All Forum Posts by: Jordan Petty

 Can't argue that there might be a reason, but I have yet to find a logical (non-rationalized) reason to buy a house with negative cash flow.

Even with the example you gave, if you were losing money over those 6-12 months, that stretched out to 24 months, at a rate of $200/month, that's almost $5k you lost...and even more important, $5k extra you had to spend (instead of your tenant), that you have to recover first...then show the profit.  If you add to it, the potential exponential gains from investing (instead of spending) that extra $5k could have gotten you, the total loss is higher than face value.

...and to me, this isn't investing...it's speculating.

I would not buy a negative cash flow property unless I was pretty certain that I could make out on the appreciation. I agree with @George Pauley that chances are you will have expenses that will come up and your negative cash flow will swallow your pay check.  

Case in point; I have a property that has a positive cash flow of about $250/mo.  A few months ago there was an issue with a shower faucet and some pipes which required a plumber and that cost me about five months of cash flow.  As an added bonus, the property taxes went up significantly and that added three more months of lost revenue. When I was renovating I estimated it would take about two months to remodel and rent the place out, it took four.  It's not the end of the world for me because I had positive cash flow to begin with but can you see yourself doing the same when you think of starting out with negative cash flow? Always always have reserves and a plan B (and an exit strategy). 

As for your question on should you look out of state... it may work out but what I know from personal experience is that managing people (whether they are tenants, property managers, contractors, etc.) from far away is a challenge at best.  

I felt the same way you are feeling... patience is key. Another thing to keep in mind... the market is hot now but what happens if you buy high and not only have to deal with negative cash flow but also a loss in value if the market cools off?  

@Jordan Petty you mention something in your first paragraph that really resonated with me... 'to give back to those who have helped you' and also you mentioned you were looking long term. I have twice bought a negative cash flowing property and it was for similar reasons.  The first time, I purchased a house in an area of North Carolina I was sure I would return to when my career permitted it (I'm military). I bought a house I loved in a great school district.  I was fortunate to have good, high quality tenants over the 9 years it was a rental. But it was always $-150 a month or so. I was able to make it up on my tax returns at the end of the year and I liked knowing it was 'waiting' for me.  When my life circumstances changed and I realized I wouldn't return there, there was no incentive to keep the house so I sold it and made a little money on the sale. 

The second time was to give back. I rent a home I own to a very beloved family member who has helped me out tremendously in life but currently could not afford to pay the total amount each month that would make it cash flow positive for me. I could get more on the open rental market, but in this case it makes me much happier to have someone I love dearly in a safe, nice house then to have strangers in it and making a few hundred more each month. Long term, the house is in an attractive area that has experienced consistent, long term growth and rising home values. 

 In each case, I was able to do this because, like you, I have outside steady income.  In my second case my family member and I had an open, honest discussion about exit strategy in the event my financial circumstances change and I need to either sell the house or make it cash flow positive. 

I'm a newer investor and I have two other properties that cash flow and I selected them because they DID cash flow and were in a nice, growing area. I wouldn't have bought them otherwise. 

I wish you good luck and if you are thinking long term on a case by case basis, such as buying a home that your parents might want to live in someday when they are elderly/retired, but could be a rental now even if you were out of pocket a bit, I'd say go for it.  I know not everyone will agree with me because there are still a lot of 'What-ifs' in each scenario. Keep us posted on your progress!

To me it depends on your strategy - if your goal is to live of the net rental income, I would not buy negative income rentals unless you have a strategy to reposition them to gain higher rents and positive cash-flow in an understood time frame.

Now, if you have a portfolio of rentals, you can consider buying some for cash-flow and some for appreciation.    We buy mostly for cash-flow but we consider appreciation rates in the neighborhoods.   We have one rental property which is in a 15% per year appreciation neighborhood so we accept basically break-even cashflow as we know in 10yrs we can sell it if we want to and make significant capital gains.

You buy an investment based on return. If you had someone come into your office and ask you to invest $50,000 and I can promise you a -2.5% return, you'd kick them out of your office and ask them never to come back.  You make the money on the purchase, not the sale so if you're future oriented but presently blind, all you can hope for is that you don't step off a cliff and get to the other side alive. Sounds like a poor plan to me.  

Be patient. It sounds like you're learning the market right now. It sounds like you are analyzing a lot of deals which will allow you to KNOW when a GOOD deal comes across your table. You could purchase this property and come across a positive cash flowing deal tomorrow and feel like the world's depression came crashing down on your shoulders. Be patient, but ready for when a good deal comes across your table. 

Great work asking questions and doing your research, just don't get antsy.

@David Greene invests out of state and has written a book on how to do it.  I invest out-of-state in STL and am looking into Colorado Springs from Albuquerque.  As stated in Cash Flow Quandrant, when you buy negative cash flowing properties, you are limited in the number of properties you can own by the amount of extra cash you have from your "day job" or savings.  If you buy positive cash flowing properties, your acquisition potential is virtually unlimited.