Landlording & Rental Properties

4 Non-Negotiable Rules For Buying a Negative Cash-Flow Property

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
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You’re considering buying a deal with negative cash flow because you like the upside.

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My first response is, “NO, don’t do it!”

This is because I view this as an advanced strategy and not for the faint of heart or the newbie.

However, sometimes there are good reasons to take on a negative cash flow property. For example, in Washington, DC investors are very successful with purchasing vacant apartment buildings, fixing them up and leasing them with Section 8 tenants. In the process they create value so that they can either refinance the building and hold it or they sell for a profit.

In order to take advantage of opportunities like these, you HAVE to take on negative cash flow.

If you’re considering a deal like this, proceed with caution, and then follow these four rules.

4 Rules for Buying a Negative Cash-Flow Property

Rule # 1: Accurately Model the Projections

Create a financial model that is able to model the income and expenses. You might have to create a monthly model that then rolls up into an annual one over the life of the investment.

Related: 5 Reasons Your Rental Property Is Not Cash Flowing

As always, the overall return should drive the deal. The return is made up of cash flow, amortization and appreciation. Make sure your deal analyzer is able to calculate the overall return from each of these components.

Obviously, the negative cash flow will put downward pressure on the overall return, so make sure you can model it!

Rule # 2: Be Conservative in Your Projections!

Things always cost more and take longer than you expect. If you think it'll take you 3 months to get all of the units rent-ready, then plan for 6. If you think it'll take you 3 months to lease up the units, then double your estimate. If you think it'll take you 12 months to achieve cash flow break-even, then give yourself a 6-month margin for error.

If the deal still works, you have a good deal! If it doesn’t, be very cautious.

Rule # 3: Be Confident About Your Business Plan

Make sure that you understand EXACTLY why the property is cash flow negative, and know EXACTLY what you need to do to fix it. This is not the time for guessing and hoping.

If the building is empty because of condition and neglect by the previous owner and the demand for housing is strong, then you can be confident in your plan to renovate and lease up.

On the other hand, if the building is 40% vacant and you’re not sure why (maybe the rental market is soft in that area), then be very cautious.

You need to have a high degree of confidence in your business plan.

Rule # 4: Have Enough Capital Reserves

Make sure you have enough capital reserves to handle the negative cash flow.

Related: Should I Invest for Cash Flow or Growth? An Investor’s Analysis

The challenge with negative cash flow situations is that there is a possibility of exhausting your cash. And if that happens you enter the downward spiral: you can’t finish the renovations, and so you can’t lease up the units. Then you can’t achieve the profitability and the valuation you were projecting. Worse, if running out of cash prevents you from achieving a cash-flow break-even, then you could lose the entire investment.

Re-visit Rule # 2 and then make sure you have enough cash to fund your conservative projections.

Conclusion

I would first try to talk you out of taking on a negative cash flow deal unless you’re already an experienced investor. However, sometimes the opportunity is so good that it would be foolish not to take advantage of it just because you might lose money for a few months.

In that case, make sure you can accurately model the scenario, be conservative in your projections, be confident about your plan, and make sure you have enough cash reserves.

Follow these four rules, and you can maximize your chances for success.

What are your thoughts about negative cash-flow deals? Why or why not would you take one on? If you’ve done one, what was the outcome?

Leave a comment below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Karen Rittenhouse Flipper/Rehabber from Greensboro, NC
    Replied over 5 years ago
    Maybe? I personally would never take on anything with negative cash flow. I know there are areas of the country where buying rentals with a positive cash flow is difficult and I’m glad that’s not the case where we live. We have not and would not take on negative cash flow. That’s gambling with the future and we never bet on the future. Anything we purchase must have profit and positive cash flow from the day we close. I think everyone should invest in North Carolina! 🙂
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 5 years ago
    Karen – this is a good rule. And if you have a good rule, you gotta stick to it!
    David Hughes
    Replied over 5 years ago
    I invest in Amazon, which can flows negative. I’m expecting that at some point in the future the company will be able to turn their growth model into a business that cash flows positively once they establish marketplace control in retail. Real estate isn’t any different to me. It’s all a stream of ones and zeroes from my perspective. I invest when I think the present value of future cash flows is high enough that it becomes my best option. Taken in context of the rest of my portfolio and my personal objectives and risk appetite, i think it’s working all right.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 5 years ago
    Another good perspective, David, thanks …!
    Eric Brown
    Replied over 5 years ago
    Pretty good advice Michael. I take over “negative” properties all the time and turn them into cash flow, but there are risks.