what's wrong with negative cashflow

18 Replies

I know that's stupid question.

I just don't see how I can start my first investment with positive cashflow. I would be banking on the appreciation. Is that really wrong? You gotta start somewhere right? If I can weather it through for 5 years with the cash I already have, wouldn't it be worthwhile? say 5% appreciation for 350K house for next 5 years in seattle. I think that's conservative number?

I really want to jump in, but my numbers say "I shouldn't do it." Did everyone start their 1st investment with positive cashflow?

Sean - where are you looking for property? There are so many opportunities for positive cash flow properties - you just have to look in the right places. I, like other here, think that you have to be loopy to buy an investment property that is negative cash flow. Considering the crazed housing market, you can't really bank on appreciation - what if things turn?

It is really hard to find good properties in many of the big cities, but if you look outside a bit, in smaller towns, for example, there are tons of great opportunities.

Weathering things for 5 years is insanity to me. Look outside Seattle a bit - go out of state if you need to, but start positive. Why start investing on the wrong foot?

But you wouldn't be earning 5% annually, not after you deduct your negative cash flow! Not all investments are good investments. If residential REI isn't good in your area, what about commercial or industrial?

Just because everyone is doing something doesn't make it a good idea. In fact if everyone is doing it it's probably a bad idea in my opinion.

I've been beating 5% consistently in the stock market since about 1991. Why would I want to buy something that I KNOW is going to lose money short term, on the CHANCE that is MIGHT make money long term?

all cash

I'll follow with everyone else here. Why take losses when you can leave your money in a checking account and make 2%-3%? It makes no sense. Maybe you need to start looking for properties somewhere else.

OK. let me dumb this senario down a lot.

negative $500 cash flow/ month *12 = -$6000
House price 350K * 5% appreciation (this is being very very conservative based on the history appreciation in Seattle) = $17500
I'm in black for $11500!!

Why not? Let's say I use half of that to cover vacancy, maintenance, etc. I still come out on top. Is that so bad? (I'm being somewhat rhetorical here)

You're assuming that the 5% appreciation will continue. Considering the market has been white hot for years now, we're in for a slowdown. Can you afford flat to negative appreciation over the next few yrs? You should consider that when looking at this analysis.

I think you're asking for trouble by bringing appreciation into any equation having to do with cash flow.

Its really not that difficult to go out and look at other properties, is it?

If you're that "in love" with this property, go for it. What is it about this place??? :shake:

Okay, if you have time on your side....then appreciation should be considered. I understand positive cash flow is nice especially in the short term, but appreciation must be considered as well if this is a long term hold.

Let's face it...everyone has to live somewhere..so when people are buying houses, the demand causes prices to increase and when people are not buying and sitting on the fence, there are more renters out there...so rents will increase because of supply and demand. If the 5% appreciation does not happen....and the next 5 yrs are lower than that....well, that means the lack of buyers are all in the rental market...too many renters means that you should be able to raise rents quickly.

From what little I've learned, one usually underestimates upkeep, repairs, bum renters and the like, so cashflow is usually less than expected. Starting out in the red doesn't sound good as it will probably get worse. Also appreciation can be a real gamble from what I've heard.

But that raises the question: How does one locate properties that *do* have a shot at cashflow?

OK. let me dumb this senario down a lot.

negative $500 cash flow/ month *12 = -$6000
House price 350K * 5% appreciation (this is being very very conservative based on the history appreciation in Seattle) = $17500
I'm in black for $11500!!

Are you considering inflation - that invisible force that's reducing your 5% appreciation to 2%, 1% or even less? In addition, to get the benefit of that appreciation, you need to sell the property or borrow money using it as collateral. If you are borrowing the money, you are paying interest on it. If you sell, you are paying taxes, closing costs, etc.

Good Luck,

Mike

Equity doesnt pay the bills. Keep looking to find a better deal that will cashflow.

There is nothing wrong with buying negative as long as you know where the money is coming from to make all the payments. Also, you have to be realistic about what the expenses are going to be, so that you know exactly how much extra you are going to have to come up with for the payments.

You are not going to be able to invest fior cash flow in the Pacific Northwest.

The trick is to find yourself a super bargain so that you go in with lots and lots of equity.

I do not believe in investing in distrant states. Keep your real estate close where you can take care of it yourself.

If I get a nice property for a good price that has $100,000 instant equity, I have made more in a few minutes than the guys that are getting $100 a unit cash flow per month are going to make in years with their property that has never appreciated and is never going to appreciate..

If you are going to invest in Seattle, you must be very careful and buy smart. Buy attractive properties that will hold their value, and don't buy until you find the super bargain.

Keep in mind that "cheap" is not the best criteria to use to evaluate whether or not a property is a good bargain or not. You want a price that is low in relationship to the value of the property, not just a property that has a low price.

Originally posted by "nextsean":
OK. let me dumb this senario down a lot.

negative $500 cash flow/ month *12 = -$6000
House price 350K * 5% appreciation (this is being very very conservative based on the history appreciation in Seattle) = $17500
I'm in black for $11500!!

Why not?

Why not just put the $6,000 that you seem to have for upfront money into a 5% CD? No risk. No worries!

REI is not the only game in town. If you had invested in gold about 5 years ago, you would have tripled your money (selling today).

Do you want to do this to be big man on campus, so you can go around telling all your buds "I own a real estate investment" or do you want to make money?

Originally posted by "PNW":

You are not going to be able to invest fior cash flow in the Pacific Northwest.

That is simply not true.

Sadly, this is a very old post, and the profiles of some of these users are not active. I would be interested in hearing what nextsean’s goals are. If you have a negative cash flow property, but a positive cash flow on your financial statement, then it’s a matter of why you are buying real estate in this way. If it’s because you don’t have a lot of time, you want to invest very close to where you live, and your children may inherit this property and benefit from owning property in a place where they otherwise could not, then fine, own a negative performer or two. If you want to make passive income, then negative cash flow makes absolutely no sense at all. If you want a high return on investment, and you are aiming for appreciation, then you need to consider principle pay down, depreciation other tax benefits, and carrying costs. You should also realize that investing for appreciation is a speculative endeavor no matter what historical data looks like.
I would also say that landlording is harder than it seems and if you are tied to other obligations, a negative cash flow property could teach you the strategies and methods of landlording without burning up a lot of your time if it's a nice place and it's close to where you live.
I agree that looking for opportunities out of area is a good way to have the best of all worlds. I have seen people do well with this technique, but it is also harder than it seems, and filled with problems that can trip you up as a new investor. One of your biggest handicaps as a new investor is going to be a lack of real world experience, and remote property managers are going to know this. If they are unscrupulous or inept, you can lose lots of money on a great deal and a great property through the simple problem of mismanagement.

The best plan is to aim for appreciation and cash flow.

Yeah....3 year time difference in the beginning of this post and present day. A lot of lessons learned in 3 years for a lot of people on the financial fundamentals of positive cashflow.

neg cash probably why not here---Hope still in the game...
EXit strategy is necessary.. May not be what you wanted to do.. IE I had to refi and rent property until it turns... With time ( past deals and experience) I'll do alright.. DON"T buy a :protest: property unless you can DEAL with a couple of exit stratigies-- one being hold and rent.. TOO many rest their deal on gotta need to sell-- I learned the hard way too--(like many of you) NEVER BUY a property on its "appreciating value" How many of you heard--- YOU always make your money on the buy... SO true. Buying property for appreciation is like hearing from a "friend" that is stock is good--buy and and make tons of cash...PURELY specualive and not what any RE investor would do... NEVER take Neg cash flow-- unless you got tons of cash in the bank you can let go of.. but that goes fast..
Whew got that off my chest!!! :beer:

I was told that I can make up for negative cash flow with the larger tax return that I would be getting back at the end of the year. For example, a property is bought using a tax deductable loan that will be paid by the renter but the tax deduction will go to me since I am the owner of the property and responsible for the loan. Is there anything wrong with this logic ? Am I missing something ?

Rick

Sounds like the strategy is to lose money to mitigate taxes...... Doesn't work unless you have passive losses. Negative cashflow is not the good kind of passive loss.

Sort of. The renter will pay the rent which will be used to pay the mortgage payment & interest but the landlord will get the mortgage interest tax deduction. Make sense ?

Remember, you're limited as to how much writeoff you can take on your taxes (I think it's $3k) and if you make too much money, you can't writeoff anything - just offset your rental income. My experience is that the supposed tax benefits of owning income property (as a passive investor at least) is over-exaggerated. Any investor should know the tax laws (or have their accountant inform them) before assuming any amount of benefit on the tax front.

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