A different perspective (I am often the contrarian on these cash flow discussions).
Question: if you could obtain $420k of a growth stock paying less than $60k over 5 years then having to obtain new financing or sell, I suspect most stock investors would jump at the opportunity. Note they both are relying on appreciation/growth for ROI.
I am not saying there are no differences: stock is passive, residential RE is much less passive. Depending on where the property is located, the property may not have a history of having appreciation similar to growth stocks. RE is easy to obtain recourse loans (only the property is the collateral) to obtain leverage. Stocks on the other hand would typically require collateralized assets (example margin loan or HELOC) to obtain leverage.
There is also the timing, RE has appreciated for 10 incredible years. The interest rates have risen significantly (but still are historically low). Can RE continue to appreciate in this environment? in my market there has been some slight depreciation over the last couple of months.
In my market I may make this purchase. My market has historically been one of the top appreciation markets in the country. Average rents have gone up at double digit percentage for most of the past 10 years and are expected to go up over 10% this year. Most important I can take this risk because I have 8 digits of RE already producing returns. $400/month negative cash flow with the potential upside would not affect me. I suspect I would not notice the negative cash flow except in my book keeping (I look at wealth every week, but $400/month would not be visible).
Note initial cash flow does not equate to actual cash flow. Cash flow can increase or decline. What happened to Detroit cash flow at the Great Recession (not as bad but Las Vegas or much of Arizona)? The higher rent growth market will always eventually be the better cash flow market (assuming the rent growth is greater than expense growth). It is elementary math. High initial cash flow markets are often this way because the expected rent growth is low or non-existent (think of places like Cleveland and other areas in the Midwest). Low initial cash flow markets are often this way because the rent growth is expected to be significant.
I use the standard definition of investing which indicates an expectation of profit. This profit expectation would be via rent growth and property appreciation. It is my view if you research your market and understand what is certain, what is likely, and what is unknown that you can determine if this is an appropriate investment.
I have made much more money from appreciation than cash flow. Cash flow is a single input into the ROI (and one that gets taxed annually making it non-optimal for wealth building). In many markets, the ROI is mostly achieved via appreciation.
Wealth is often generated by taking calculated risks. Ideally low risk items that can produce good/great upside. The risk here seems low. $60k over 5 years is low on a asset worth $420k. You need to determine what is the upside and if the upside warrants the risk.
good luck
