Buying cashflow-negative properties? (massachusetts)

16 Replies

Hi everyone, this is my first post. I live in Boston and am an aspiring buy-and-hold-investor. The prices here are ridiculous. I'd prefer to rent to college kids. Usually they are getting the money from their parents, they tend to be from well off families and the market is plentiful.

Here is an example from a realtor.com listing (tenant is really paying this rent amount):

$195,000 asking price

Rent $1150
Management fee (%10)
Revenue net of fee - $1,035

$790/mo mortgage
$210/mo property tax
$ ? / mo insurance
$250 condo fee

We are already in cash flow negative territory and that is without factoring in insurance or repairs.

I am a long-term, buy-and-hold investor. I'm okay with buying a property losing money in the short run if it's worth it. But is there anyway this could work? When looking at cashflow-negative properties, what should one look for?

Often times in college towns price is not justified by market rent. In the right locations, however, you can far exceed typical market rent by renting to students.

You can cram a bunch of students into a house and charge them by the bedroom or bed. This often far exceeds what you could get by renting to a single individual or family. You of course must comply with local codes.

You didn't share the location of the property or the # of beds/baths. Without more information I can't comment on this particular property.

If you are investing in a negative cash flow then I would assume you are looking for appreciation. This appreciation would also have to account for your additional yearly financial contributions into the property.

You need to know what you want from the investment and establish your buying criteria from there.

Do you want cash flow? How much per unit?

What are you anticipating for appreciation?

How long do you intend to hold?

I hope this helps.

It is Allston and is a 1 bed room, 1 bathroom. I was just wondering what people are thinking when they buy a similar property to this.

Are college towns typically a good buy for long term appreciation?

Why buy negative cash flow properties when you can find ones that do cash flow? You may have to look harder, or further.

True buy & hold "investing" is about cash flow, possible appreciation is a bonus. If you're planning on buying, betting on whether there will be appreciation or not in the future, that's speculation, not investing.

That's how I feel about it!

@Alex Silang

Boston and the surrounding areas are tough for cash flow as the prices are very high even though rents can be high as well. They just aren't proportional.

Wasn't to hard to figure out what place you are looking at on the MLS. So it is actually a studio (Which makes me feel the rent is pretty solid) but I think it is priced more like a small 1BR.

While still probably not being a great cash flowing investment it is overpriced based on the comps and should be under $180K. It has also been listed for 47 days so it isn't getting scooped up like most things around there.

I'd figure out what I am comfortable offering and offer them that with no regard to what the asking price is.

To not totally rain on your parade Allston is a strong area and will always have high demand with all the business there and being so convenient to BU (Went there so know that is true first hand).

Also for your expenses since it is a condo your insurance will be cheap. Master Insurances is in the fee and getting your landlord HO6 policy will likely be well under $300/year.

For me you make money four ways with leveraged real estate, cashflow, pay-down of loan principal by tenant, tax saving and appreciation. Weight those benefits against the risk of the investment. There are situations where I would consider (just consider) a property that breaks even or goes a little negative but it would be really really rare. That said $200 + additional maintenance is too rich for my blood to be paying out each month.

With how accessible everything today is online I would probably look at a different market rather than a cashflow negative property. Just too much risk for me and going along with @Mehran K. why settle for a mediocre investment.

@Alex Silang maybe the lot is worth 300k. There are multiple reasons people buy properties but apparently someone is willing to pay that. The reason may or may not be good but if the market will pay that then the value is there.

You are assuming everyone buys with a mortgage. There are plenty of people who pay cash that would be happy with a 4% return if they feel the investment is solid.

My own take is that when you are first starting off (as a buy and hold investor), you definitely want to find properties that cash flow right from the start. This not only provides a psychological boost (who wants to lose money?), but it helps you build the snowball and save up for the next downpayment.

If the property is cash flow negative, this will only hinder your progress in saving up for the next investment.

With all that said, I'm not opposed to never buying into cash flow negative properties. Just wouldn't want to do it when first starting out. Later on, that's a different story... For instance, if I could find some killer deals on some beach front properties located next to Laguna Beach or Newport Beach, I would definitely do it, even if they were slightly cash flow negative to start. With a 30 year fixed mortgage, it would only be a matter of time before rents/appreciation caught up. I believe this is the type of approach David Schumacher used to build his empire described in his book Buy and Hold Forever. I agree that this type of investing is more speculation... but location is king... just ask any landlord up in SF! And if you can ever get the thing to cash flow... why sell? In a prime location I'm definitely not selling... buy and hold forever!

Just curious why buy negative cashflowing properties when there are other markets that are appreciating as well as creating positive cash flow??

I played the negative cashflow game here in Vegas before the crash. I will tell you personally it is a lot easier to buy and hold a proeprty that is creating positive cash flwo while the tenants pay it off.

There are so many negative cash flow properties in Australia.

The only theory behind investing in such a property is the tax benefit that the losses can be written off agains the individuals income. I don't believe the same goes here in the US.

Australian property also supposedly goes up in value quickly so the buyer hopes that the property will go up in value more that he will loose in cash flow every year. Hoping is not a strategy.

This is not a sustainable way of investing and thats one of the reasons why I personally decided to move to the US and start building a portfolio here.

Thanks.

@Alex Silang

The RE company I work for is in Allston and we do an insane amount of college rentals in Allston/Brighton/Brookline. My company also manages about 100 properties with multiple units in each and we raised the rent 20% on each unit from last year and we "sold out" before September 1 (the cycle the area is on)

Whenever an investor comes into the office and wants to buy anything 1 bedroom the end game is to convert to a two bedroom.

As long as there are no restrictions, the unit is large enough bigger than ~700 sq/ft and not in a basement (they're a lot harder to rent) it is always viable to add that extra bedroom to increase cash flow.

Going off what @Shaun Reilly said a quick look at the MLS pretty much determined the property you were talking about. Would I recommend to an investor that this was a really great property at the price based on sq/ft and comps in the area- probably not. But they're definitely out there.

Keep in mind Allston is littered with cash buyers and bidding wars are typical.

@Derek Carroll is on point!

you can avoid the negative cash flow by renting BY THE ROOM to students. Now I am not sure how legal that is in Allston (and I am not just talking about the zoning laws). I posted a few weeks back about it and there are a few things you might need to do to make it legal but these are just obstacles.

This is my main area and I deal with a lot of rentals and investors. You can definitely find cash flowing properties here, but they are harder to find and very hard to find on mls because inventory is low and cash flow potential means a bidding war. You need to find something where you can add value such as reno or increase bedrooms. The advantages are strong appreciation potential, super easy to rent (tenants pay the fee), and practically non existent vacancy. That management fee is also ludicrous, you can find as low as 2% in this area. I would suggest spending some cash on marketing for off market deals.

Interesting thread... In 2013 it was already difficult to find positive cash flow properties here, now 2 years later, it's even more so; hence, the reason why I decided to start investing outside the state... 

Since you are paying a PM, I would look at other parts of the country and this forum will be able to help you there.


Flavio

That is a lot money to put into and get a Neg cash flow properties. I would advise to look else where unless you are one of those people that have ton money in the bank. 

 If you want to do it long term and reach FI , then you have to make money when you buy the properties not when you sell it. 

Good Luck. 

Alex,

I wouldn't trust that listing, There haven't been any listings with those figures in Allston in awhile. Also, $1150 for a 1 bed is way below market value. $1400-1700 is more like it in one of those older buildings. Also, you determine who manages the unit so throw that pricing out the window.

Do know that many of these buildings have such low owner occupancy that A) getting a mortgage can be tough and B), the banks are right in not wanting to lend as the properties aren't taken care of.

When I talk to buyer I tell them that they don't need to be savvy to the market or even know much about investing. They just need to take a look around. There is a ton of new construction off Comm Ave and they aren't condos (thought they are separately metered to make selling them as condos that much easier, thought he owner is marketing that feature as "green"). If that investor is spending that much money with a long term view then there you go, your research has been done for you.

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