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

107 Replies

Originally posted by @Nathan Yarnell :

So I recently was sent 2 possible duplexes to purchase from an agent I trust. I ran the numbers using the basis Brandon lined out, and the properties comes out to a negative monthly cash flow by about $175 per property . I told the agent I had to pass, and gave her the reasons why. I got a follow up email that was considerate and agreed with my assessment but also stating that people get to caught up on “monthly cash flow, and should consider the yearly tax benefits.” Being that this would be my first investment, am I being too picky? I’m not looking for a crazy cash flow, $150/$200 a door, I just don’t want to be negative. Thanks for any input!

I'd take a BIG pass on loosing money. Appreciation, mortgage pay down, and tax benefits are icing on the cake. 

I'd find a new agent too...

Originally posted by @Will Strozier :

@Michael E.

How much should you calculate for vacancy collection/ operating expenses to get you NIO to apply a rate

It depends on your area and the property. The BP calc says 5%-15% is the general range for CapEx, repairs and vacancy. The best way to know what they are for the area you're looking in, is to ask your rockstar agent (hopefully you have one of those), what's typical for that area. You could also ask other investors (BP members love to help) that own property in the same area what are their typical expenses.

Hope that helps and good luck!

I think alot of people are wanting killer deals that are turn key and on the MLS. which is very hard to find and if you do you will need to act quickly. As I help first time investors I say do not worry much about cash flow as the first deal may be a little worse cash flow wise but it gets you in the game. That being said I would never recommend buying something negative cash flow. The two things I would suggest is shop around to see if you could improve your loan terms in your calculations and find a price it does cash flow and tell your agent you would be interested at that price.

Originally posted by @David Dachtera :

@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 ...

 Thanks David, that’s very informational!

Originally posted by @Jared Hottle :

I think alot of people are wanting killer deals that are turn key and on the MLS. which is very hard to find and if you do you will need to act quickly. As I help first time investors I say do not worry much about cash flow as the first deal may be a little worse cash flow wise but it gets you in the game. That being said I would never recommend buying something negative cash flow. The two things I would suggest is shop around to see if you could improve your loan terms in your calculations and find a price it does cash flow and tell your agent you would be interested at that price.

 Thanks Jared, that was my initial reaction, was how to make it a better deal. Then I started considering what she said, and thought I’d ask all of BP, I appreciate the input!

Find a broker/agent that is already a multi-millionaire and owns real estate to work with. Now if you are just starting out will be harder because that type of broker is in demand and established in their field whether for residential, commercial, etc. They likely are picky who they take on for new clients. Ones buying smaller properties or starting out will ask lots of questions for a smaller return.

So the question becomes to try and find the best broker/agent you can for the deal level and stage of your investing career you are at.

Just remember if only buying on potential and that potential never materializes then can be a big waste of time.

Another benefit to a wealthy broker/agent is they like doing transactions to help clients and for the ART of the deal. They do not need to live off of transactions so can tell you point blank this a POS you shouldn't buy it. On the commercial side I love telling clients what I think. I own my company and do not have to work. I can give them my unfiltered opinion and thoughts because I do not live transaction to transaction. Brokers and agents that have to stack deals to live off of the income it provides are caught in a vicious circle with no end in sight. They can often struggle with giving their true opinion versus making a sale to feed their family and keep the lights on one more week.     

Originally posted by @Joel Owens :

Find a broker/agent that is already a multi-millionaire and owns real estate to work with. Now if you are just starting out will be harder because that type of broker is in demand and established in their field whether for residential, commercial, etc. They likely are picky who they take on for new clients. Ones buying smaller properties or starting out will ask lots of questions for a smaller return.

So the question becomes to try and find the best broker/agent you can for the deal level and stage of your investing career you are at.

Just remember if only buying on potential and that potential never materializes then can be a big waste of time.

Another benefit to a wealthy broker/agent is they like doing transactions to help clients and for the ART of the deal. They do not need to live off of transactions so can tell you point blank this a POS you shouldn't buy it. On the commercial side I love telling clients what I think. I own my company and do not have to work. I can give them my unfiltered opinion and thoughts because I do not live transaction to transaction. Brokers and agents that have to stack deals to live off of the income it provides are caught in a vicious circle with no end in sight. They can often struggle with giving their true opinion versus making a sale to feed their family and keep the lights on one more week.     

Thanks Joel! To be fair, I don’t think she had any malicious intent or was trying to screw me over. After reading the mentions and replies I just think she knows her niche and our goals just don’t align. I appreciate the advise on looking for the type of agent/broker you mentioned, and I’ll for sure be researching for local ones near me, thanks for the input! 

Yes when I have potential commercial clients submit a form on my website we ask lots of questions to gather information. Then based on that information after the form is submitted I decide whether further research is needed to hop on a phone call to see if they would be a good fir for my ideal client I look for.

If they are not a match I wish them well. I think one of the biggest mistakes is investors and brokers/agents alike do not define their IDEAL VISION for what they want their life and business to be. Instead they just take leads as they come in and see what they can try and make somewhat work.

By defining and saying NO a lot you get to better opportunities you can say YES to. You have to be patient and work the system and processes you put in place. I would rather buy 5 home run properties over a year then buy 10 but some of them lost money, some broker even, some did good buy not great, and a few did amazing. I do not want to create extra work that is not needed that drains my energy and time for a marginal return.

@Nathan Yarnell negative cash flow is not neccesarily a problem but it limits your scalabilty. There is a point where you cant afford to buy negative cash flowing properties. Also it prevents from saving up money for capex and future investments.

The tax benefits get limited if income is too high and are meaningless if your income is too low so you have to be in the sweetspot. Then it is only a deferral not a true reduction, so don't factor it in. Consider it a bonus if it materializes.

Negative cash flow is ok in high appreciation markets if you can afford it, even when vacant (high income or deep reserves). I recommend against it for those starting out. A small mistake or random event takes a negative $175 and become negative $400, better to be positive $175 and then end up negative $50.

When you have many positive cashflow properties you can have a negative few as long as in total of all the properties is positive.

Hope this helps.

Originally posted by @Ken Naim :

@Nathan Yarnell negative cash flow is not neccesarily a problem but it limits your scalabilty. There is a point where you cant afford to buy negative cash flowing properties. Also it prevents from saving up money for capex and future investments.

The tax benefits get limited if income is too high and are meaningless if your income is too low so you have to be in the sweetspot. Then it is only a deferral not a true reduction, so don't factor it in. Consider it a bonus if it materializes.

Negative cash flow is ok in high appreciation markets if you can afford it, even when vacant (high income or deep reserves). I recommend against it for those starting out. A small mistake or random event takes a negative $175 and become negative $400, better to be positive $175 and then end up negative $50.

When you have many positive cashflow properties you can have a negative few as long as in total of all the properties is positive.

Hope this helps.

Thanks Ken, that makes a lot of sense, I appreciate the input!

@Nathan Yarnell

Ask her to send you something that has a better ROI and see what she comes up with. Next, figure out what CAP rate you require and look for properties that fit the bid. Just know that the higher rates of return usually mean that a property is either not in great condition or not in a great area.

Originally posted by @Michael K. :

@Nathan Yarnell

Ask her to send you something that has a better ROI and see what she comes up with. Next, figure out what CAP rate you require and look for properties that fit the bid. Just know that the higher rates of return usually mean that a property is either not in great condition or not in a great area.

 Thanks Michael, appreciate the info!

@Nathan Yarnell

Negative cash flow is great if you need to loose money to make the books work in your favor.

I like making money, and taxes are not totally out of line for me right now.

When I get more properties this may change.

Originally posted by @Daniel Smyth :

@Nathan Yarnell

Negative cash flow is great if you need to loose money to make the books work in your favor.

I like making money, and taxes are not totally out of line for me right now.

When I get more properties this may change.

 Thanks for the information, yeah not where I’m at in my journey yet!

ALL RENTAL PROPERTIES HAVE TAX BENEFITS. When you find that deal that cashflows it will have the same tax benefits as the weaker deals she is presenting. Tax benefits are a reason to buy investment property in general, not a reason to buy the two negative cashflow deals presented to you. 

Unless you're running very conservative expenses or putting very little or no money down (0% VA Loan for example) you should not buy deals that don't cashflow. The one exception I'd make is the VA loan and certain FHA loans - you put so little cash into the deal that expecting it to cashflow on day one in the 2021 market may not be achievable.

If she pivots and the next deal she sends is better I'd keep working with her though. Sometimes agents send properties without thoroughly analyzing them (we're busy too!) but that should be more of an exception than a rule.  If she continues to send you bad deals and push you to buy them start shopping for a new agent.

Originally posted by @Michael Haas :

ALL RENTAL PROPERTIES HAVE TAX BENEFITS. When you find that deal that cashflows it will have the same tax benefits as the weaker deals she is presenting. Tax benefits are a reason to buy investment property in general, not a reason to buy the two negative cashflow deals presented to you. 

Unless you're running very conservative expenses or putting very little or no money down (0% VA Loan for example) you should not buy deals that don't cashflow. The one exception I'd make is the VA loan and certain FHA loans - you put so little cash into the deal that expecting it to cashflow on day one in the 2021 market may not be achievable.

If she pivots and the next deal she sends is better I'd keep working with her though. Sometimes agents send properties without thoroughly analyzing them (we're busy too!) but that should be more of an exception than a rule.  If she continues to send you bad deals and push you to buy them start shopping for a new agent.

Thanks Michael, those are some great points. She had set me up a mailing list a while ago, and I would just analyze those and not bring them up, but these two were off market deals from a fellow agent. So I made a  point to really go through them and email her back. But I know she’s busy and appreciate the interactions we’ve had, I was just very confused at her kind of push back at my reason for not being interested in the properties ( the negative cash flow).

I would imagine you two had a conversation about what your investing goals were before you started looking at properties together? If so, he/she should be very clear whether cash flow is an important metric to you and whether or not you have other income you're looking to offset via taxes. If you spelled those things out and this was their answer anyway, I'd find another agent right away. This sounds like an agent more interested in pushing you into a purchase than helping you find a purchase that is right for you. Most agents are not investors themselves so they're not equipped to offer you advice on your investing strategy. Find someone who is an investors, works with investors, and thinks like an investor thinks.

There are a couple things.  The agent wasn't all wrong but there is much more to the picture.  The agent was clearly not an investor agent.  Right now interest rates are super low so I have clients buying now even though it is a little short on positive cash flow but knowing that they will raise rents in the next year, reduce expenses and in the long run they will be just fine.  Another thing to keep in mind is that if you are financing the property and the income covers operating expenses and the interest on the loan you are breaking even.  If you have to contribute to the principle of the loan then you are just moving money from one account to the other.  If you are negative on cash flow by ~$100 and the property is financed then chances are your just contributing money towards the equity of your property.  This isn't a bad thing and after you reduce expenses and raise rents you still have that cheap 30 year money.  

Cheers,

@Nathan Yarnell

I would like to offer you a different perspective than almost all the posts you will read in reply to your situation.

Imagine you bought this property all cash. Will the Property Cash Flow? YES! That's a Cash Flowing property!! AMAZING!

Now, back to your situation. If you are financing the property and it will NOT Cash Flow, WHAT?! That's a Negative Cash Flowing Property!

WAIT... is this a Positive or a Negative?! It's so confusing?! Right?!

NO... the point is that the characteristics of Cash Flow for an income producing Asset that may or may NOT be financed should NOT be on the Asset.

It's not the Investment that Cash Flows... it's the INVESTOR that Cash Flows the properties.

I have bought most of my properties where I decided to allow the properties to break even or maybe slightly cash flowing initially.

HOWEVER, I have been buying in Brooklyn, NYC for 23 years and own approx. $20 Million in RE today.

Today's Cash Flow FAR exceeds any break even or negative cash flow I initially have had when I originally purchased the property.

I will say that generally, when someone tells me that a Property is Negative Cash Flowing which is a bad investment, I generally don't correct them that it's the INVESTOR that Cash Flows the Investment. Not the other way around.

It's difficult to change the confirmation bias for those that only see the Investment as either cash flowing or not. So I am reserved in my opinion and just continue to out perform many Cash Flowing biased Investors.

Regardless, you should make your own decision, but do it being well informed and not getting just one side of the equation.