Is a negative cash flow property NOT an asset?

Maxwell Milholland · 2018-08-22T07:39:06-07:00

Hello Bigger Pockets community! I've read enough books at this point to have a pretty basic grasp on the fundamentals of real estate. One principle that comes up time and time again is cash flow. There seems to be a consensus that a positive cash flow is what an investor should strive for, and a negative cash flow is bad. I'd like to hear your opinion on this matter. I think that this is perhaps too black and white. Take for example a duplex that cash flows 200 a month. Decent investment right? It's certainly better than one that has a negative 200 cash flow. But is the negative cash flow property BAD? I don't think it is. The only difference between the two is 400 dollars a month. 4800 a year. Sure, that's a good amount of money. But, the reason why the positive cash flow property is an asset, at least in my mind, is due to more than just the income it produces. Tax benefits, loan paydown, and potential appreciation all are factors that make this a valuable asset. These same factors also make the negative cash flow property an asset, just one that doesn't pay for itself. I don't think that's bad, so long as you have prepared for that and have other income to offset that. Essentially, I see it as paying a monthly fee for an asset that will make you far more money in the long run than what you pay for it monthly. Again, a positive cash flow property is better, but I think a negative one CAN be okay. What do you think? I'm open to being completely wrong here.

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

from my perspective in areas were rents have or are stable IE have not moved much in 20 years and probably wont move much in the next 20 years.. and values are stable or they peaked years ago and there is no real expectation of MEANINGFUL appreciation.. there is little reason to buy a negative cash flow property for rental purposes.

you can take negative if your re positioning or you have expectation of some big gains IE path of progress etc.

Bare land of course were your going to change the use.. and make some big upside..

so no stable historic non appreciating markets no reason to buy negative cash flow.. you don't have to the markets are not that hot.. no one is going to beat you to it.. all the investors are going to back into them the same way..

other than those being taken advantage of... and don't really know the true values.

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9 Reply

Ray Johnson

Irvine, CA · Member since 2016 · 545 posts · 614 votes

8y

@Maxwell Milholland There are many ways you can look at this question

1) A 20-25% down payment means you don't actually have any cash flow until you've earned your 20%+ down payment plus acquisition cost back, depending on your rent amount some investors don't actually have any "True" cash flow for several years in the asset. Those that buy all cash the realization is even longer versus those using leverage. Ever do a break-even analysis on your properties?

2) I personally would not start off with negative cash flow because it just means you'll spend a longer time breaking even and building your portfolio.

3) If you bought in California in 2011 as a targeted appreciation play your negative cash flow property would be irrelevant at this point when you sell since some assets have doubled or more in value.

3 Reply

Andrew B.

Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes

8y

banking on that appreciation to make you money in the long run is pretty comparable to gambling. in addition, it will depend on your location. if your property is in the Midwest, that's a big gamble. if its in California, maybe you can bank on appreciation. those hoping for appreciation on a negative cash flowing property should not do so unless they have a portfolio big enough to ride out the losses. if your only property is negative cash flowing, you are just subsidizing someone's living expenses.

you are correct to say it is not black and white, but I think that grey area is MUCH smaller than you think it is.

of course, this excludes properties where you plan to rehab and raise rents.

4 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

The cost of any hold property, is what comes out of your pocket...that's it.

If you buy a property for 100k, put 20% down, and have positive cash flow, that property cost your $20k. If that same property had a negative cash flow of $100/month (1200/y), that property cost you $21,200 after year 1, $22,400 after yr 1, $23,600 after 3, and so on...until you fix the cash flow. Then, you have to generate positive cash flow equal to your total cost before you can make a profit.

The goal in REI is not to own, but to control RE. Another way to look at this is what comes out of your pocket is what your cost is to control a property. Once you recover your "cost to control", you are making a profit from that point forward (as long as you keep the positive CF), and now it cost you nothing to control it.

Who pays the rest of the sale price? As long as you have positive CF...the tenant(s) do. That's their job.

17 Reply

Maxwell Milholland

OP

Buffalo, NY · Member since 2018 · 86 posts · 30 votes

8y

@Joe Villeneuve Hey Joe thanks for the reply. Suppose I get an FHA loan on a 100k property, and my total out of pocket cost to own (or control) the property is 10k. The property has a negative cash flow of 100/month. After year 1, cost to control is 11,200, year 2 12,400, year ten 22,000, and year 30 46,000. If I took out a 30 year loan, and got no appreciation at all, I'm left with a property I paid 46,000 for, but is worth 100k. Of course there are things in there like vacancy occasionally, maybe taxes go up, and a slew of other things but for proof of concept, this deal looks good to me. I made ~50k.

0 Reply

Maxwell Milholland

OP

Buffalo, NY · Member since 2018 · 86 posts · 30 votes

8y

@Andrew Boettcher hey Andrew. I don't think in this scenario I'm banking on appreciation. At some point in the future, this property will be completely paid off by the cumulative rent payments of my tenants, leaving me with a property that is worth far more than the total additional price I paid per month to offset the negative cash flow. If the property doesn't appreciate at all, I still make money over the long term. If it goes down in value, I will still probably make money over the long term. Im having trouble understanding how this is not wise.

0 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

Originally posted by @Maxwell Milholland:

@Joe Villeneuve Hey Joe thanks for the reply. Suppose I get an FHA loan on a 100k property, and my total out of pocket cost to own (or control) the property is 10k. The property has a negative cash flow of 100/month. After year 1, cost to control is 11,200, year 2 12,400, year ten 22,000, and year 30 46,000. If I took out a 30 year loan, and got no appreciation at all, I'm left with a property I paid 46,000 for, but is worth 100k. Of course there are things in there like vacancy occasionally, maybe taxes go up, and a slew of other things but for proof of concept, this deal looks good to me. I made ~50k.

Problems with your assumptions:

1 - You are of course assuming that in 30 years the property WILL be worth $100k
2 - You could buy a different $100k property, that DID cash flow during that time period, and...
3 - How many negative CF properties can you afford to buy?
4 - How many positive CF properties can you afford NOT to buy?
5 - Where will you get the added money needed to cover the negative CF on any and all of your negative CF properties? This doubles the negative.
6 - When you introduce the compounding effect (it works both ways), now how much did that negative CF property cost you? What if you took that positive CF and invested it (compounding it) over that same 30 year period, at a conservative 5% return/year? How does that stand up to 30 years of negative CF waiting for your net return of $54k.

Oh, and that appreciation you mentioned, happens the same whether the property is positive, or negative CF.

5 Reply

Maxwell Milholland

OP

Buffalo, NY · Member since 2018 · 86 posts · 30 votes

8y

@Ray Johnson Hey Ray. I have not done a break even analysis just yet. I will look into that. And I completely agree, a negative cash flow property certainly is not ideal and will take longer to break even. But, even if it does take longer, does that make it a bad investment? It will break even at some point, at it shouldn't take that much longer if the only difference is a couple hundred a month.

0 Reply

Andrew B.

Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes

8y

Originally posted by @Maxwell Milholland:

@Andrew Boettcher hey Andrew. I don't think in this scenario I'm banking on appreciation. At some point in the future, this property will be completely paid off by the cumulative rent payments of my tenants, leaving me with a property that is worth far more than the total additional price I paid per month to offset the negative cash flow. If the property doesn't appreciate at all, I still make money over the long term. If it goes down in value, I will still probably make money over the long term. Im having trouble understanding how this is not wise.

equity paydown and appreciation are synonymous, as major events can happen anytime that would cause your property values to crash. equity is not real until you sell.

in addition, you have ignored the time value of money. by waiting 30 years to take your money out, you have deprived yourself of the ability to invest in other properties.

I'm not saying equity paydown is irrelevant, its a factor to consider when investing but it shouldn't be higher on the list than cash flow.

1 Reply

Frank Jiang

Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes

8y

Cashflow is a garbage metric.

The same house can have positive or negative cashflow depending on whether you put 0%, 5%, 25% or 100% down.

Most people don't even calculate cashflow properly and fail to account for deferred maintenance or future capex spend.

It "works" fine for simple deals, but any investor worth their salt is capable of underwriting to IRR.

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

Originally posted by @Frank Jiang:

Cashflow is a garbage metric.

The same house can have positive or negative cashflow depending on whether you put 0%, 5%, 25% or 100% down.

Most people don't even calculate cashflow properly and fail to account for deferred maintenance or future capex spend.

It "works" fine for simple deals, but any investor worth their salt is capable of underwriting to IRR.

In California.

4 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

Originally posted by @Frank Jiang:

Cashflow is a garbage metric.

The same house can have positive or negative cashflow depending on whether you put 0%, 5%, 25% or 100% down.

Most people don't even calculate cashflow properly and fail to account for deferred maintenance or future capex spend.

It "works" fine for simple deals, but any investor worth their salt is capable of underwriting to IRR.

In California.

0 Reply

Jason Miller

Member since 2018 · 7 posts · 8 votes

8y

How sustainable is this approach in the long run? Ie., how many negative cash flowing properties can you handle. If your goal is for 2 homes paid off by retirement its not the end of the world, look at it like investing 100$ a month. But if your goal is to stop working a day job before they are paid off its not going to work unless you get lucky and the property value goes up. However, that is speculating and not investing IMO.

4 Reply

Seth Parmelee

Realtor · Wilmington, NC · Member since 2018 · 71 posts · 24 votes

8y

Can a negative cash flow property be used to off set taxes? Would it even be worth it to that?

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Joe Villeneuve:

Originally posted by @Maxwell Milholland:

@Joe Villeneuve Hey Joe thanks for the reply. Suppose I get an FHA loan on a 100k property, and my total out of pocket cost to own (or control) the property is 10k. The property has a negative cash flow of 100/month. After year 1, cost to control is 11,200, year 2 12,400, year ten 22,000, and year 30 46,000. If I took out a 30 year loan, and got no appreciation at all, I'm left with a property I paid 46,000 for, but is worth 100k. Of course there are things in there like vacancy occasionally, maybe taxes go up, and a slew of other things but for proof of concept, this deal looks good to me. I made ~50k.

Problems with your assumptions:

1 - You are of course assuming that in 30 years the property WILL be worth $100k
2 - You could buy a different $100k property, that DID cash flow during that time period, and...
3 - How many negative CF properties can you afford to buy?
4 - How many positive CF properties can you afford NOT to buy?
5 - Where will you get the added money needed to cover the negative CF on any and all of your negative CF properties? This doubles the negative.
6 - When you introduce the compounding effect (it works both ways), now how much did that negative CF property cost you? What if you took that positive CF and invested it (compounding it) over that same 30 year period, at a conservative 5% return/year? How does that stand up to 30 years of negative CF waiting for your net return of $54k.

Oh, and that appreciation you mentioned, happens the same whether the property is positive, or negative CF.

over 30 years of owning it you will have to replace all thing mechanical probably 2 roofs windows etc etc. you will be in it way more than 46k.. most folks totally underestimate what it cost long term to own these homes that are already 30 or 40 years old.

this may work with a brand new brick home that you keep on top of and in an area with no frost thaw frost thaw no thunderstorms no wind etc..

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7 Reply

Joseph M.

Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes

8y

@Maxwell Milholland I think it really depends . Most people buy rental property with the goal of building up cash flow $100 or $200 a door per month . I agree with Jay it could make sense in certain situations if you are buying in an area with rent growth or has high historic appreciation . As rents go up you won’t be negative $200 a month for too long . Of course this is a more speculative play than buying something that cash flows . I can definitely see it being dangerous though having too many negative cash flow properties . Really depend on how much other income you have and how stable that income is . Buying negative cash flow and betting on appreciation did hurt a lot of people last crash .

0 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

Originally posted by @Jay Hinrichs:

Originally posted by @Joe Villeneuve:

Originally posted by @Maxwell Milholland:

@Joe Villeneuve Hey Joe thanks for the reply. Suppose I get an FHA loan on a 100k property, and my total out of pocket cost to own (or control) the property is 10k. The property has a negative cash flow of 100/month. After year 1, cost to control is 11,200, year 2 12,400, year ten 22,000, and year 30 46,000. If I took out a 30 year loan, and got no appreciation at all, I'm left with a property I paid 46,000 for, but is worth 100k. Of course there are things in there like vacancy occasionally, maybe taxes go up, and a slew of other things but for proof of concept, this deal looks good to me. I made ~50k.

Problems with your assumptions:

1 - You are of course assuming that in 30 years the property WILL be worth $100k
2 - You could buy a different $100k property, that DID cash flow during that time period, and...
3 - How many negative CF properties can you afford to buy?
4 - How many positive CF properties can you afford NOT to buy?
5 - Where will you get the added money needed to cover the negative CF on any and all of your negative CF properties? This doubles the negative.
6 - When you introduce the compounding effect (it works both ways), now how much did that negative CF property cost you? What if you took that positive CF and invested it (compounding it) over that same 30 year period, at a conservative 5% return/year? How does that stand up to 30 years of negative CF waiting for your net return of $54k.

Oh, and that appreciation you mentioned, happens the same whether the property is positive, or negative CF.

over 30 years of owning it you will have to replace all thing mechanical probably 2 roofs windows etc etc. you will be in it way more than 46k.. most folks totally underestimate what it cost long term to own these homes that are already 30 or 40 years old.

this may work with a brand new brick home that you keep on top of and in an area with no frost thaw frost thaw no thunderstorms no wind etc..

Correct. My maximum for holding a home is usually between 5-10 years...depending on when the roof was replaced, appreciation and access equity buildup.

This is another reason why a negative cf property, doesn't cut it.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

8y

Originally posted by @Seth Parmelee:

Can a negative cash flow property be used to off set taxes? Would it even be worth it to that?

Tax deduction isn't the same thing as a tax credit...and I wouldn't pay for either

1 Reply

Lesley Resnick

Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

8y

It is neither good nor bad. It is a matter of strategy and goals. I am interested in cashflow. My goal is to generate enough passive income to cover all my fixed expenses. I work with investors who do not care about the income, rather they are interested in the tax advantage and diversification. RE can be expected to outpace inflation in the long term. Others are interested in the long term appreciation and want to make it part of their legacy for their children.

Land banking is the ultimate negative cash flow. There is no depreciation, you pay tax, insurance and get nothing in return. It only offers the promise of a future pay out.

I think a lot of people are in search of absolutes. "The three things every investor must do.... The RULE of...." Sadly life does not work that way. There are as many ways to make money as to lose money in RE. The one equalizing factor is TIME. On a long enough time line all RE is profitable. How much did your parents pay for the house you grew up in?

4 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

8y

Add value and you don't have to worry about low or negative monthly cash flow. There are zillions of posts on BP about either (1) negative cash flow value plays or (2) modest cash flow plays where appreciation is non-existent or unpredictable. There is an easier, more predictable, way...add value and force appreciation (and cash flow).

4 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

Originally posted by @Lesley Resnick:

It is neither good nor bad. It is a matter of strategy and goals. I am interested in cashflow. My goal is to generate enough passive income to cover all my fixed expenses. I work with investors who do not care about the income, rather they are interested in the tax advantage and diversification. RE can be expected to outpace inflation in the long term. Others are interested in the long term appreciation and want to make it part of their legacy for their children.

Land banking is the ultimate negative cash flow. There is no depreciation, you pay tax, insurance and get nothing in return. It only offers the promise of a future pay out.

I think a lot of people are in search of absolutes. "The three things every investor must do.... The RULE of...." Sadly life does not work that way. There are as many ways to make money as to lose money in RE. The one equalizing factor is TIME. On a long enough time line all RE is profitable. How much did your parents pay for the house you grew up in?

Best of both worlds is buying high producing timber ground.. with a mixed age stand.. so you can harvest most every year...

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1 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

8y

Buying a house based on appreciation and not cash flow is moronic for a multitude of reasons . The only rebuttal I see people try to use is the idea it will be worth X amount of dollars more in 2057 which of coarse can’t be assured in the slIghtest , we csnt even be sure what the housIng market In one year from now much less 30 years . It is just speculation aka gambling ,hopIng ,and wIshIng that everything goes up In value over time

2 Reply

Shane H.

Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes

8y

I get what the OP is getting at. Would you rather invest $10k into an IRA and add $100 (-$100 expense) into it each month where you'd have around $128k in 30 years (assuming a rate of 5%). Or you would you rather use that same $10k to buy a property worth $150k with a negative monthly cash flow of -$100 and end up with an asset worth at least the initial $150k, that is paid in full, and pays a monthly income of $900+ in todays dollars. Of course this doesn't take into account the repairs along the way, opportunity costs, etc. But the idea has merit IF that is all you are planning to do for your retirement plan.

However like @Joe Villeneuve pointed out, how many of these can you afford to do? And more importantly, why? Run that same scenario but on a rental that nets $100 a month instead of -$100 a month over 30 years and see just how massive the difference can be.

So yes, i see what you're saying about it being a feasible investment. But if you're only benchmark for a decent investment is that it's better than other options, then i'd recommend rethinking your strategy. =) Happy hunting!

4 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

8y

The problem with your assumptions is that they are based on expecting to sell cash positive. There are no such guarantees with real estate. Many investors are forced to sell prematurely and lose money, markets drop and properties end up upside down, **** happens.

I can afford a infinite number of positive cash flow properties, negative cash flow not so much. As a investor I expect to make money not lose money and speculate on appreciation.

Any property that loses money is not a asset. Gambling on selling to make a profit is faith investing. I personally have zero faith.

2 Reply

Llewelyn A.

Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes

8y

Here is the order of the most common 4 elements which will make you a profit in Real Estate listed in ORDER of which will give you the BIGGEST return.

1) APPRECIATION

2) Mortgage Balance Reduction

3) Cash Flow

4) Tax Savings

NOTE, Appreciation will give you the BIGGEST return, especially if you invested in the very high, long appreciating markets.... LIKE BROOKLYN, NYC.... a Market I have been investing in for 21 years.

If you feel the Biggest driver of Wealth is a Gamble, then don't gamble. LEARN how to calculate appreciation and factor it into the 4 factors above.

If it was easy, everyone would be rich. So learn thing Internal Rates of Return, Future Value, Mortgage Amortizations and historic appreciation rates. All of which will help you. However, because these calculations are not easy, many people don't use them or understand them.

If you haven't learn them, of course Appreciation is a Gamble! But by learning those calculations, it might open your mind to the possibility that YES, you can factor in appreciation into your calculations!

BTW, not using historic appreciation rates can also cause you to have subpar Investments even if your cash flow is decent and that's all you used to make a decision.

You can easily become out-priced by not investing in these appreciating markets. So those NOT investing in these high appreciation markets risk not being able to buy in those markets.

I have plenty of examples of relatives that never bought in Brooklyn, but rather rented.

Over the 21 years I have invested, those relatives seen house prices move up so dramatically, they not only cannot buy, but their children won't be able as well.

An example is one of my properties I bought in the year 2000. I paid $140k. We appraised it in order to take out an Equity Loan and it appraised for $1.4 Million, 10 times what I bought it for 18 years ago.

So, I would caution those that want to live in high appreciation areas..... if you still have not been out priced, do you believe that somehow the prices will come down to to levels you believe you can snatch it up? Or will you just wait until it's just too late.

It's not all previously high appreciating Markets that have done as well as Brooklyn, NYC. But there are so many that those that did not buy in the high areas of appreciation, especially where they live, taking the advice of "Appreciation is a Gamble" did the complete opposite to them. It actually hurt them the most rather than helped them.

It was so incredibly disappointing that of all the friends, family and business partners that I have had in my life, 95% can no longer afford to buy a home in NYC despite all of the efforts of investing in other asset classes like Stocks or mutual funds. Some of them have done well. But the reality is that even someone who had done well over the year, they may still not be able to afford to buy their home here in a decent area.

Something to consider.

Just a short bit so I can stay on this topic.

Because I don't consider Cash Flow to be a Characteristic of the Investment, I know that I can have an effect on whether or not an Investment Cash Flows.

For instance, if I financed a NYC property with a 100% Mortgage and Zero down... of course I will have a negative cash flow.

BUT, if I paid all case and ZERO Mortgage.... of course I will have a Cash Flow.

So I fully believe that it's NOT the Investment that Cash Flows.... it's the INVESTOR!

Once you realize that it's the Investor that Cash Flows an Investment, then you start to realize how important the other 3 factors are.

So maximize the other 3 factors and then see if you want to Cash Flow the property, or NOT. It's really up to you!

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Is a negative cash flow property NOT an asset?

Is a negative cash flow property NOT an asset?

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