How Important Is Cash Flow When You're Just Starting Out in Real Estate?

Question

Hey everyone,

I’m currently a college student at the University of Georgia studying Management Information Systems (MIS) at the Terry College of Business. I’ve been getting more and more interested in real estate investing and I’m trying to map out what a smart path might look like after graduation.

Here’s my situation:

• I’ll probably move in with my girlfriend after school, but I’m not sure where yet—we’ll likely be renting initially.
• My goal is to save up for a down payment over the next couple of years.
• Ideally, I’d love to house hack a small multifamily like a duplex—live in one unit, rent out the other.
• Long-term, I want to build a rental portfolio by living in properties for a few years, then turning them into rentals when I move into a new primary residence.

I’ll probably move in with my girlfriend after school, but I’m not sure where yet—we’ll likely be renting initially.

My goal is to save up for a down payment over the next couple of years.

Ideally, I’d love to house hack a small multifamily like a duplex—live in one unit, rent out the other.

Long-term, I want to build a rental portfolio by living in properties for a few years, then turning them into rentals when I move into a new primary residence.

My big question is:

How important is cash flow when you’re just starting out? Is it okay if I buy a property that maybe just breaks even or slightly loses money each month, as long as I'm gaining experience and equity? Or would it be smarter to wait until I can afford something with solid cash flow from day one?

I’ve been doing what I can to learn by watching YouTube videos, networking on LinkedIn, and hopping on calls with experienced investors to hear their perspectives.

What else should I be doing right now to prepare?
I’d love any advice from people who were in my shoes not long ago. Is there anything you wish you knew or did differently when you were just getting started?

Thanks so much in advance!

Alex Quinlan

Dan H. · Answer

Most new investors do not have the means to support a large negative cash flow property for an extended period of time.  In addition, most new investors significantly under estimate expenses.

However, once you have sufficient reserves to be unconcerned about the cash flow you should evaluate a property’s investment quality based on total return.

My last purchase had total revenue $3200/month less than PITI.  My under writing was showing -$5000/month when allocating for all sustained expenses & vacancy.   Not sure how many people have purchase a non commercial property that protected a worse cash flow outlook.   Today its value is nearly $1m higher than purchase and value add costs.  The market rent is $8k more than PITI.  From horrendous cash fliw to modest cash flow, but the big return is in its current valuation.   I could never make $1m cash flow on a non commercial residential in 3.5 years.  It is not possible.

Because cash flow is taxed in the year earned, it is my least desired source of return. Note if I extract from the $1m of value ($750k at 75% LTV), that money is tax deferred. Via 1031 I can tax defer it to another property. When I die (Everyone dies) the property (or the 1031 exchanged property) gets a stepped up basis and no one ever pays a tax on the gain.

So the answer to the question of how important is cash flow depends significantly on your current finances and where you are in your RE investing journey.

Good luck

Ned Carey · Answer

Negative cash flow is a high risk game. @Joe Villeneuve has some good posts on this.

House hacking works even though it is usually negative cash flow, because you have to live somewhere and it is a way to reduce your housing cost. That can allow you to same to invest more.

Peter W. · Answer

More than anything it depends on your personal finance situation.  The second thing is the market.  In the HCOL, there are properties that negative cash flow 1k/ mo that would likely let you retire in 5-10 yeas.  I was trying to convince someone to house hack in NYC on another post.  At 5% down on a 1m dollar house hack, you would lose 1k-1.5k a month compared to market rent, but would, conservatively, gain 50k+ a year on home equity.   By year 3 or 4 you would be cash flow neutral.  Repeat the process twice and you'd be able to retire by year 10.

I expect my properties to be at least cash flow neutral. However, if I lived and invested in Washington DC, NYC, Boston, SF and maybe, but probably not, Seattle, LA, Philadelphia and San Diego I would consider negative cash flow properties. I would expect my principle paydown part of PITI to be on par with my negative cash flow.

Drew Sygit · Answer

Buy a 2-4 unit with FHA loan as only 3.5% down.

You can even look at FHA 203(k) loan if property needs work.

If you live in the smallest or least desireable unit and rent out the other(s), your monthly cost of housing should be lower than paying rent to someone else!

You'll also start building equity and eventually cashflow.

Alecia Loveless · Answer

@Alex Quinlan Hey Alex. I found a great duplex 3/1 and 3/3 that I house hack. It’s the best way to get started in real estate in my opinion.

When you reach the point that you’re ready to invest in something don’t shy away from “problem” properties.

My duplex was initially listed at $199K and the contract fell through 3 times because the initial inspection showed foundation problems. The first people under contract had a foundation guy look at it and he said $75,000 to Jack up the building, dig a basement and pour a new foundation.

The deal fell through 3 times based on this one opinion. Finally as it sat on the market for weeks I looked at it and brought in my own foundation expert. He said the fix was only $3000. I made an offer of $99K and got it accepted based on the necessary $75,000 quote.

Now 6 years later it’s worth more than $400K, the tenant pays for most of my expenses as well as most of my renovations. And each year when we close out the books there’s a small amount of cash flow that usually goes towards our family Christmas expenses.

Sometimes problem properties are easy to fix once you get your own experts. It can be a great way to get a nice property for a discount.

Caleb Brown · Answer

Starting out when you are looking at a house hack it won't cashflow if you are occupying a unit. You do want to run numbers when it's fully rented. House hacking gets you in the door using lower DP and you can reduce your housing expense. That will help you save and repeat. As far as cashflow as you accumulate units that's preference. You do want to make sure it's paying for itself. I would be nervous if it was negative.

Dan H. · Answer

Neighborhoodscout appreciation for this century.  Note this century includes the biggest housing value decline in us history (GFC):

- Washington DC: 6.23%

- nyc:: 5.32%

- Boston: 5.05%

- San Fran: 4.13%.  work from home has not been kind to SF appreciation   Prior to work from home SF was very high on this list.

- Seattle: 5.15%

- LA: 6.31%

- Philadelphia: 5.61%

- San Diego: 5.74%

the only city not ranked 10/10 for appreciation this century is San Francisco.  Historically it has been high on the list of highest appreciation cities but lost ground with the work from home movement.

https://www.neighborhoodscout.com/dc/washington/real-estate

https://www.neighborhoodscout.com/ny/new-york/real-estate

https://www.neighborhoodscout.com/ma/boston/real-estate

https://www.neighborhoodscout.com/ca/san-francisco/real-esta...

https://www.neighborhoodscout.com/wa/seattle/real-estate

https://www.neighborhoodscout.com/ca/los-angeles/real-estate

https://www.neighborhoodscout.com/pa/philadelphia/real-estat...

https://www.neighborhoodscout.com/ca/san-diego/real-estate

Michael Dumler · Answer

@Alex Quinlan, I'd highly recommend reading "Real Estate by the Numbers" by J Scott and Dave Meyer—90% of your underwriting questions will likely be answered there. Moreover, it provides a clear framework for determining whether a deal truly aligns with your financial goals and risk tolerance.And as others have mentioned, house hacking is one of the most risk-averse and effective ways to enter the real estate space, especially for your first deal. In the meantime, focus on positioning yourself well—secure a W-2 job after graduation and commit to saving aggressively. Everyone talks about financial freedom through real estate, but the reality is: you need capital to get there.

Sam McCormack · Answer

When I househack, obviously the goal is to decrease your cost of living and not cash flow. But even when I move out, I will barely cash flow after expenses, and i'm so okay with that. I'm in a solid area with a good future that will attract good tenants. That's all I care about, because I can tell you that getting an additional $50/month on paper, will not matter in 10 years when it has appreciated more than other properties that would've made that $50 and I 1031 to something else

But with OOS, this may be a little different. I would at least make sure it covers it covers main/capex/vacancy, etc generously. Assuming the property is in a great area OOS, I would be fine breaking even with the same outlook

JD Martin · Answer

Can you afford to carry a property on the front end? If you can't, that's going to partially answer your question.

You should be calculating the investment value of any property as if it's fully rented at or slightly below market rates. That includes a duplex - it doesn't make a difference if you're living in one side or not. If you have a duplex that should rent for $1k per side, let's say, your gross income is $2k; you're just eating some of the cash flow right now by taking $1k of that money (the side you live in) and eating the profit right off the bat, because you're not paying for living costs somewhere else. For *most* people, this ends up putting them ahead because if they weren't "house hacking" they would be paying rent or a mortgage somewhere else, usually more extravagantly than the duplex they're living in (IE you would be renting a $2k house or paying a $2k mortgage). So if you get a duplex you're only at negative cash flow, even if you're living in it, if the costs of ownership exceed the FMV of both units. If you buy a duplex with a $1200 mortgage, including taxes, insurance, etc, and assuming the place is fully renovated with no capital or maintenance expenses, you're not "losing" $200 - you're gaining $800 (plus the value of principal pay down & tax benefits, if any).

How Important Is Cash Flow When You're Just Starting Out in Real Estate?

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