Negative Cash Flow on Low Money Down

Member since 2021 · 31 posts · 11 votes

Hello BP community. I'm looking to get into my first ever property as a live in duplex with a 3.5% down FHA here in Chicago (McKinley Park, Bridgeport, or Pilsen) The problem I am running into is that any properties I analyze on the MLS will not cash flow even after I am moved out and the property is fully rented. I feel that this is due to higher mortgage payment and mortgage insurance with my 3.5% down (a lot of them would cash flow fairly well with 20% down and no mortgage insurance.)

My question would be, would it ever be wise to take a deal with negative cash flow that I could cover with my personal finances as a trade off for not having the capital now to put down 20%? Or better off to wait and continue building a better down payment / look for off market deals? To be fair, I have not put effort into finding an off market deal at this point.

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

And now a word from the other side of the aisle.

1)While you were househacking, assuming this is the kind and price of place you would rent anyway, you are several hundred per month better off as you are paying down your mortgage instead of your landlords.

2) By the time you move out/move on I’m going to assume rents will rise at least $100/mo per side so you are cashflow even. If you don’t think rents will rise, don’t buy.

3) the reason this property isn’t cashflowing, as you said, if because of your low downpayment. BUT, the same people who say not to buy it because it’s not cashflowing would call you dumb for paying extra towards your mortgage. But putting more down is exactly that, paying more towards your mortgage.

4) you’re getting a better internet rate for the next 30 years because you’re living in it now. That will save you $10’s of thousands of dollars.

5) you’re paying off at least $210/mo towards your loan, so while you’re cashflow negative you’re still making a profit. If this was an interest only loan and it broke even you’d be in the same spot.

6) one of my best investments now is a townhome on the lake that cashflowed negative $900/mo for 7 years. it was making a profit of about $10k/year the first year and now that it’s paid off it makes over $20k/year, all cashflow. This is the same tenant for 7 years. Probably 4 phone calls. A new garage door opener, a fridge and a leaky faucet.

If this is your only way to get in to real estate and are confident you can afford it. I don’t think anyone on BP thinks interest rates or prices will be lower in 5 years. Prices could easily increase faster than you can save more for a downpayment.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
No
10 Reply
Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
4y
If a deal doesn't cash flow today, there is no guarantee it will cash flow tomorrow. Yes rents go up over time, but it doesn't make sense to lose money every month while waiting for appreciation or rental increases that may or may not come.
That was just a long way to say no.
4 Reply
Paul De Luca
Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
4y
@Bryce Renicker
You should not buy a property if it does not cash flow once fully rented. You should be able to find properties that cash flow once fully rented using FHA financing but it sounds like you may need to adjust your criteria. You also need to make sure you're estimating rents correctly because if you're off by even $100-$200 that can make or break your decision to buy. Are you sure you're not overestimating expenses too?
3 Reply
Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
4y
Negative cash flow is not smart investment wise. If you plan on living on one side of a duplex it makes sense to have rent coming in to cut your living expenses but it would not be smart to buy properties for the sole reason to invest if its actually going to cost you money every month. What happens if the market starts to slide and you end up having zero or negative equity in the house? You wouldn't even be able to get out of the property because you owe more than its worth on top of the monthly bills exceeding the rent. A situation like this could wreck you financially. Don't jump into a nightmare just because you can't wait for the right deal, it could end your real estate investing career early.
You could also look for a partner who has the cash to put down 20% and use private money to finance the deal. It's easy to add partners to hard money loans. Open an LLC to spilt up the company as you wish. This would allow you to use someone else's money and credit to get into the investing game.
[email protected]413-348-8346
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3 Reply
Jonathan KlemmBusiness Member
Moderator
Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
4y
@Bryce Renicker - Probably not the best idea unless you are in no need of the cash flow. I'd want a decent amount of reserves on the side.

That was always my play in Chicago as well. Find good buildings, Full rehab them to eliminate cap-ex as much as possible, in A areas, that barely cash flow, but have done great over the long term appreciation. I also had a very stable high-income W2 job so was fine getting hardly any cash flow.
You see a lot of high nets worth people take little cash flow just for all the great tax benefits and long-term appreciation bet.
Regardless I'd highly recommend getting into the game as fast as possible.
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3 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Well, if you need the income (from the cash-flow) then No. But if you think these properties will appreciate well over the next few years, then a possible Yes..
2 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
@Paul De Luca thanks so much for the reply. I want so badly to jump into a deal to get my feet wet but that voice is telling me that negative cash flow is a deal breaker. Here’s a deal I’m looking at now in Bridgeport
Purchase price: 340000
PIMI + Tax: 2125
Water: 200
Common electric: 150
Property manager: 290 (10%)
Vacancy: 145 (5%)
Maintenance: 2O0 (7%)
Rent: 2900 (year one)

Negative cash flow = $210
I can eliminate property manager fee and self manage for the next few years and be positive $80 cash flow but it feels like a squeeze.

Thanks so much for your perspective
2 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
@Jonathan Klemm thanks so much for your reply! Yes I feel like I’m in a similar situation where I don’t see anything cash flowing anytime soon but I have a good and stable income that I could pretty easily cover the negative cash flow so it’s just tempting to jump in, but don’t want to sink myself down the road. I laid out my analysis in the above comment if you would care to take a peak at my numbers! Thanks Jonathan. PS - hope to be at one of your meetups with A/N mortgage soon!
1 Reply
Paul De Luca
Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
4y
Originally posted by @Bryce Renicker:
@Paul De Luca thanks so much for the reply. I want so badly to jump into a deal to get my feet wet but that voice is telling me that negative cash flow is a deal breaker. Here’s a deal I’m looking at now in Bridgeport
Purchase price: 340000
PIMI + Tax: 2125
Water: 200
Common electric: 150
Property manager: 290 (10%)
Vacancy: 145 (5%)
Maintenance: 2O0 (7%)
Rent: 2900 (year one)

Negative cash flow = $210
I can eliminate property manager fee and self manage for the next few years and be positive $80 cash flow but it feels like a squeeze.

Thanks so much for your perspective

How many units in the building? How many beds/baths?

0 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
@Paul De Luca it’s a 2 unit with 2Bed/1bath each. Rehabbed in 2016 with fairly nice finishes and appliances. Parking in back yard with gate, I would be interested in adding a garage at some point!
0 Reply
Daniel SmythPro Member
Rental Property Investor · Rockford, IL · Member since 2019 · 471 posts · 342 votes
4y
@Bryce Renicker
And another No!
I bet this place has a personal hold on you, doesn't it? We all get that!
Just before Covid was made a money tree by our president as he declared a national Emergency, I found my 2 homes that were just perfect!
They cash flowed, but just barely. Nothing like what Brandon suggests in the webinars, but what does he know? I was going to be smarter!
Thankfully a lender relative backed out after the president gave his address, and the properties didn't cash flow at all.
I just about did it anyway. I have some cash. I am a Carpenter, and I can do the work for free!
Brandon won me over by yet another webinar of coming sense! Thank you Brandon!
No one knew that my tenants would have rented for free just a month later. I would have list big!
Minimum cash flow after all debits and expenses should be at least $200.00 or walk!
I do the same for duplexes. Every residence needs to put $200.00 clear in the jar or its not a deal for me!
Do this:
Find that number that works for you.
Say the property is selling fir 100k firm and you just love it
You use the calculators and get someone else in the business to look over what you end up with.
What ever that number, even $50k, you send THAT as your offer.
If it is gone in two weeks you win.
If still unsold, send that offer again unless it needs to be reduced.
You have nothing to loose by working with at least ESTIMATED positive cash flow.
Good luck.
[email protected]
1 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
@Daniel Smyth thank you so much for your perspective!! You are exactly right the property does have a bit of a hold on me, but more than anything its probably just my impatience!
Here's the crazy thing on this property... its listed at 370 and Im running my numbers assuming I could get it at 340, and without calculating property management to the equation. With property management included and to get $200 cashflow... I would need to get the property at 255K!! Seller purchased it 1.5 year ago at 290. Maybe time to consider long distance investing..
1 Reply
Eric Selhorn
Member since 2021 · 13 posts · 7 votes
4y
Is $2,900 rent for just one of the two units? Would you also rent out the second bedroom in the unit you live in?
1 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
And now a word from the other side of the aisle.
1)While you were househacking, assuming this is the kind and price of place you would rent anyway, you are several hundred per month better off as you are paying down your mortgage instead of your landlords.
2) By the time you move out/move on I’m going to assume rents will rise at least $100/mo per side so you are cashflow even. If you don’t think rents will rise, don’t buy.
3) the reason this property isn’t cashflowing, as you said, if because of your low downpayment. BUT, the same people who say not to buy it because it’s not cashflowing would call you dumb for paying extra towards your mortgage. But putting more down is exactly that, paying more towards your mortgage.
4) you’re getting a better internet rate for the next 30 years because you’re living in it now. That will save you $10’s of thousands of dollars.
5) you’re paying off at least $210/mo towards your loan, so while you’re cashflow negative you’re still making a profit. If this was an interest only loan and it broke even you’d be in the same spot.
6) one of my best investments now is a townhome on the lake that cashflowed negative $900/mo for 7 years. it was making a profit of about $10k/year the first year and now that it’s paid off it makes over $20k/year, all cashflow. This is the same tenant for 7 years. Probably 4 phone calls. A new garage door opener, a fridge and a leaky faucet.
If this is your only way to get in to real estate and are confident you can afford it. I don’t think anyone on BP thinks interest rates or prices will be lower in 5 years. Prices could easily increase faster than you can save more for a downpayment.
13 Reply
Arlan Volquez
Investor · Providence RI · Member since 2020 · 4 posts · 3 votes
4y
@Bryce Renicker if you keep waiting by the time you have a higher down payment the price of the home is going to be higher. I will buy now and start building that equity that is going to help you to built your portafolio and probably your mortgage payment is going to be lower that the rent your probably are paying right now. The home will appreciate over time the rent increase over time.
3 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
You are beginning to sound emotional, and are rationalizing a bad deal into a good one. Walk, not check that, RUN away as fast as you can and don't look back.
Someone said it would be OK if your income could cover the negative CF. WHY? That's like saying, I have a full time job that pays me enough so I can go work a second job, and pay the employer for the privilege.
2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Arlan Volquez:
@Bryce Renicker if you keep waiting by the time you have a higher down payment the price of the home is going to be higher. I will buy now and start building that equity that is going to help you to built your portafolio and probably your mortgage payment is going to be lower that the rent your probably are paying right now. The home will appreciate over time the rent increase over time.

Fixing negative CF with a higher DP is just paying for all that negative CF upfront.
4 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
4y
Originally posted by @Joe Villeneuve:
Originally posted by @Arlan Volquez:
@Bryce Renicker if you keep waiting by the time you have a higher down payment the price of the home is going to be higher. I will buy now and start building that equity that is going to help you to built your portafolio and probably your mortgage payment is going to be lower that the rent your probably are paying right now. The home will appreciate over time the rent increase over time.

Fixing negative CF with a higher DP is just paying for all that negative CF upfront.

Agreed...everything cash-flows with sufficient capital up front. Also, and I don't mean to single you out Arlan because I'm speaking in general terms, but I'm pretty astonished at how everyone used to label investing for appreciation as gambling. Now, so many people are posting about appreciation. As someone who lives in Los Angeles and relies heavily on appreciation, I can tell you without any uncertainty that investing now and counting on short term appreciation in the current market environment is what I would call gambling. Unless you're an experienced value-add investor, counting on appreciation right now is not a good idea.
0 Reply
Brett G.
CO · Member since 2018 · 69 posts · 52 votes
4y
@Bryce Renicker
Never jump in to a deal just to get your feet wet, you may end up drowning. ALWAYS go with the numbers, never go with your emotions.
If the numbers don't initially work, can you make it a deal by creating some value that's not there now? If not, move on.
1 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
Originally posted by @Joe Villeneuve:
You are beginning to sound emotional, and are rationalizing a bad deal into a good one. Walk, not check that, RUN away as fast as you can and don't look back.
Someone said it would be OK if your income could cover the negative CF. WHY? That's like saying, I have a full time job that pays me enough so I can go work a second job, and pay the employer for the privilege.

Hey Joe thanks so much for the reply. I think what you are saying here makes a ton of sense. They way Im thinking of it is it allows me to get in to a deal with low money down, and the 200-300 dollars a month I may put into negative cash flow is a transfer or alternative to putting that or more into savings for a bigger down payment. With that I am speculating on the rents going up and eventually going cash flow positive. I know this is me just really trying to stretch my way into a not so great deal so I really appreciate your feedback!
0 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
Originally posted by @Bill B.:
And now a word from the other side of the aisle.
1)While you were househacking, assuming this is the kind and price of place you would rent anyway, you are several hundred per month better off as you are paying down your mortgage instead of your landlords.
2) By the time you move out/move on I’m going to assume rents will rise at least $100/mo per side so you are cashflow even. If you don’t think rents will rise, don’t buy.
3) the reason this property isn’t cashflowing, as you said, if because of your low downpayment. BUT, the same people who say not to buy it because it’s not cashflowing would call you dumb for paying extra towards your mortgage. But putting more down is exactly that, paying more towards your mortgage.
4) you’re getting a better internet rate for the next 30 years because you’re living in it now. That will save you $10’s of thousands of dollars.
5) you’re paying off at least $210/mo towards your loan, so while you’re cashflow negative you’re still making a profit. If this was an interest only loan and it broke even you’d be in the same spot.
6) one of my best investments now is a townhome on the lake that cashflowed negative $900/mo for 7 years. it was making a profit of about $10k/year the first year and now that it’s paid off it makes over $20k/year, all cashflow. This is the same tenant for 7 years. Probably 4 phone calls. A new garage door opener, a fridge and a leaky faucet.
If this is your only way to get in to real estate and are confident you can afford it. I don’t think anyone on BP thinks interest rates or prices will be lower in 5 years. Prices could easily increase faster than you can save more for a downpayment.

Hey Bill, man thank you so much for this detailed response. It is super interesting to hear this side of the story as I know that cash flow really is a super important factor. To be honest, the main reason I am even considering a deal like this is because I have heard multiple people on the bigger pockets podcast including BP hosts mention that they have had negative cash flow initially and made out ok in the long run. Of course this should not be the goal, but Im not seeing much of another option for an FHA deal within chicago proper that is not in a super dangerous neighborhood. To be fair, I should give finding an off market deal a bigger effort in the near future.

0 Reply
Bryce Renicker
OP
Member since 2021 · 31 posts · 11 votes
4y
Originally posted by @Tony Kim:
Originally posted by @Joe Villeneuve:
Originally posted by @Arlan Volquez:
@Bryce Renicker if you keep waiting by the time you have a higher down payment the price of the home is going to be higher. I will buy now and start building that equity that is going to help you to built your portafolio and probably your mortgage payment is going to be lower that the rent your probably are paying right now. The home will appreciate over time the rent increase over time.

Fixing negative CF with a higher DP is just paying for all that negative CF upfront.

Agreed...everything cash-flows with sufficient capital up front. Also, and I don't mean to single you out Arlan because I'm speaking in general terms, but I'm pretty astonished at how everyone used to label investing for appreciation as gambling. Now, so many people are posting about appreciation. As someone who lives in Los Angeles and relies heavily on appreciation, I can tell you without any uncertainty that investing now and counting on short term appreciation in the current market environment is what I would call gambling. Unless you're an experienced value-add investor, counting on appreciation right now is not a good idea.

Hey Tony thanks so much for your reply. Could you expound a bit more on your short term appreciation point? I know that appreciation is never a guarantee, but historically RE has always appreciated over time. Most of the research I have done so far has people (who know way more than me of course) saying that they don't for-see appreciation slowing too much and let alone below normal rates within the next few years. For perspective I would plan to hold any property I would acquire for the long term.
0 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
If you believe in inflation then you believe in rising rents and property values.

People love to gamble on cashflow even after an 18 month eviction moratorium. They have very short memories.

You have to be able to survive negative cashflow or you shouldn’t be investing in real estate. One bad water heater or ac unit can turn your whole year negative. Heck 1-2 months of vacancy can do the same.

Last two points. You’re already in a negative cashflow situation (renting). And if this is basically a retirement option most people have no problem with their retirement accounts having negative cashflow for 30 years while they gamble on stock appreciation.

Pa. As been said on BP many times. The rich members of BP pry got there with cashflow. The truly wealthy almost all got there with appreciation.
6 Reply
Bill F.
Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
4y
@Bryce Renicker I wish I could upvote @Bill B. initial post twice. That's how good it is.
Cash flow is important, but not everything when it comes to a house hack. You need to take into account appreciation and debt pay down.
How long will you plan on staying at the property? Will it be long enough to get you to 20% equity and retire PMI? If yes, what does that do to your cash flow?
What will rents have to be when you move out to make this cash flow and then figure out what that rental growth rate. If its 10%/yr that's bad. If it is 1-2%, well that's more realistic.
The world is all about opportunity cost and right now, as Bill said, you are 100% cash flow negative with rent so how does this compare to the situation you are in now?
2 Reply
Cory WallacePro Member
Rental Property Investor · Norfolk, VA · Member since 2020 · 53 posts · 38 votes
4y
@Bryce Renicker if it does not cash flow, I do not think it is worth the risk. I must cash flow from the beginning.
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