cashflow there.

They both have a purpose and come with their own strategies but let’s not forget the biggest reason. We’re not using our own money to cashflow with real estate.

Back to the original post.

If you’re losing $1,000 at an 10% rate. I could understand waiting a little and trying to refinance into a better rate.

If you’re losing $1,000 at 2.5% I don’t know how you could improve this anytime soon. 


-Are you going to refinance later and lock in a higher rate after the principle goes down?

-How much would you have to pay off for you to even break even at a 7.5% every month?

That interest rate sounds GREAT but not when it comes with a negative cashflow.

I love seeing everyones feedback!

How much of the payment is lowering your principle?

The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k. 

Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it.  Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)