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

107 Replies

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.

@Nathan Yarnell When I learned from Robert Kiyosaki he would say “I want it all - cash flow, appreciate, and tax benefits- all of it”. I follow that and it’s smart. One HVac issue and your cash flow could be wiped out for a year - if you have cash flow… if not, you’re just coming out of pocket. So, that agent is 100% wrong. :)

@Nathan Yarnell

1st off the logic of that agent is ludicrous why should you not care about cash flow. Although yes there are other reasons to invest there still are so many cash flow deals that include the other reasons so why not get that as well. And if you don't cash flow its a terrible deal. Also when looking to invest and picking and area you should know already what your looking for and care for in a deal and don't trust the agent to tell you what to care about, remember the agent wants to sell cause that's how they make money, always take what agent says with grain of salt.

@Naftali Green

Thanks for the input, yup I’ve lived in the area the majority of my life and have been researching thoroughly the last 6 months. I was really taken back when I received her email, that’s why I thought I’d ask the smart people of BP if I was missing something!

Find someone who is honest and will tell you the good AND the bad about rental property!! NEVER, EVER, EVER believe what anyone else says about a property!! Most folks are in this for themselves and very few will be very honest! Find someone who will give you the good things about rental units and the bad! Yes, the good is awesome but the bad can hit you like a ton of bricks if you are not prepared for it!! There are 3 rules to investing, 1 never lose money, 2 never lose money, 3 never lose money. You can always message me and I will be glad to give you the pitfalls that I have faced and yes there are some BUT it is way worth it!!

If anyone ever tells you that real estate is all rosy then RUN!! 

 Agents will make money when you buy it and will make it when you are tired of losing money and want to sell it in 6 months!!!   

Get a new agent that understands your goals. I am sure there are plenty right here on this web site that know your market. Or, revise your offer price. The asking price is only a starting point. After your underwriting, make the offer that works based on the actual operations of the property, not the pretend proforma.

From what I'm seeing "investments" sell for on the market today I believe that some "Investors" are betting highly on appreciation and tax benefits as well. My guess is that they are taking on risk and not accounting for expenses, management, repairs, vacancy. It's absolutely frustrating. More power to them...

@Nathan Yarnell

I under contract on a single family rental with plan to demolish and build a multi family on the lot. While waiting for approvals the single family

is going to cashflow. It didn’t matter if it didn’t I would have built that into my numbers but this gives me options.

Unless you’re in a high appreciation market or have a net worth high enough to absorb that loss I would say no go. Also it’s not really your agents position to tell you about the tax benefits. They should help you through the process snd advise you on price. That agent is out of line in my opinion and it’s a good thing you didn’t blindly follow!!

@Nathan Yarnell

Tax benefits, net operating income, depreciation, and appreciation should be considered when evaluating a purchase of real estate. Increase in net worth vs cash flow should also be evaluated. Financing and interests rates are very important in RE purchases and can increase yield.

I believe investments should provide value and profit immediately if not sooner.

Your lifestyle is based on cash flow, determine what lifestyle you want and when and the rest will fall in line.

@Llewelyn A. This to me is the most complete and correct answer. Just put a little more down and it cash flows, or maybe the down payment is 5% so it doesn’t cash flow but otherwise it is a great deal, which is why people look at net operating income when comparing deals, then layer in the financing component. This is more of a general comment and it is possible that the deals she is presenting are stinkers regardless.

@Nathan Yarnell Especially for you just starting, I believe the best advice is to make sure it cash flows well. Leave the speculation to those with big cash reserves that are able to be without a chair when the music stops playing. Could you take the risk? Yes. Would it most likely cashflow and be a good property in the future? Yes. But again, if you buy with this criteria you better hope you're already "set" or have multiple exit strategies when the music stops. It's easy to forget the hardships that happened years ago, especially when the market hasn't done much but increase in most of our lifetimes. 


To the point of "the investor makes the property cashflow". I agree, but then that's where you COC comes into play. What return are you willing to deal with the headache for? 5%? 8%? 12%....To each his/her own...

@James Barnes Thanks for the input! My thoughts exactly, since this is my first property/properties, I’m really being conservative with my analysis and numbers. And I understand I’m not gonna hit a home run starting out, but also just don’t want to start out in a hole if I can avoid it!

@Nathan Yarnell tax benefits are great if you have lots of income but they will not put any food on your table. If you are losing money of $175 a month I wouldn't do it. Sounds like your realtor is not a real estate investor, and is interested in her commission more that your livelihood.