Agent said not to worry about cash flow and consider tax benef

107 Replies

Originally posted by @Joe S. :

How fast this area appreciating? Can you pull out of negative cash flow if the tenant renews and you go up the rent little in a year? Is $175 a big deal for you per month? 

 It’s in Lawrence, so a college town, average appreciation. I mean negative money is not optimal

Everyone, and I mean everyone, expects some sort of cash flow. I don't care about a tax benefit. If you're tying up money for the down payment and closing costs and coming out of pocket every month, is it really a tax benefit? Your realtor is looking for a sale and nothing more.

Markets like LA and Manhattan are appreciation markets where investors don't make cash flow a top priority and even they net 5-8% COC year one.

Yeah, that is the wrong agent! If they know you're a REI and arent concerned about helping you find cash flowing properties, then they're the wrong. My personal take is the first thing they should ask is what is criteria (ie are you a 1 percenter? what ROIs do you want? etc)

It would be nice to like your agent, but it would be best for them to help you make good money, so you can keep buying. I absolutely feel RE is going up, but I do not know that with complete certainty. So, I would not recommend you buy something going in with a loss especially if you're new AND you intend to keep buying. In my area, I'm having to invest $60-120k per property. I don't focus on profit per door, more so cash on cash returns. My husband and I make good money, but I still hate the idea of buying something where I saved that much cash to get a negative return. The lowest I will go is 9% cash on cash, comfortably 15-20%. Also, check in your area if you are using those duplexes to their highest and best use. You might get higher profit via airbnb or being creative.

Originally posted by @Timothy Hero :

Everyone, and I mean everyone, expects some sort of cash flow. I don't care about a tax benefit. If you're tying up money for the down payment and closing costs and coming out of pocket every month, is it really a tax benefit? Your realtor is looking for a sale and nothing more.

Markets like LA and Manhattan are appreciation markets where investors don't make cash flow a top priority and even they net 5-8% COC year one.

 Thanks for the input!

Originally posted by @Michael Koch :

Yeah, that is the wrong agent! If they know you're a REI and arent concerned about helping you find cash flowing properties, then they're the wrong. My personal take is the first thing they should ask is what is criteria (ie are you a 1 percenter? what ROIs do you want? etc)

 Thanks, and yeah we’ve been communicating for a while and none of those questions came up, just price range…

Originally posted by @Grey Stone :

It would be nice to like your agent, but it would be best for them to help you make good money, so you can keep buying. I absolutely feel RE is going up, but I do not know that with complete certainty. So, I would not recommend you buy something going in with a loss especially if you're new AND you intend to keep buying. In my area, I'm having to invest $60-120k per property. I don't focus on profit per door, more so cash on cash returns. My husband and I make good money, but I still hate the idea of buying something where I saved that much cash to get a negative return. The lowest I will go is 9% cash on cash, comfortably 15-20%. Also, check in your area if you are using those duplexes to their highest and best use. You might get higher profit via airbnb or being creative.

 Thanks, those are some options I hadn’t considered!

@Nathan Yarnell It's not often but there might be specific situations where it might make sense to buy a property with "neutral" cash flow...but that would be really personalized advice that needs to come from someone who knows the tax code as well as your entire financial picture inclusive of your taxes and any retirement plans.

While real estate agents do provide a valued service, that is simply not what they are trained to do...their function is to help you transact a home purchase. Any advice given by them is not coming from their actual training, it's generally coming from their experience or thoughts; which means it's just one person's opinion. Not sure about you, but I've heard a lot of different unsolicited opinions in my lifetime and many of them are about as valuable as what I've paid for them.... Don't just assume that just because they help buy/sell houses, that they can be relied upon to know anything about personal finance or investment.

Originally posted by @Sunil Kurian :

@Nathan Yarnell It's not often but there might be specific situations where it might make sense to buy a property with "neutral" cash flow...but that would be really personalized advice that needs to come from someone who knows the tax code as well as your entire financial picture inclusive of your taxes and any retirement plans.

While real estate agents do provide a valued service, that is simply not what they are trained to do...their function is to help you transact a home purchase. Any advice given by them is not coming from their actual training, it's generally coming from their experience or thoughts; which means it's just one person's opinion. Not sure about you, but I've heard a lot of different unsolicited opinions in my lifetime and many of them are about as valuable as what I've paid for them.... Don't just assume that just because they help buy/sell houses, that they can be relied upon to know anything about personal finance or investment.

 "Neutral cash flow"?

That's like saying there's a difference between driving off a cliff or crashing in a plane.

She should not be offering up tax advice. Right now I am seeing a lot of multi-family (Duplex) investors cashing out. When I run the numbers they don't make sense for new investors except maybe for house hacking. If you can't do a value add and raise the rents significantly then move on.  

@Nathan Yarnell It is completely normal to be hesitant about purchasing your first rental. It doesn't matter what market you're in, it never goes away (especially in Columbus).I would say your cashflow door to door is where it needs to be. If you go over 200$ your setting false expectations for the market. I would say a duplex would be your best bet as well, but also stay open to SFH. SFH can fluctuate faster than duplex's in some sub-markets. Some acquire equity faster than others, plus they can be easier to cash out refi. Either way, 150-200 is a good goal to have door to door and use your own judgement. Don't trust a realtor's judgement over your own knowledge. Feel free to reach out to me if you any questions! Happy Investing!

@Nathan Yarnell

Don't worry if you're business loses money you get tax benefits.

Sounds like the sales man is selling you.

Even the agent your working with is trying to sell you. They are looking out for their best interest not yours.

Stick to your guns, if it loses money the tax benefits don't matter because you can turn a profit by avoiding taxes on money you didn't make.

Originally posted by @Clay Boykin :

@Nathan Yarnell It is completely normal to be hesitant about purchasing your first rental. It doesn't matter what market you're in, it never goes away (especially in Columbus).I would say your cashflow door to door is where it needs to be. If you go over 200$ your setting false expectations for the market. I would say a duplex would be your best bet as well, but also stay open to SFH. SFH can fluctuate faster than duplex's in some sub-markets. Some acquire equity faster than others, plus they can be easier to cash out refi. Either way, 150-200 is a good goal to have door to door and use your own judgement. Don't trust a realtor's judgement over your own knowledge. Feel free to reach out to me if you any questions! Happy Investing!

 Thanks Clay! I appreciate the offer!

Originally posted by @Jeremy Komer :

@Nathan Yarnell

Don't worry if you're business loses money you get tax benefits.

Sounds like the sales man is selling you.

Even the agent your working with is trying to sell you. They are looking out for their best interest not yours.

Stick to your guns, if it loses money the tax benefits don't matter because you can turn a profit by avoiding taxes on money you didn't make.

 Thanks Jeremy, that’s what my intuition was telling me, just thought I’d put it out in here and get advice from people with more experience!

As an investor I would not buy a property with negative cash flow. Even though what I have bought this year is not as deep green compared to what I was able to buy ten years ago (yeah, if I could go back..). Slight positive is the least I require on a higher price point property. Your need for cash flow decreases as your portfolio grows, but in the beginning it's all about CF.

Make sure your rents are correct; underestimating rents is a common issue and most agents don't know much about rents.

Also, you can only buy the best deal your market will allow. So I would go and look at recently sold properties and see where that benchmark is. This way you know you are not chasing a ghost.

@Nathan Yarnell the biggest issue with no cash flow is you get stuck in a debt to income ratio trap where you can't buy more property. This is a bigger issue than just a couple $100. Fannie and Freddy only look at 70% of the rent towards your next property so you gdt stuck. I tried to move from an apartment I would be getting $1,500 a month once I left to a condo that would cost me $1,250 and they said I couldn't cause of cash flow. I would have had a surplus per month and was turned down. Place went from $153,000 to $325,000 in three years and cash flow is what killed it.

A different perspective than all about cf if you're in an expensive market or are in more of the capital preservation stage is to buy for equity capture. 

With enough equity going in and a clear strategy (not buy and hope), I'll take a non-cashflowing asset all day.

$175/mo is really close.  Is there a PM in there?  Most of my op expenses run about 36% self-managed, 50% with a PM. 

Originally posted by @Marcus Auerbach :

As an investor I would not buy a property with negative cash flow. Even though what I have bought this year is not as deep green compared to what I was able to buy ten years ago (yeah, if I could go back..). Slight positive is the least I require on a higher price point property. Your need for cash flow decreases as your portfolio grows, but in the beginning it's all about CF.

Make sure your rents are correct; underestimating rents is a common issue and most agents don't know much about rents.

Also, you can only buy the best deal your market will allow. So I would go and look at recently sold properties and see where that benchmark is. This way you know you are not chasing a ghost.

Appreciate that Marcus, that’s why I’m concentrating on that location. Feels like I have a good grasp on rents, but I’ll do more research to verify! 

Originally posted by @Steve Vaughan :

A different perspective than all about cf if you're in an expensive market or are in more of the capital preservation stage is to buy for equity capture. 

With enough equity going in and a clear strategy (not buy and hope), I'll take a non-cashflowing asset all day.

$175/mo is really close.  Is there a PM in there?  Most of my op expenses run about 36% self-managed, 50% with a PM. 

 I put a PM in when I ran my numbers, even though I plan on managing it for the time being. I don’t want to get stuck having to manage a property to make the numbers work though.

@Nathan Yarnell ,

Either your agent is not an investor or the deal may makes sense for her ... not necessarily for you.

Remember: for deductions to make sense, you must have the income to offset using deductions. Perhaps you can carry deductible losses forward to a point (ask your financial professional - I'm not one, and this is not financial advice).

That said, if you can work the numbers so you know what price point you must have to break even or be slightly positive, you can then consider ways to either force appreciation or reduce expenses, or both. That price point gives you a negotiating target to work toward with the seller.

My $0.02 ...

Not much tax benefits if this is your first rental property. I could see this being valuable if you had 10 properties and the appreciation was going to be worth it over the next few years, but I would say lose the agent. If your goal is cash flow and they are trying to fight for you to get a negative cash flowing property for the tax benefits, doesn't really sound like they want you to win starting out.