Will Negative Cash Flow Be Okay Here?

Question

Hello all,

First time real estate investor and first post. My wife and I have been saving up and ready for our first rental property. I found a property (new build) that is in an up and coming area we really like and want to make an offer. The issue is whether to put down 20% or 25% down on a $270k property.

20% down will result in a negative cash flow of about $200 which it is not a problem for us. Our plan here is to refinance in 12-18 months when interest rates (hopefully) come down and allow the house to appreciate in value as the surrounding area gets built out.

The other option is to put 25% down and cash flow positively (barely) however I'd rather save the $13,000 difference for general cash reserves and other investment opportunities we have going on.

Does anyone have any advice here? Is this even a good deal worth going for? The entry to buying a home will just get harder and tougher as interest rates will start to drop and more buyers flood the market. Any advice/thoughts would be greatly appreciated!

Bill B. · Answer

Obviously everyone who says never is exaggerating or lying but you know that. Anyone who needs cash flow shouldn’t be investing in real estate. What if you had positive $100/mo cash flow and the ac unit went out costing $10k? Or just a $1700 fridge? Well, there goes your cashflow, better not buy.

Almost all your wealth will be built with appreciation. If you plan to own 50 or 100 properties so you can have $5-10k mo income? One $400k property at just 4% appreciation is $1,300/mo. Plus you can refi your cash out to own it for nothing. Cashflow doesn’t do that. My best performing properties were negative $500-$800/mo cashflow. Oh no, I had to kick in $6,000/yr towards loan pay down while it only appreciated $70k/yr. Even now while paid off. It only cash flows about $30k/yr. It still appreciates more than cash flow.

You want cashflow? That’s all that matters? You can buy 100, or 200 Midwest sfrs for $50k that will meet the 2% rule. And you’ll lose your behind. But they’ll cashflow, until something major breaks. When you’re talking $1-200 positive or negative, it just doesn’t matter. If that would sink you, invest in something else.

Joe Villeneuve · Answer

None of the above.  Find a different property.  None of your solutions are good ones, each one just transfers the problem to a different reason for not buying.

Negative CF is never OK.

Adding to a DP just means you are paying for all your negative CF up front.

Theresa Harris · Answer

If you are going to refinance in a year, the $200/month translates to $2400 vs the increased down payment of $13K.  As you said, you can do more with the $13K and would rather have that, so do 20% down.

Also even though it is a new build, still get an inspection done.

Amika B. · Answer

I agree with Joe... negative cash flow is never a good thing. You should not settle for this. This may not be the right property for you. If you're searching in an up and coming area, chances are you might be able to find a really good fixer upper that you can do a BRRRR deal with. That might cost you less out of pocket and cash flow much better than a new build.

Nicholas L. · Answer

some good feedback - just want to add a few things

do NOT buy anything assuming rates will come down in 12-18 months... buy assuming they won't

and

"The entry to buying a home will just get harder and tougher as interest rates will start to drop and more buyers flood the market"

what are you basing that on?

Eliott Elias · Answer

Negative cash flow is never worth it. Do not spend any more time trying to justify this.

Alecia Loveless · Answer

@James Marsh Depending on the market there’s no reason why you can’t have appreciation and positive cash flow too. If I couldn’t all buy guarantee a positive cash flow by the end of the second year I wouldn’t consider the property. There’s too many other options for properties to move forward with one you’re going to lose money on. I ONLY average $200/unit cash flow per month but I’ve got 25 doors now so that’s $60,000 per year.

Tim Bratz · Answer

James, I think a better use of your money that you saved up would be on educating yourself on what is or isn't a good deal. It's fine to get opinions in these forums, but the reality is once you have that knowledge, you can then attack deals based on what you know.

Tim Ryan · Answer

Robert Kiyosaki taught me years ago to never buy with negative cashflow. I believed and adhered to this - no matter what.  You'll find another property. We always do.  Or make the offer less to where the 20% down does cash flow. Who cares if they say no.

Will Negative Cash Flow Be Okay Here?

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