Short term negative cashflow on 1st property?

11 Replies

I'm interested in buying my first investment property. I am working with a Turnkey provider in an out of state market. My projections show this single family home will cashflow a little over 100 dollars per month after management, conservative vacancy, maintenance and piti with 20% down. I am considering using a 401k loan for the down-payment. The problem is that it is a 5 yr loan at 4.25% interest which will cost me about $900 a month in a repayment. I am currently saving right around $900 a month to start investing in real estate but don't have the full down payment yet. My thought is that I would eat the negative cashflow for the 5 years and consider it a wash as I was planning to save it anyway and let the house appreciate in the meantime. I have money set aside for reserves. Thoughts on this approach?

Not to change your plans but have you ever looked at evansville Indiana? SFR I'm the 40-75k range cashflow between $150-300. The down payment on 50k homes is obviously substantially lower. The rental market is extremely hot as well. I'd love to discuss more if that's something that interests you.


Run the numbers on this specific property, and you will have your answer.  You shouldn't pose questions in general since the answer you're looking for is specific to the numbers this property will generate.

What is the total accumulated negative cf over that time period?  Add that number to your down payment, and you have what your total cost is for that property.  Once you start with positive CF, how much will it be per year?  Divide the total cost, by the positive CF/year.  Add that number, to the 5 years it will take to get to that point, and that tells you how long it will take before you can start making a profit.

...and no, the equity built up from appreciation doesn't offset this accumulated loss. Your losses are liquid losses, and they impact you directly...and now. The equity you are gaining through appreciation, which should cost you nothing, now costs you. That should never happen. Appreciated equity gains are gifts to you. Once you start paying for them, they become a cost...and to use your own words, a "wash". If you have to pay for it, there's no gain.

Just a few thoughts: A $100 per month cash flow can "disappear" quickly into unexpected maintenance and/or capex expenses. A furnace/AC or sewer expense can eat up all 5 years worth of "profits." Not sure a deal this tight is going to improve your financial position unless you hit a zone of high appreciation. What makes you think the part of FL you are investing in will appreciate? What concrete facts are you relying on in believing the property will appreciate? Also, if you are borrowing from your 401k you are paying interest to yourself (unless there is some kind of administrative expense in your calculation). Unless you need the cash right now, these are forced savings and not a genuine cost.

@Darius Ogloza Thanks for your thoughts.  Yes the 401k repayment and interest is to myself, no administrative expenses.  I agree with you on the deal being tight.  I am basing the appreciation potential on the last 10 or so years of history and I know I can't rely on it.  

I don't need the cash flow right now.  I like your term "forced savings", that is what I was trying to say.  At the same time I am struggling to overcome Joe's point about having to pay for the potential appreciation now.  I know I should be getting positive cash flow on a deal but it confuses the matter that I am loosing the cash flow back to my retirement account for 5 years.

Every investment entails some degree of risk.  We all have different tolerances for risk.  I personally have gone through periods of negative cash flow with several of my real estate investments over the years.  Some fizzled out, and I found myself working hard to try to break even to preserve my sense of self-respect.  Some, however, succeeded spectacularly.  Location matters greatly.  A fixer rambler bought in Marin County for $400K-$450K in 1997 will, in the current market, sell for about $1.4 - $1.8 million, likely in 5-7 days on market.  All cash, no contingencies is standard.  It will generate $5,000-$6,000 in monthly rent in the mean time - about $48,000-$60,000 per year over property taxes and insurance).  Back in Northwest Ohio, where I rented a 1 bedroom for $300/month in 1985, I hear people are paying $400/month now for that single bedroom apartment. Go figure.

Dan,

You might want to find a rental where the seller will do owner financing. Our investors love those deals! We just got an investor in a house for $10k down. He's paying a total of $55k for it and getting $1100 a month in rent. He pays the seller $500 a month and that includes insurance and taxes. So after taking into account vacancy, property management and maintenance, he's netting $330 a month. He has a 5 year term, so he has plenty of time to buy outright, if he wants to. But seller financing, (subject 2), can be a great way to get started with little money upfront. In this example, IF you saved the $330 cash flow each month, you'll have the house paid off at the end of 5 years and don't need to come out of pocket. So deals like this can be a win win. Best of luck.  

Many rentals in high markets negative cashflow unless you put more than 20% down. Yet, investors keep buying them! Why? Because the investors are betting on appreciation to exceed the cashflow losses.

Other investors buy lower priced properties that cashflow, but may appreciate slowly if at all.

Know your market and what your risks are, so you can make the best decision for yourself.