Negative Cashflow, Appreciation for First rental property?

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Negative Cashflow, Appreciation for First rental property?

Alex P.
Member since 2023 · 1 post · 0 votes

I'm a first-time home buyer looking to purchase my first rental property. I'm wondering whether negative cashflow for appreciation is a bad move for someone starting out.

I have a strong interest in buying in Folsom, CA. Its much cheaper for newer homes than the bay area, schools are all 9+/10, city has very high ratings for safety and quality of living, and the area looks to have a lot of growth in the next few years.

Only thing is negative cash flow. I can only put down up to 10%, so total monthly (with pmi, taxes, interest etc) will be around $4k-5k. Avg rent per room in the area is $900-1200, and avg rent per house is $3.2-3.6k. I plan to hold longterm and rent by room MTR/LTR, but assuming vacancies and at least 2 rooms occupied, I'll be short $2k-3k most months until rents follow the upward trend of home prices in the area or my monthly decreases.

I understand the huge emphasis on the cashflow-focused approach on BP, and that following appreciation is a gamble. However, if you're from/familiar with Norcal/sac, I'd like your advice on this move and projections for the city. I have a decently comfortable salary, so although it'll slow the rate at which I can save for the downpayment of another property, I can manage covering the negative cashflow. Also, despite all the new developments in the area, properties are selling like wildfire (in the case of TM, even before the models are built) and the number of available homes at this lower price range are becoming scarce. So, I'd like to make a decision before it's too late, or more buyers come into the market and increase competition.

Property Info: 550-600k, 3-4 rooms, loft (can later turn into an additional 4th/5th room to add value), 1800-2200 sqft, 2 car garage, hoping for a lot size suitable for an ADU/DADU

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Quote from @Alex P.:

Welcome to the BiggerPockets forums!

Let's look at the numbers first. Let's say rent income is $4,000 a month. Your mortgage payment, taxes, and insurance is $4,000 a month. That's a break-even deal, right? Wrong! If the property sits vacant for a month, you lose $4,000. If a tenant trashes the carpet, you lose $10,000 for flooring plus $4,000 for the month, plus another $200 for utilities. These are common examples that happen all the time to every Landlord. When I calculate for cash flow, I include setting aside a 30% - 50% of the monthly rent to cover maintenance, vacancies, capital expenditures, taxes, insurance, and other projected costs, then I pay the mortgage and interest, then whatever is left over is considered cash flow. Your calculation doesn't account for other expenses. Even at a $400 loss per month, you would lose nearly $5,000 a year or $25,000 in five years and that's before dealing with any vacancies, maintenance, bad tenants, and other common expenses.

The other issue is betting on appreciation. Yes, property values will always go up over the long term. No, that doesn't mean they will go up over the next five years. The market had an historic rise for two years and peaked a year ago. Most housing and economic experts still believe we are facing a reckoning for all the "free" COVID money that was passed our for three years. The fact that buyers are still aggressively buying should be a warning that the correction has not happened yet. How would you feel if you bought this property with a monthly loss of $400 and then the market value dropped 10% next year? It could take you 5+ years just to break even. That's a gamble, not an investment.

Here's a guide that describes what good cash flow looks like and how to analyze a property.

https://www.biggerpockets.com/...

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Alex P.:

    Welcome to the BiggerPockets forums!

    Let's look at the numbers first. Let's say rent income is $4,000 a month. Your mortgage payment, taxes, and insurance is $4,000 a month. That's a break-even deal, right? Wrong! If the property sits vacant for a month, you lose $4,000. If a tenant trashes the carpet, you lose $10,000 for flooring plus $4,000 for the month, plus another $200 for utilities. These are common examples that happen all the time to every Landlord. When I calculate for cash flow, I include setting aside a 30% - 50% of the monthly rent to cover maintenance, vacancies, capital expenditures, taxes, insurance, and other projected costs, then I pay the mortgage and interest, then whatever is left over is considered cash flow. Your calculation doesn't account for other expenses. Even at a $400 loss per month, you would lose nearly $5,000 a year or $25,000 in five years and that's before dealing with any vacancies, maintenance, bad tenants, and other common expenses.

    The other issue is betting on appreciation. Yes, property values will always go up over the long term. No, that doesn't mean they will go up over the next five years. The market had an historic rise for two years and peaked a year ago. Most housing and economic experts still believe we are facing a reckoning for all the "free" COVID money that was passed our for three years. The fact that buyers are still aggressively buying should be a warning that the correction has not happened yet. How would you feel if you bought this property with a monthly loss of $400 and then the market value dropped 10% next year? It could take you 5+ years just to break even. That's a gamble, not an investment.

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...

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    WebsiteView Page
    9Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Alex P.:

    I'm a first-time home buyer looking to purchase my first rental property. I'm wondering whether negative cashflow for appreciation is a bad move for someone starting out.

    I have a strong interest in buying in Folsom, CA. Its much cheaper for newer homes than the bay area, schools are all 9+/10, city has very high ratings for safety and quality of living, and the area looks to have a lot of growth in the next few years.

    Only thing is negative cash flow. I can only put down up to 10%, so total monthly (with pmi, taxes, interest etc) will be around $4k-5k. Avg rent per room in the area is $900-1200, and avg rent per house is $3.2-3.6k. I plan to hold longterm and rent by room MTR/LTR, but assuming vacancies and at least 2 rooms occupied, I'll be short $2k-3k most months until rents follow the upward trend of home prices in the area or my monthly decreases.

    I understand the huge emphasis on the cashflow-focused approach on BP, and that following appreciation is a gamble. However, if you're from/familiar with Norcal/sac, I'd like your advice on this move and projections for the city. I have a decently comfortable salary, so although it'll slow the rate at which I can save for the downpayment of another property, I can manage covering the negative cashflow. Also, despite all the new developments in the area, properties are selling like wildfire (in the case of TM, even before the models are built) and the number of available homes at this lower price range are becoming scarce. So, I'd like to make a decision before it's too late, or more buyers come into the market and increase competition.

    Property Info: 550-600k, 3-4 rooms, loft (can later turn into an additional 4th/5th room to add value), 1800-2200 sqft, 2 car garage, hoping for a lot size suitable for an ADU/DADU


    The thing with Folsom area is, that area has a lot of supply.
    The -$100 CF is very different than -$200 CF in bay area.

     Your appreciation would be much more longer in higher supply market. 

    THere're third or fourth eye when examining appreciation.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Alex P.:

    The other issue is betting on appreciation. Yes, property values will always go up over the long term. No, that doesn't mean they will go up over the next five years. The market had an historic rise for two years and peaked a year ago. Most housing and economic experts still believe we are facing a reckoning for all the "free" COVID money that was passed our for three years. The fact that buyers are still aggressively buying should be a warning that the correction has not happened yet. How would you feel if you bought this property with a monthly loss of $400 and then the market value dropped 10% next year? It could take you 5+ years just to break even. That's a gamble, not an investment.

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...


    Chance popular CA homes going down 10% is very very very miniscule. If you active in the local market, it's almost impossible to see that scenario.

    The drawback of investing in Folsom is the following:
    - The median SF in that house is already 700k-ish, 700k-ish you could buy in bay area
    - Folsom as part of greater Sacramento area, is secondary market, land and estate supply is much much more available in there
    - The diff between peak of 2022 and March 2023 is 10% of 80k in that market
    - When you examine market, examine market absortion and trend of supply. 
    Two houses in 200 miles apart would behave differently if one market has downtrend supply and one has uptrend supply.
    - Since you're focusing on appreciation, this should be your key metrics

    I personally would invest more into less supply market in Class C property rather than Class A in uptrend supply market.

     Good luck. This is why I never interested joining folks that moves to Texas for investment,etc,etc.

    2Reply
  • Obi Nwapa
    Member since 2023 · 16 posts · 5 votes
    3y

    Thanks Nathan, for the info.

    As a new investor myself looking to invest in buy and hold rental properties, the most important thing to me is cash flow after the expenses you outlined. I've heard some say that cash flow isn't that important if you intend to buy and hold because of appreciation but as you pointed out, what if there's an economic downturn that causes the market to plummet. How is that better than leaving that money in the bank with a modest interest rate?

    Much appreciated!

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Carlos Ptriawan:

    False. The chance of popular CA homes increasing by 20% in one year is very, very miniscule, but it happened. Meteoric rises can - and often are - followed by falls.

    A property in Folsom sold for $1.6 million in 2016. It sold for $1.9 in 2019. It was listed last year for $1.6 and as of October 2022 was reduced to $1.4 and still sitting on the market. That's a 13% decrease from the purchase price six years earlier and probably a 30% decrease from the peak market in 2022.

    Look around the country. Prices increased 50% or more in just a couple years and buyers are still buying. Do you honestly believe there will be no correction and prices will continue to rise in the next 2-5 years? I am betting on the market dropping 20% - 30% below peak prices in 2022. And we're not there yet.

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    3y

    @Obi Nwapa Real estate investing is better than leaving money in the bank for numerous reasons, but in my opinion the biggest is tax savings, leverage, and ability to scale. You CONTROL everything. You screen tenants, create remodel budgets, hire contractors, and command a monthly rent (income). A lot of other investments have uncontrollable aspects. 

    There's only two ways to protect yourself in an economic downturn. Reserves and equity. Buy and hold investors need both. 

    2Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:
    Quote from @Carlos Ptriawan:

    False. The chance of popular CA homes increasing by 20% in one year is very, very miniscule, but it happened. Meteoric rises can - and often are - followed by falls.

    A property in Folsom sold for $1.6 million in 2016. It sold for $1.9 in 2019. It was listed last year for $1.6 and as of October 2022 was reduced to $1.4 and still sitting on the market. That's a 13% decrease from the purchase price six years earlier and probably a 30% decrease from the peak market in 2022.

    Look around the country. Prices increased 50% or more in just a couple years and buyers are still buying. Do you honestly believe there will be no correction and prices will continue to rise in the next 2-5 years? I am betting on the market dropping 20% - 30% below peak prices in 2022. And we're not there yet.


    False :) LOL There's no market appreciates more than 6-7% in CA. Most area in CA grows steadily over the years, with much less spikes.

    When you look at the property, look at ratio between median income and home value, most home outside CA/west coast market still has 0.33 ratio, it has long way to go for appreciation. The drawback is more supply.

    In CA, the ratio is 0.5 to 0.6 meaning the house can only be bought by double income family, this is why CA property keeps rising. Getting 200k salary is not difficult in CA, in Wyoming maybe, that's why there's still lot more appreciation to see in CA.


     When you say price increases by 50%, you don't factor the baseline price, if baseline price has stagnant for previous 10 years, then we could expect the appreciation to keep growing up steadily, maybe in more slower pace.

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Carlos Ptriawan:


    This data is public knowledge and not difficult to find. Look at the chart below and do the math to see that Califonian cities have experienced growth at rates greater than 6-7%, particularly in the last couple of years. Those prices peaked in 2022 and now prices are starting to drop. Read the news and you'll find some markets are seeing double-digit depreciation.

    https://www.gobankingrates.com...

    Back to the original post:
    1. The OP only accounts for PITI. He doesn't account for maintenance, capex, vacancy, or other realistic expenses. This is unwise, even in a healthy, growing market.
    2. The OP will lose money on day one . . . and continue losing money for years. The only way they win is if rents increase dramaticaly and erase the negative cashflow, or the property appreciates in value. Given the dramatic increase in rent rates for the last 15 years and the dramatic increase in appreciation these last two years, it's foolish to think that trend will continue in the near future without a correction first.
    3. The OP is asking if he should bet on appreciation and my answer is that the data - and the experts - appear to indicate depreciation is coming first.

    It's a free country and nobody can predict the future, so do what you want with it.

    California Median Prices, December of Each Year, 1990-2021

    YearLos Angeles CountyOrange CountyVentura CountySan Bernardino CountyRiverside CountySan Diego CountySanta Barbara County
    2021$826,500$1,182,500$850,000$460,000$586,000$836,700$937,500
    2020$660,000$950,000$740,000$378,500$488,250$730,000$970,000
    2019$641,340$840,000$657,000$320,000$420,000$655,000$770,000
    2018$588,140$785,000$640,000$295,000$398,000$618,500$840,000
    2017$577,690$785,500$645,000$278,000$385,000$605,000$730,000
    YearLos Angeles CountyOrange CountyVentura CountySan Bernardino CountyRiverside CountySan Diego CountySanta Barbara County
    2016$522,520$745,000$589,150$255,000$360,000$568,000$735,000
    2015$502,750$700,000$601,910$234,080$341,000$530,000$602,500
    2014$464,650$683,490$569,600$216,020$322,020$494,500$655,000
    2013$439,830$677,660$535,180$199,020$310,020$479,690$701,920
    2012$367,400$582,930$446,150$158,540$251,520$418,290$588,230
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    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y

    According to Redfin, specifically for Folsom, CA:

    From Zillow:

    And from REALTOR.com:

    some variations in their data, but they all show one thing: double-digit depreciation in the last year for Folsom, California.

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    0Reply
  • Tashfeen Islam
    Rental Property Investor · New York, NY · Member since 2018 · 29 posts · 11 votes
    3y

    As a long-time former Bay Area resident, most of what's been said already is pretty spot on, especially the person who mentioned that your expenses don't end at the $4-5K for the mortgage, PMI, etc. and collecting $4K every month is not guaranteed either.

    Expensive markets like the Bay Area (and Sacramento slowly getting there) are meant to offer little-to-no cash flow unless you have minimal debt on the property. However, with the strategy of purchasing a property for $550-600K, you’ll be paying expenses out-of-pocket for a long time, pretty much until you pay the loan off. If you can afford that with your other income(s), that’s great, but very few people can. 

    Two suggestions I'd offer are 1) if you can somehow claim this as a primary residence (e.g., moving into the property for at least a year to avoid any form of mortgage fraud), you may be able to reduce your interest rate to save some funds monthly & manage the property yourself so you can avoid paying someone to do so while also monitoring the condition of the property on a daily basis (e.g., gives your more insight into the quality of tenants, whom to not renew a lease with, etc.) and 2) if you decide to make this a purely investment property, lenders will require 20% down so you'd be best off finding something for half the price you were originally seeking. Given that a property for $275-300K in Sacramento is tough to find excluding condos and apartments, which have HOA fees monthly eating into your margins, you may need to consider a fixer-upper (some lenders may even finance some of the renovation expenses for the same percentage as they're lending to you to buy the property) but that's a different story though can be successful, as I've done so once myself in Texas without living in-state.

    Reach out if you ever want to discuss further. Good luck! 
     

    0Reply
  • Ray Hage
    Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes
    3y

    @Alex P. Any property cashflowing that negatively and you hoping for big appreciate is called gambling. It is absolutely not worth the risk and I wouldn't look in that particular market. Expand your search to less risky areas and investments

    3Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    3y

    TERRIBLE IDEA, buy it lose money each month and hope the market goes up, NOT a winning strategy 

    3Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Nathan Gesner:

    According to Redfin, specifically for Folsom, CA:

    From Zillow:

    And from REALTOR.com:

    some variations in their data, but they all show one thing: double-digit depreciation in the last year for Folsom, California.


     when you use Zillow, change it non-adjusted to see actual data.

    Our area actually already appreciated 10% from Dec 2022 alone. Zillow catch the trend changes bit late.

    0Reply
  • Vadim F.
    Investor · Member since 2020 · 337 posts · 213 votes
    3y
    Quote from @Alex P.:

    I'm a first-time home buyer looking to purchase my first rental property. I'm wondering whether negative cashflow for appreciation is a bad move for someone starting out.

    I have a strong interest in buying in Folsom, CA. Its much cheaper for newer homes than the bay area, schools are all 9+/10, city has very high ratings for safety and quality of living, and the area looks to have a lot of growth in the next few years.

    Only thing is negative cash flow. I can only put down up to 10%, so total monthly (with pmi, taxes, interest etc) will be around $4k-5k. Avg rent per room in the area is $900-1200, and avg rent per house is $3.2-3.6k. I plan to hold longterm and rent by room MTR/LTR, but assuming vacancies and at least 2 rooms occupied, I'll be short $2k-3k most months until rents follow the upward trend of home prices in the area or my monthly decreases.

    I understand the huge emphasis on the cashflow-focused approach on BP, and that following appreciation is a gamble. However, if you're from/familiar with Norcal/sac, I'd like your advice on this move and projections for the city. I have a decently comfortable salary, so although it'll slow the rate at which I can save for the downpayment of another property, I can manage covering the negative cashflow. Also, despite all the new developments in the area, properties are selling like wildfire (in the case of TM, even before the models are built) and the number of available homes at this lower price range are becoming scarce. So, I'd like to make a decision before it's too late, or more buyers come into the market and increase competition.

    Property Info: 550-600k, 3-4 rooms, loft (can later turn into an additional 4th/5th room to add value), 1800-2200 sqft, 2 car garage, hoping for a lot size suitable for an ADU/DADU


     I am a Bay Area local and very familiar with the Sacramento market. Folsom is great place to live if you are an owner-occupant, but to invest in and lose money on a monthly basis? You are better off putting your money into 5% CD  for 12mo or a 4.15% hysa that Apple is offering now if you want to have access to it. If you are looking at potential appreciation, those days are gone and you will have to hope that rates drop 1-1.5% to get 10% appreciation and thats not happening anytime soon. Sacramento region experience massive appreciation due to Bay Area buyers packing up and moving 1-1.5hr north because of the pandemic and being able to WFH. Again, those days are gone and majority of companies are requiring employees to be in the office 3days a week on avg and no one is making that commute from Sacramento Region to the Bay Area. Also, don't forget about Landlord laws in California, some of the worst if not the worst in the nation. Personally, I'm not touching an investment property with a 100ft pole in CA and am looking strictly out of state with landlord friendly laws.

    1Reply
  • Doug SmithPro Member
    Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
    3y

    We are odd in that we don't add appreciation in our modeling, so we don't hold anything that is negatively cash flowing. To each their own. We tend to be a bit on the conservative side with our decision making when it comes to investments. 

    1Reply
  • Konstantin GinzburgPro Member
    Member since 2021 · 376 posts · 242 votes
    3y

    My personal preference would be to ensure some cash flow in any property that I get since I like seeing a return on my investment and help save for additional properties in the near future. I do not personally invest in the California market but I am aware that coastal market tend to have less cash flow with increased appreciation being the trade off but $2,000 to $3,000 is a pretty large negative cashflow and not one I would personally take on. There are so many unforeseen things that can go wrong such as a bad tenant, property damage, capital expenditures, increased insurance rates, ect. that will put your break even point further and further out. If you need to wait years to break even on any investment, then the return on your investment either needs to be incredibly substantial or there are likely better places to invest your money while you look for a deal in your target market that has a more immediate return on your investment. If you keep looking, you will likely find those deals. Don't be in a rush and wait for the right deal. One mistake you don't want to make is sinking your capital into a bad deal and not have that capital available once a good deal does finally come your way.  

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Ray Hage:

    @Alex P. Any property cashflowing that negatively and you hoping for big appreciate is called gambling. It is absolutely not worth the risk and I wouldn't look in that particular market. Expand your search to less risky areas and investments


     gambling is when you can't see other people card. BUying property anywhere in US is not gambling as verything is open, how many people is buying/selling, job availability, there's nothing gambling in real estate as market is extremely transparent.

    To count future appreciation one could just measure the supply and buying demand,as simple as that. 
    Negative 200 dollar cash flow doesnt matter much for someone making 200k and above like in bay area. I would rather invest negative 200k permonth in bay area rather than investing for postivie 150/month in Fargo, North Dakota. Not just because I know the market but also because I'm active in the market LOL

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Alex P.:

    I'm a first-time home buyer looking to purchase my first rental property. I'm wondering whether negative cashflow for appreciation is a bad move for someone starting out.

    I have a strong interest in buying in Folsom, CA. Its much cheaper for newer homes than the bay area, schools are all 9+/10, city has very high ratings for safety and quality of living, and the area looks to have a lot of growth in the next few years.

    Only thing is negative cash flow. I can only put down up to 10%, so total monthly (with pmi, taxes, interest etc) will be around $4k-5k. Avg rent per room in the area is $900-1200, and avg rent per house is $3.2-3.6k. I plan to hold longterm and rent by room MTR/LTR, but assuming vacancies and at least 2 rooms occupied, I'll be short $2k-3k most months until rents follow the upward trend of home prices in the area or my monthly decreases.

    I understand the huge emphasis on the cashflow-focused approach on BP, and that following appreciation is a gamble. However, if you're from/familiar with Norcal/sac, I'd like your advice on this move and projections for the city. I have a decently comfortable salary, so although it'll slow the rate at which I can save for the downpayment of another property, I can manage covering the negative cashflow. Also, despite all the new developments in the area, properties are selling like wildfire (in the case of TM, even before the models are built) and the number of available homes at this lower price range are becoming scarce. So, I'd like to make a decision before it's too late, or more buyers come into the market and increase competition.

    Property Info: 550-600k, 3-4 rooms, loft (can later turn into an additional 4th/5th room to add value), 1800-2200 sqft, 2 car garage, hoping for a lot size suitable for an ADU/DADU


     This is latest market intel for you. if you want to invest at appreciation, focus on lowest sup:demand ratio following your buying power. Your price point and reward/risk is equal to castro valley/hayward but potential is much higher in hyward/castro valley as supply getting lower. Too bad I can't get sold data for Austin and Cody LOL but investing in Cody seems cool idea as well. I may need to do manual check on Cody's Nathan market LOL

    city Under_List avg_Feb avg_Mar Diff sup_demand_ratio
    hywrd 52% $824,000 $831,000 1.008495 32:08:00
    sramon 71% $1,479,000 $1,499,000 1.013523 24:04:00
    austin 76% $553,000 $555,000 1.003617 N/A
    cody n/a $445,000 $449,000 1.008989 N/A
    folsom 59% $727,000 $733,000 1.008253 85:01:00
    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y

    actually if I'm pure appreciation player and my buying power is 500k, I would rather invest in Cody WY rather than Austin TX, I'm particularly surprised seeing how Cody developed. What's the trigger in Cody is interesting. Folsom in CA on other hand is usually a secondary market for bay area resident that donot want to invest OOS.

    0Reply
  • Ray Hage
    Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes
    3y
    Quote from @Carlos Ptriawan:
    Quote from @Ray Hage:

    @Alex P. Any property cashflowing that negatively and you hoping for big appreciate is called gambling. It is absolutely not worth the risk and I wouldn't look in that particular market. Expand your search to less risky areas and investments


     gambling is when you can't see other people card. BUying property anywhere in US is not gambling as verything is open, how many people is buying/selling, job availability, there's nothing gambling in real estate as market is extremely transparent.

    To count future appreciation one could just measure the supply and buying demand,as simple as that. 
    Negative 200 dollar cash flow doesnt matter much for someone making 200k and above like in bay area. I would rather invest negative 200k permonth in bay area rather than investing for postivie 150/month in Fargo, North Dakota. Not just because I know the market but also because I'm active in the market LOL

    If it is slightly negative, then maybe it could be worth it if you can be really sure it will appreciate handsomely. However, in a state like CA, it could take months to get rid of a non-paying tenant so now you went from slightly negative for the year to extremely negative. Even if you miss 2 months rent due to a tenant not paying, renovations or inability to fill, you end up being a big loser. It is very risky and maybe worth trying if you have a ton of cashflow from other properties, but I wouldn't mess with this type of investment
    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Ray Hage:
    Quote from @Carlos Ptriawan:
    Quote from @Ray Hage:

    @Alex P. Any property cashflowing that negatively and you hoping for big appreciate is called gambling. It is absolutely not worth the risk and I wouldn't look in that particular market. Expand your search to less risky areas and investments


     gambling is when you can't see other people card. BUying property anywhere in US is not gambling as verything is open, how many people is buying/selling, job availability, there's nothing gambling in real estate as market is extremely transparent.

    To count future appreciation one could just measure the supply and buying demand,as simple as that. 
    Negative 200 dollar cash flow doesnt matter much for someone making 200k and above like in bay area. I would rather invest negative 200k permonth in bay area rather than investing for postivie 150/month in Fargo, North Dakota. Not just because I know the market but also because I'm active in the market LOL

    If it is slightly negative, then maybe it could be worth it if you can be really sure it will appreciate handsomely. However, in a state like CA, it could take months to get rid of a non-paying tenant so now you went from slightly negative for the year to extremely negative. Even if you miss 2 months rent due to a tenant not paying, renovations or inability to fill, you end up being a big loser. It is very risky and maybe worth trying if you have a ton of cashflow from other properties, but I wouldn't mess with this type of investment

     then that's tenant screening issue .... which is true if property is located in Detroit or Oakland. Eventually we need to have backup plan and properly choose the right tenant. 

    Actually in reality I have more tenant problem in Cash flow market than CA market, but maybe because I'm unlucky.

    0Reply
  • Kevin McGuirePro Member
    CTO of BiggerPockets · Seattle, WA · Member since 2019 · 178 posts · 178 votes
    3y
    Perhaps a better word would have been "speculating" (versus investing).

    I think of real estate investing in terms of creating a business. Let's say I came to you and said, "Hey Alex, I have an opportunity for you: I'd like you to invest your money into a business that's losing money every year, with a single asset (thus ultra low diversification), and where I'm banking on appreciation over an unknown time scale because 'values always go up'?". How appealing an opportunity does that sound?

    For me the answer is "no thanks" because that sounds like speculation and I'm not a speculator.

    A few things to consider:

    1: You need cashflow to sustain an investment over the long term. Without it, you put your personal finances at risk. As with all investing, you need enough buffer to avoid being forced to sell in a down market. Cashflow gives you that. Worst scenario is that in an economic downturn you could lose your job, rents could drop, and home values could drop. Would you be able to hold on?

    2: Mortgage = leverage and that alone creates risk. So now you have two sources or risk. How will you mitigate them?

    3: I'm not sure if you've factored in costs for vacancy and repairs. Again, having some cashflow, and building up reserves, provides you resiliency to withstand short term financial problems.

    Now of course some people get rich speculating, but more lose money. You'd need to be clear on your risk tolerance and financial ability to withstand loses. Without knowing you, my advice would be to pass
    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y
    Quote from @Kevin McGuire:
    Perhaps a better word would have been "speculating" (versus investing).

    I think of real estate investing in terms of creating a business. Let's say I came to you and said, "Hey Alex, I have an opportunity for you: I'd like you to invest your money into a business that's losing money every year, with a single asset (thus ultra low diversification), and where I'm banking on appreciation over an unknown time scale because 'values always go up'?". How appealing an opportunity does that sound?

    For me the answer is "no thanks" because that sounds like speculation and I'm not a speculator.

    A few things to consider:

    1: You need cashflow to sustain an investment over the long term. Without it, you put your personal finances at risk. As with all investing, you need enough buffer to avoid being forced to sell in a down market. Cashflow gives you that. Worst scenario is that in an economic downturn you could lose your job, rents could drop, and home values could drop. Would you be able to hold on?

    2: Mortgage = leverage and that alone creates risk. So now you have two sources or risk. How will you mitigate them?

    3: I'm not sure if you've factored in costs for vacancy and repairs. Again, having some cashflow, and building up reserves, provides you resiliency to withstand short term financial problems.

    Now of course some people get rich speculating, but more lose money. You'd need to be clear on your risk tolerance and financial ability to withstand loses. Without knowing you, my advice would be to pass

     Speculating is when one do not see the trend. Buying appreciation is simply trend follower. 

    It really doesn't make different actually making +500/mo from cash flow property in 100k Alabama property compare to +40/mo from cash flow property in 1 mil property out of california. The HVAC cost itself is actually higher in cash flow property in Alabama, CA doesn't require HVAC LOL.

    I know from speaking of actual real life experience because I do both type of investment.

    All you mentioned above is called risk management, which is good. One should not do is doing all these cash flow thing without proper risk management. At the end of that day after capital gain, the net profit from appreciation city always wins.

    If one net worth liquid account is only 100k and doing -200 CF in bay area , yes that's crazy LOL

    0Reply
  • Scott ScovilleBusiness Member
    Real Estate Agent · Sacramento, CA · Member since 2019 · 497 posts · 272 votes
    3y

    Hey Alex,

    Great question and lots of good advise. I'm an agent and investor. I started out building a portfolio of Class C or Class B cash flowing properties. Now, I'm focused on Class A properties and accept cash flow neutral or slightly negative if I'm dealing with a property in a really great location. I hedge with cash flow first, and then I'm able to pull the trigger on appreciation plays. I'd recommend being more conservative with your first purchase, make sure to have plenty of reserves, and look at different areas in the region. Let me know if you'd ever want to chat over the phone. Be happy to help.

    [email protected]415-933-2202
    Scoville Realty & Investments LLC
    WebsiteView Page
    0Reply
  • Vadim F.
    Investor · Member since 2020 · 337 posts · 213 votes
    3y
    Quote from @Carlos Ptriawan:
    Quote from @Kevin McGuire:
    Perhaps a better word would have been "speculating" (versus investing).

    I think of real estate investing in terms of creating a business. Let's say I came to you and said, "Hey Alex, I have an opportunity for you: I'd like you to invest your money into a business that's losing money every year, with a single asset (thus ultra low diversification), and where I'm banking on appreciation over an unknown time scale because 'values always go up'?". How appealing an opportunity does that sound?

    For me the answer is "no thanks" because that sounds like speculation and I'm not a speculator.

    A few things to consider:

    1: You need cashflow to sustain an investment over the long term. Without it, you put your personal finances at risk. As with all investing, you need enough buffer to avoid being forced to sell in a down market. Cashflow gives you that. Worst scenario is that in an economic downturn you could lose your job, rents could drop, and home values could drop. Would you be able to hold on?

    2: Mortgage = leverage and that alone creates risk. So now you have two sources or risk. How will you mitigate them?

    3: I'm not sure if you've factored in costs for vacancy and repairs. Again, having some cashflow, and building up reserves, provides you resiliency to withstand short term financial problems.

    Now of course some people get rich speculating, but more lose money. You'd need to be clear on your risk tolerance and financial ability to withstand loses. Without knowing you, my advice would be to pass

     Speculating is when one do not see the trend. Buying appreciation is simply trend follower. 

    It really doesn't make different actually making +500/mo from cash flow property in 100k Alabama property compare to +40/mo from cash flow property in 1 mil property out of california. The HVAC cost itself is actually higher in cash flow property in Alabama, CA doesn't require HVAC LOL.

    I know from speaking of actual real life experience because I do both type of investment.

    All you mentioned above is called risk management, which is good. One should not do is doing all these cash flow thing without proper risk management. At the end of that day after capital gain, the net profit from appreciation city always wins.

    If one net worth liquid account is only 100k and doing -200 CF in bay area , yes that's crazy LOL

    @Carlos Ptriawan I’m curious to know what parts of the Bay Area you are investing in. Have you acquired any new investment properties in the last 6mo where you are cash flow negative but have 10% appreciation since you purchased it to now how to worry about cash flowing? Especially if you are negative 3+k a month.

    0Reply
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