Is it okay to not cash flow? (Young and Dumb investor)

36 Replies

Hi everyone, young inexperienced guy looking to break into real estate investing. I live and work in the Boston area and I am looking to move out of my parents place within the coming year. I wanted to get your thoughts on “House Hacking” and buying a property that will not cash flow (even after I move out). My plan is to skip the renting phase by living at home and jump right into the owning phase.

Here is my plan.

  • -Stay at home and save for another 12-15 months
  • -Use FHA financing to buy a first multifamily property (2-4 units)
  • -Live in one unit while renting out the rest
  • -Pay down mortgage for 1-3 years, refinance FHA status into a conventional loan
  • -Apply for another FHA loan and repeat the same process in another property

Obviously it would be better to buy and find a property that can cash flow. But it may be unlikely because I am not experienced with construction/repairing houses (can’t buy anything that needs major work), I do not know any real estate agents/real estate investors, and I am young and dumb and I doubt I would be able to find the best deal without connections. Instead of paying 1k (I live in Boston) in rent a month to a landlord, I figured I would rather build equity.

However, the only certainty is I do eventually need to move out. Is it worth it to buy a higher priced property and pay into a mortgage, than to rent and wait until I find a great deal?

I do not think I am experienced enough to buy a “tear down” house, so I was thinking going with a broker and getting something close to a “turnkey”.

  • -Less than 20k of loans (very low interest rate)
  • -18k cash, and ability to save more

My income is around 70k per year, and I think my max budget for a house would be around 350k (open to critique). Thus the areas I am looking at are Lynn/Lowell (open to suggestions). I would love advice from experienced investors and what their thoughts are with this plan. I am not looking to speak with real estate agents at this point. Thank you kindly. 

A couple of thoughts:

1. It's difficult to find properties close to Boston that meet the FHA limits. Below are the limits for Boston. You can of course buy further from the city.

SingleDuplexTri-plexFour-plex
$603,750$772,900$934,250$1,161,050

2. You don't need to re-fi out of the FHA. You should just keep it in the FHA unless you create equity or gain it through appreciation.

3. Where in Boston are you renting for $1,000? Rents for a tiny studio in Boston and Cambridge are well above 1k a month.

4. If you're going to be losing money when you move out, how is that better than renting? There is a ton of info on appreciation versus cash flow. Everyone has an opinion.

My 2 cents. Think about your goals. I suspect that right now you want cashflow over things like appreciation and tax deductions. Think about adding roommates to maximize your house hack. You need to do a lot more reading on BP and other resources before jumping in.

I wouldn’t buy anything that won’t cash flow post house hack. Might as well rent unless you want to gamble on appreciation. When I look at house hack deals I make sure my negative cash flow is less than or equal too what I would be paying in rent. I also make sure it at least cash flow neutral post house hack.

Take with grain of salt. I am new to house hacking myself. That is just my criteria here in Southern California Market.

No, no, and I believe the word I'm looking for is ..."NO".

Why bother?  If  you wanted to pay your tenant to live in your house, just give them the "negative CF" check and get rid of the middle man.

@Dan K. Thank you for the reply Dan. That is an interesting fact about the FHA status, does that mean you cannot use an FHA for houses over those costs? Because I would be hoping to look at a house in the 350k price range so I think I would be okay.

Currently I am not renting in Boston, I live at home for free, most of my colleagues pay 800-900 for rent with a few roommates, I was rounding up a tad. Also, I am nearing 25 so I would probably not want roommates for too much longer if I could afford it.

As for your 4th point, I figured that paying money into a house to build equity would be better than renting. The negative cash flow would not be huge by my calculations (although I have not done something very specific). I figured after I moved out and rented out the place it might be around -100 a month. Another question I have, is wouldn't the cash flow of the property be able to increase over time? Because I can scale rents appropriately and as I pay off the mortgage the cost of it goes down. And refinancing the FHA loan would allow me to get rid of PMI insurance which would help cash flow. Am I thinking correctly here? Appreciate your feedback.

@Patrick Fraire Thank you for your response Patrick. I read a joke on here from a real estate agent who when asked "are there any properties around that cash flow" he would respond "if they were, I would have bought them". To me that makes sense in a competitive environment, that someone as inexperienced as myself would have a tough time finding a cash flowing gem.

I like the point you made about how you make sure negative cash flow is less or equal too what I would pay in rent. By my calculations after taxes, repairs, PMI, vacancy rate calculations, mortgage, etc. I would only be around -100 a year or so. However, the advantage is that I can use leverage from the bank and get a high return.

I guess my other question is wouldn't cash flow potential increase over time as your mortgage cost (the interest payments) decrease and you can increase rent. 

My reasoning was that I would rather pay 1k a month into equity in my house than pay 900 a month in rent to someone else. Please let me know your thoughts, thank you. 

I responded to your post as I read it, you're fine with the FHA limits. You are look way below the Middlesex County limits.

I totally understand not wanting roommates, however, the ability to supplement even a condo with roommates can be phenomenal and an easy way to get started in RE investing.

You final question has a few concepts packed together:

1. -$100 a month does give you some tax losses plus the depreciation. That being said, it doesn't do a whole lot for you at your stage of life.

2. Rents can certainly increase over time. Very close to Boston you can expect increases of 5-10% a year. In Lowell I suspect it will be less. What's important is to implement the increases every year. $1,000 a month to $1,100 isn't huge, but if you wait several years and try to increase the rent by $400 a year good luck.

3. As you pay your mortgage and increase your equity your mortgage payments will remain the same. On a 30-year mortgage, your payment on month 1 is the same as month 359. Of course because of inflation the payment in many years will be less money in terms of spending power. You should spend some time learning about amortization -- basically early on in the mortgage your mortgage payment largely goes to paying interest and towards the end it largely goes to building equity. At all times your actual payment remains the same.

4. Getting rid of PMI is certainly good as it's expensive, however, a re-finance just to get rid of PMI is a big pain. If you're not adding significant equity, just seek out a traditional loan with no PMI from day 1.

Thank you for your reply @Joe Villeneuve . If you don't mind could you elaborate a little bit or help me correct my thought process here. Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

I figured the advantages of this strategy are as follows:

- Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. Instead of having a $1000 expense, I would be building equity that is mine.

- This strategy allows me to utilize leverage from the bank to increase my net worth. My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

- Some tax advantages 

My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

I appreciate any feedback, I am a novice and have a lot more to learn. Thank you.

@Matt T. You may want to find an experienced investor in your area who is doing what you want to do. By finding a mentor, you'll be able to learn how to find deals and spot them. In any market, there are always deals to be made. Unfortunately, most real estate investors play on the outside but the ones who get the best deals are always on the inside. Sure, it may take years to get there and gain the experience but once you do the knowledge and opportunities that come your way are priceless. Good luck!! 

Originally posted by @Matt T. :

Thank you for your reply @Joe Villeneuve. If you don't mind could you elaborate a little bit or help me correct my thought process here. 

Question #1:  Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

Answer #1:  YES!

I figured the advantages of this strategy are as follows:

Question #2:  - Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. 

Answer #2:  NO!  First, your comparison is like asking  if "it's better to be shot with a pistol or a arrow.  Second, where are you building equity?  You're trying to "buy it"...and paying more for it than it's worth

Instead of having a $1000 expense, I would be building equity that is mine.

Question #3:  - This strategy allows me to utilize leverage from the bank to increase my net worth. 

Answer #3:  No you're not.  You're decreasing you Net Worth because of the Negative Cash Flow

Question #4:  My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. 

Answer #4:  ...that is offset by the negative Cash Flow.  You are gaining nothing.

Question #5:  Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

Answer #5:  You're rationalizing a bad deal into a good one...and "rationalization" is the most expensive word a REI can use.  This isn't investing...it's speculating.  You're depending on future events that you have no control over to correct the initial negative results of a bad deal.  Bad idea.

- Some tax advantages 

Questions #6 - 9: My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

Answers #6 - 9:  <See Answer #5>

Question #10:  I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

Answer #10:  <See answers #1 - 9, and especially #2>

REI isn't about getting properties...it's about getting deals.  This is a property, that is also a bad deal.  The numbers don't lie.  Don't argue with them...you'll lose every time.

@Matt T. If it’s a B or A class neighborhood and your at -100 cash flow after conservatively estimating expenses...your really investing for the long term. I mean how different is -$100 vs $0 a month? For me that’s like two extra dinners a month with my girlfriend and I. That’s negligible. I wouldn’t even notice. What you will notice is the tenants you deal with. I’d choose a -$100 cash flow property in a B class over a +$50 I’m a C-.

Regarding your question on cash flow getting better. Rents will probably go up slightly over time but your mortgage payment will stay pretty much the same. Even when it switches from mostly interest to principal, the total you are paying is the same. Someone else mentioned looking into amortization. You should google amortization schedule calculator and punch in the numbers. You will see what I mean. The big thing that changes over time is your equity. The cash flow doesn’t “appreciate” that much unless you hit a market at the right time.

Hope this helps man and 97.5% of the people on bigger pockets have more experience than me so take what I say with a grain of salt. Everything I say on this is aggregated information from several resources not so much tried and true personal experience.

Originally posted by @Matt T. :

Thank you for your reply @Joe Villeneuve . If you don't mind could you elaborate a little bit or help me correct my thought process here. Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

I figured the advantages of this strategy are as follows:

- Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. Instead of having a $1000 expense, I would be building equity that is mine.

- This strategy allows me to utilize leverage from the bank to increase my net worth. My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

- Some tax advantages 

My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

I appreciate any feedback, I am a novice and have a lot more to learn. Thank you.

You wrote: "after I moved out and rented out the place it might be around -100 a month", but, that doesn't include your negative cash flow from where you next move to!

Yes, your "cash flow potential" might improve over time, but, so might your cash flow expenses!

ie. No-one here knows the future. We're all guessing! But, you're asking all the right questions.

[Btw, did you really mean/expect "and the interest rates decreased"?]. Good luck...

Originally posted by @Matt T. :

Thank you for your reply @Joe Villeneuve . If you don't mind could you elaborate a little bit or help me correct my thought process here. Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

I figured the advantages of this strategy are as follows:

- Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. Instead of having a $1000 expense, I would be building equity that is mine.

- This strategy allows me to utilize leverage from the bank to increase my net worth. My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

- Some tax advantages 

My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

I appreciate any feedback, I am a novice and have a lot more to learn. Thank you.

FHA rates are typically lower, you're almost awlays going to be refi'ing into a higher interest rate. So even trying to drop PMI may not work in your favor with FHA. Better off using a 5% ARM or conv and then hope to drop PMI early with appreciation and if not at 80% LTV automatically. Also you can always write off some of your PMI. And about the interest rates they are at 5%, chances of them dipping back to recession levels are pretty low.

Yes, -$100 is not as bad as $1000 (if you’re gaining apprecition) but you’re forgetting a huge chunk of your monthly mortgage is actually interest. Very little is actually going to your principal.

Example: I have a rental where a tenant paid me $1595/month last year. Over the course of the year, she paid $19140 total. Yet my equity paydown was only $4k off of my initial loan amount, the rest went to interest, taxes, insurance, etc. Now if the property value went down or stayed the same...that could be a really crappy situation. Luckily, this year, I was able to drop my PMI due to appreciation (increasing cash flow by $75/month) and also jacked the rent up by $55.

Lastly, at 25, and after reading your posts it sounds like you’re young and humble. Far from dumb, imo. It’ll hopefully prevent you from making serious mistakes. If you’re making $70k and have the self-awareness to understand where you are financially and where you want to be - you’re better off than many with just pipe dreams.

Originally posted by @Patrick Fraire :

Matt T. If it’s a B or A class neighborhood and your at -100 cash flow after conservatively estimating expenses...your really investing for the long term. I mean how different is -$100 vs $0 a month? For me that’s like two extra dinners a month with my girlfriend and I. That’s negligible. I wouldn’t even notice. What you will notice is the tenants you deal with. I’d choose a -$100 cash flow property in a B class over a +$50 I’m a C-.

Regarding your question on cash flow getting better. Rents will probably go up slightly over time but your mortgage payment will stay pretty much the same. Even when it switches from mostly interest to principal, the total you are paying is the same. Someone else mentioned looking into amortization. You should google amortization schedule calculator and punch in the numbers. You will see what I mean. The big thing that changes over time is your equity. The cash flow doesn’t “appreciate” that much unless you hit a market at the right time.

Hope this helps man and 97.5% of the people on bigger pockets have more experience than me so take what I say with a grain of salt. Everything I say on this is aggregated information from several resources not so much tried and true personal experience.

I’ve got a few Class A rentals and those tenants display their entitlement before they even get past the initial screening. “I expect this to be installed, want this to be painted this color, want this appliance swapped out.” They haven’t even got their paystubs submitted and are already demanding stuff like you owe them your investment property.

Originally posted by @Patrick Fraire :

@Aaron Hunt interesting. So in your experience Class A is worse than others?

It’s not worse, just a different type of tenant. I like having educated tenants, who I can communicate with easily (email/text), tend to be cleaner, can pay me online, have jobs and lives that are more stable and keep them busy and mostly out of trouble.

They tend to be pretty transparent. You can tell who is going to be a handful and who will be easy to work with based on how they communicate during the initial screening & showing.

Every Class A tenant we’ve had initial doubts about for personality/credit related issues, inevitably made for a tougher year - even if they always paid (which is still the end goal).

Originally posted by @Rachel H. :

@Matt T. You may want to find an experienced investor in your area who is doing what you want to do. By finding a mentor, you'll be able to learn how to find deals and spot them. In any market, there are always deals to be made. Unfortunately, most real estate investors play on the outside but the ones who get the best deals are always on the inside. Sure, it may take years to get there and gain the experience but once you do the knowledge and opportunities that come your way are priceless. Good luck!! 

 Thank you for the advice @Rachel H. I have been trying to find a mentor, but it is difficult. I do not have any family connections, or friends who are experienced real estate investors. Any suggestions on where to look? 

Originally posted by @Joe Villeneuve :
Originally posted by @Matt T.:

Thank you for your reply @Joe Villeneuve. If you don't mind could you elaborate a little bit or help me correct my thought process here. 

Question #1:  Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

Answer #1:  YES!

I figured the advantages of this strategy are as follows:

Question #2:  - Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. 

Answer #2:  NO!  First, your comparison is like asking  if "it's better to be shot with a pistol or a arrow.  Second, where are you building equity?  You're trying to "buy it"...and paying more for it than it's worth

Instead of having a $1000 expense, I would be building equity that is mine.

Question #3:  - This strategy allows me to utilize leverage from the bank to increase my net worth. 

Answer #3:  No you're not.  You're decreasing you Net Worth because of the Negative Cash Flow

Question #4:  My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. 

Answer #4:  ...that is offset by the negative Cash Flow.  You are gaining nothing.

Question #5:  Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

Answer #5:  You're rationalizing a bad deal into a good one...and "rationalization" is the most expensive word a REI can use.  This isn't investing...it's speculating.  You're depending on future events that you have no control over to correct the initial negative results of a bad deal.  Bad idea.

- Some tax advantages 

Questions #6 - 9: My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

Answers #6 - 9:  <See Answer #5>

Question #10:  I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

Answer #10:  <See answers #1 - 9, and especially #2>

REI isn't about getting properties...it's about getting deals.  This is a property, that is also a bad deal.  The numbers don't lie.  Don't argue with them...you'll lose every time.

 I am still a bit confused, Joe and as you pointed out, I want to make sure I am not trying to rationalize a bad decision. But if I had two scenarios, A) paying $1000 dollars in rent a month to a landlord or B) Paying $1000 dollars into a home (covering my part of the mortgage and covering the negative cash flow from the other units) is scenario B not superior to scenario A? I do pay a lot in interest in the early payments, but wouldn't I be building equity into the multifamily property? Maybe the costs won't add up exactly to those made up numbers, and it is also probably more likely renting is cheaper, but it is not by much around my area. 

Another question I have, is isn't cash flow impacted by the down-payment. If you put 20-30% down on a property, your mortgage payments are less than if you put 3-5% down. I guess my point is isn't one of the difficulties of my situation that I am putting down such a small down-payment? Is that a reason to shy away from buying? Would my cash flow potential improve after I paid off more of the loan? Thanks again for your insight.

Originally posted by @Patrick Fraire :

Matt T. If it’s a B or A class neighborhood and your at -100 cash flow after conservatively estimating expenses...your really investing for the long term. I mean how different is -$100 vs $0 a month? For me that’s like two extra dinners a month with my girlfriend and I. That’s negligible. I wouldn’t even notice. What you will notice is the tenants you deal with. I’d choose a -$100 cash flow property in a B class over a +$50 I’m a C-.

Regarding your question on cash flow getting better. Rents will probably go up slightly over time but your mortgage payment will stay pretty much the same. Even when it switches from mostly interest to principal, the total you are paying is the same. Someone else mentioned looking into amortization. You should google amortization schedule calculator and punch in the numbers. You will see what I mean. The big thing that changes over time is your equity. The cash flow doesn’t “appreciate” that much unless you hit a market at the right time.

Hope this helps man and 97.5% of the people on bigger pockets have more experience than me so take what I say with a grain of salt. Everything I say on this is aggregated information from several resources not so much tried and true personal experience.

 Thank you @Patrick Fraire, that is a good point about the quality of tenant, and honestly due to my price point I'm looking at what would probably be classified as Class C. Your reasoning is similar to mine, I do not mind taking a $50 hit in profitability in order to compensate for other good things. However, I am getting a lot of feedback that is very against negative cash flow. Your right about the mortgage payment being the same, I didn't think of that when I first posted. I think one detail I left out was I would be trying to pay more than the mortgage required at times (I work in sales, so if I ever got a large paycheck I might toss more of it at the mortgage). Hopefully this would improve my cash flow opportunity along with raise rents, appreciation of the property and attempting to mitigate cost (although I bet a lot of people with experience might laugh at me there). Thanks for your help, I found your comments very helpful! 

Originally posted by @Brent Coombs :
Originally posted by @Matt T.:

Thank you for your reply @Joe Villeneuve . If you don't mind could you elaborate a little bit or help me correct my thought process here. Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

I figured the advantages of this strategy are as follows:

- Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. Instead of having a $1000 expense, I would be building equity that is mine.

- This strategy allows me to utilize leverage from the bank to increase my net worth. My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

- Some tax advantages 

My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

I appreciate any feedback, I am a novice and have a lot more to learn. Thank you.

You wrote: "after I moved out and rented out the place it might be around -100 a month", but, that doesn't include your negative cash flow from where you next move to!

Yes, your "cash flow potential" might improve over time, but, so might your cash flow expenses!

ie. No-one here knows the future. We're all guessing! But, you're asking all the right questions.

[Btw, did you really mean/expect "and the interest rates decreased"?]. Good luck...

 Oh haha, no I meant the interest rate payments not the specific interest rates. That's a great point about where I move to next, hopefully I will be more experienced after my first house hack and can find a cash flowing property. I also think I would try not to move out until I made the place cash flow. What are cash flow expenses? Are those just regular expenses? And your right, I know a lot of this is speculation, and particularly with asset prices so high, it would be hard to bank of significant more appreciation of the property. But to combat that notion, and to ease my worries about properties dropping in value, I said to myself I will be buying more than 1 property over my lifetime (my goal would be to have around 15 doors) so my buying period is probably 30 years. I will probably see some swings in property values during that 30 year period, so I can't just wait around banking of property prices to fall. Thanks for the input!

You're thinking like a homeowner and not an investor.

First, contact me direct to get a more detailed answer to all of this.  It's really hard to go through the entire explanation in this format.

Second, the more money you spend upfront doesn't mean you are improving your cash flow.  It just means you are getting it returned to you slowly through the rent.  Look at it this way.  All the money you spend, that comes out of your pocket, you have to recover before you start to show a profit.  The more you spend, the longer it takes to get to that break even point.

Let's say you put down $10,000 and get $500/month in CF.  If you put down $20k instead, and got another $50 more in CF, you're losing money.  You would get an added $600/year, but spent $10k to get it.  That means it would take you over 16 years to recover it and break even...which is when you start to turn a profit.

The worst thing you can do is to think you can turn a negative CF property into a positive one with a larger DP.  All you're doing is paying for all that negative CF upfront.

Third, think of a stairway in a house.  If you look at a plan of the 1st and 2nd floor, it may look like you have 2 stairs, but the reality is it's the same stair on both plans.  Any cash you move from your control to equity equals the same thing in both locations.  All you're doing is moving it from one place to another.  The key is the impact that movement has when it "lands" at each location...and the idea of it moving is what you want.  The more you move it, the more impacts it has.

This is one of the problems when you park it in equity...it stops moving and dies.

Every move you make has a domino effect on future things as well as collateral impact on other things at the same time.  You can't simplify all of this by looking at only two of them (rent vs equity) and coming to a conclusion.  All of this is part of a system.  Every move within that system impacts a lot more than what you see.

Originally posted by @Aaron Hunt :
Originally posted by @Matt T.:

Thank you for your reply @Joe Villeneuve . If you don't mind could you elaborate a little bit or help me correct my thought process here. Is this still the case even if cash flow is slightly negative (maybe 50 or 100 a month)?

I figured the advantages of this strategy are as follows:

- Obtaining a negative cash flow of a $100 or so a month would be superior return wise than paying about 1000 in rent because I would be able to build equity. Instead of having a $1000 expense, I would be building equity that is mine.

- This strategy allows me to utilize leverage from the bank to increase my net worth. My 30k down payment on a house would allow me to receive an appreciation return on a 300k asset. Granted prices could drop, but I think appreciation over a 30 period year period would be more likely.

- Some tax advantages 

My other question is, wouldn't my cash flow potential increase overtime as I paid off the loan and the interest rates decreased, rents rates increase (potentially) as well as refinance my FHA status to avoid PMI insurance after a year?

I guess I am still a bit confused on how paying rent is a better alternative than negative cash flow. Rent is still a loss for me correct? If I had a smaller loss from negative cash flow than from rent is it still a bad idea? 

I appreciate any feedback, I am a novice and have a lot more to learn. Thank you.

FHA rates are typically lower, you're almost awlays going to be refi'ing into a higher interest rate. So even trying to drop PMI may not work in your favor with FHA. Better off using a 5% ARM or conv and then hope to drop PMI early with appreciation and if not at 80% LTV automatically. Also you can always write off some of your PMI. And about the interest rates they are at 5%, chances of them dipping back to recession levels are pretty low.

Yes, -$100 is not as bad as $1000 (if you’re gaining apprecition) but you’re forgetting a huge chunk of your monthly mortgage is actually interest. Very little is actually going to your principal.

Example: I have a rental where a tenant paid me $1595/month last year. Over the course of the year, she paid $19140 total. Yet my equity paydown was only $4k off of my initial loan amount, the rest went to interest, taxes, insurance, etc. Now if the property value went down or stayed the same...that could be a really crappy situation. Luckily, this year, I was able to drop my PMI due to appreciation (increasing cash flow by $75/month) and also jacked the rent up by $55.

Lastly, at 25, and after reading your posts it sounds like you’re young and humble. Far from dumb, imo. It’ll hopefully prevent you from making serious mistakes. If you’re making $70k and have the self-awareness to understand where you are financially and where you want to be - you’re better off than many with just pipe dreams.

That's interesting that FHA loan rates are lower, I didn't realize that. If anything I thought they would be higher since it seems like more of a risk. Although if I refinance into another FHA loan (I guess you can only have 1 at a time) I don't think it would make a different which house I had the FHA status on (I am planning on buying more than 1 property over time). The only difference would be I could put down a smaller down payment. I think whats affecting my cash flow is the fact that I am putting down such a small down payment (5% in an FHA vs 25% most people do). I was also planning on trying to pay off the mortgage must faster than what I sign up for. I work in sales, so if I get a larger than usual income, I will put it towards the mortgage which I figured might help cash flow potential by lowering my interest payments. Thank you for the bit of encouragement at the end, I have a lot to learn and thank you for your input.

Your job is to control the property, not buy it.  The down payment is how you control the property...and the total cost of the property to you.

Your tenants job, is to buy the property for you...don't help them.

it is certainly true that it is better to pay 1k in house payment than 1k in rent. The problem is - these numbers don't work. A payment of 1k (with interest and taxes and insurance) is probably on a 150k loan.

Good luck finding a parking space to buy for that price in boston. Even 1k rent in Boston is only possible with room-mates. THe equation for someone who is actually buying vs renting in Boston is more likely - is it better to pay 4k in mortgage or 3.5 k in rent? And the answer to that question depends. This is not really an investment question - it is a lifestyle question.

With renting you will have no possibility for appreciation. With owning, you have possibility of building equity but the responsibilities of maintenance etc.

For investing purposes, I think Cash Flow and Cash on Cash return are what's important - not what your mortgage costs are vs what you personally pay in rent. You want to look at what you collect in rent and in Boston, mostly your payments will be more than what you can collect in rent.

For purposes of house hacking and learning, I think owning is fine but if you are thinking of owning for 1k mortgage repayment in Boston, then forget even Lynn or Lowell. Probably look to Springfield and western Mass.