Negative Cash Flow on Low Money Down

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Negative Cash Flow on Low Money Down

Bryce Renicker
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
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. 

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  • Tony Kim
    Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
    4y
    Originally posted by @Bryce Renicker:
    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. 

    All I'm saying is that when I joined BP years ago, the mantra was that investing for appreciation was gambling.  Now that we've had this epic run-up in prices, the mean sentiment seems to have shifted away from that and has somewhat progressed to one where no cash flow or even negative cash flow is acceptable because your property will appreciate in value. I consider that to be a somewhat dangerous line of thought. RE, like many other asset classes, is highly cyclical. In ANY type of due diligence when evaluating an investment, you have to ask yourself where we are in the RE cycle. Is it the time to be banking on appreciation?

    And as a reminder, I'm an investor that relies heavily on appreciation. But with that said, I never invest in anything that once stabilized, still has a negative cash-flow. All of my local properties had positive cash flow from day one and I will never invest in anything that pencils negative. 

    I agree that it's still hard to see anything that would cause us to enter a pull-back phase. But once it does start, RE downcycles last for at least a few years. It's also hard to picture rents going down, but I'm pretty sure rents will level off and slowly decrease in the next downcycle. It just wouldn't be worth it for me personally. I would still want the comfort of having positive cash flow (even if reduced) during an economic downcycle.

    Of course, in the long-term, all RE goes up. So even a terrible purchase today will always look good when given enough time.

    Also, I just reread your initial post. You're going to start with a house hack with 3.5% down......that changes things significantly! Even if it pencils negative after you move out, if you find a place to house hack with 3.5% down and you like it, I say go for it!  

    0Reply
  • Luciano A.
    Developer · Houston TX · Member since 2018 · 423 posts · 400 votes
    4y

    @Bryce Renicker

    I am not a fan of buying knowing you will lose money. However, if you can pay less than what you are currently paying for rent and you like the house/area then basically you are buying your first house with tenants next door helping you cover your mortgage. I would not say this is an investment but if you live in it for a few years and the economy plays in your favor you can have a winner on your hands. BUT don't let FOMO (Fear Of Missing Out) lead you to a poor decision. As others pointed out here. Don't forget there were 1000s of investors that looked smart before the 2008 crash bragging how they made $100k in appreciation and losing only $500 per month. There is no real gamebook for this current economy so better to take your time than to jump into a ship that has a small leak growing without the occupants knowing. 

    If you buy with only 3.5% down and the market turns you will be holding onto an asset that has negative valuation thus no longer an asset and will prevent you from buying in the near future as banks see you with negative net worth versus an asset. 

    Best of luck 

    4Reply
  • Daniel Giacomazzi
    Raleigh, NC · Member since 2021 · 8 posts · 3 votes
    4y

    Have you looked into house hacking it? Rent out the second bedroom. Also, have you considered making it a short term rental instead of a long term rental? Not sure where it's located and what STRs look like in the area but that may be an option.

    There are ways to be creative and make it work. Don't just force it. You could look into a short term rental or renting it by the room after you move out (typically that brings in a little more income than just renting it out to a single family/person)

    1Reply
  • Michael Johnson
    Investor · Chicago · Member since 2020 · 66 posts · 55 votes
    4y

    @Bryce Renicker

    I bought a 4 plex in Rogers Park 5 months ago. The top 3 units are 4 bed 2 bath, the garden is a 2/1. In the listing the rents on the owners unit alone were listed $500-600 under market. I converted one unit so far to by the bedroom model. PITI w utilities are $4900, gross income once I move out will be $6900 - you can find deals - I got this for 25k under asking! It was just over the FHA limit when listed so it didn't pop up on most of their searches. It worked out in the end because with seller credits I still ended up with only 3.5% down.

    Look for listings where you can raise rents or do a by the bedroom model. I may convert another unit to Airbnb and the last one to a by the bedroom - it’s at least easy to manage while house hacking.

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    4y

    I agree with @Joe Villeneuve that paying more upfront to cash flow is purchasing the cash flow and at too high a price.  

    I do not agree that cash flow should be the only criteria or even a primary criteria.

    If you need the cash flow to make the bills, then cash flow is critical.  If that is not the case and you are in a position to be able to handle unexpected items such as an eviction moratorium that could result in a year of no rent, then the total return is how a RE should be evaluated.  I have the resources accumulated from RE investing that I do not worry one iota about cash flow if the total return meets my criteria.

    Here is the reality about cash flow: initial cash flow has a poor correlation to actual cash flow over a long hold.  In my poor initial cash flow market (San Diego), I have multiple properties at better than 2% rent to purchase ratio.  The best initial cash flow is in places that the market is anticipating poor appreciation or considers high risk.  This is because the RE market is efficient and based on numerous parameters with projected appreciation and projected risk being 2 of the more critical.

    There are numerous reputable references for historical appreciation and/or historical return on buy n hold RE (Case Shiller, neighborhood Scout, Zillow). Looking at these reputable references indicate that the best return is achieved in markets that had terrible initial cash flow. Case Shiller has the 3 top returns in the US for this century as San Francisco, Los Angeles, and San Diego. All 3 markets have poor initial cash flow. An average purchase in any of those 3 cities from 5, 10, 20, 30, 40 or 50 years ago would produce better ROI than an average purchase in the great initial cash flow markets.

    As indicated I have multiple 2% ratio properties (that would have outstanding cash flow if they had not had cash extracted, so they have OK cash flow), but what about the appreciation?  My worst appreciating property over the hold period is $1900/month.  The best is over $6K/month.  Do I think my purchases were outstanding?  some where, but most where normal purchases and 2 were slightly poorly timed purchases (both depreciated after purchase).  Even the poorly timed purchases have appreciated at least $1900/month.  I wonder how many properties with great initial cash flow have total returns that can match just the appreciation of my properties?  I suspect very few if they are small unit count properties.

    Cash flow gets taxed.  Minimizing cash flow minimizes taxes.  Appreciation gets taxed if you sell without a 1031.  If you die before you sell, the RE gets a new value base and the gain evaporates.  With the current laws I expect to never pay taxes on my RE profits.  The goal should be as much return with as little via cash flow as possible (at least until the rules change).

    Good luck

    2Reply
  • Tucker Cummings
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    4y

    If the cash don’t flow, it’s a no go

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Bryce Renicker:
    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! 

     That money you are "transferring" isn't transferring.  You are buying equity.  There's no gain here, but there is a cost...and that cost is what the tenant's job is...to buy that equity for you.

    0Reply
  • Bryce Renicker
    OP
    Member since 2021 · 31 posts · 11 votes
    4y
    Originally posted by @Tony Kim:
    Originally posted by @Bryce Renicker:
    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. 

    All I'm saying is that when I joined BP years ago, the mantra was that investing for appreciation was gambling.  Now that we've had this epic run-up in prices, the mean sentiment seems to have shifted away from that and has somewhat progressed to one where no cash flow or even negative cash flow is acceptable because your property will appreciate in value. I consider that to be a somewhat dangerous line of thought. RE, like many other asset classes, is highly cyclical. In ANY type of due diligence when evaluating an investment, you have to ask yourself where we are in the RE cycle. Is it the time to be banking on appreciation?

    And as a reminder, I'm an investor that relies heavily on appreciation. But with that said, I never invest in anything that once stabilized, still has a negative cash-flow. All of my local properties had positive cash flow from day one and I will never invest in anything that pencils negative. 

    I agree that it's still hard to see anything that would cause us to enter a pull-back phase. But once it does start, RE downcycles last for at least a few years. It's also hard to picture rents going down, but I'm pretty sure rents will level off and slowly decrease in the next downcycle. It just wouldn't be worth it for me personally. I would still want the comfort of having positive cash flow (even if reduced) during an economic downcycle.

    Of course, in the long-term, all RE goes up. So even a terrible purchase today will always look good when given enough time.

    Also, I just reread your initial post. You're going to start with a house hack with 3.5% down......that changes things significantly! Even if it pencils negative after you move out, if you find a place to house hack with 3.5% down and you like it, I say go for it!  

     Thanks for the feedback Tony. Everything you mention is what I have really been back and forth in my mind about! Really cool to hear a more seasoned investors viewpoint and yes the 3.5% househack seems to come with its unique set of challenges but also a very interesting potential. Cheers! 

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ 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 

     First off, I am going to touch on something nobody has done in this thread. Using a 5% vacancy factor is most likely your BEST case scenario and you or anyone else should NEVER use "best case" for underwriting your deals. Second, 7% maintenance - that is certainly a good number, many use only 5% but what is missing is capital expenses which should also be 5% for a total of 10%. You are also missing other expenses like accounting, legal (if and when you have an eviction or any need for legal fees), leasing fees (PM's will manage for the 10% you show but they also charge a decent portion of the first months rent for leasing fees too). All in all, your negative cash flow projection on this deal is too low, your negative will likely be greater.

    Now, with that said, I too will take a different approach than the majority consensus here with a caveat. Cash flow is only ONE income stream that stems from buy and hold investments in RE. There are a number of other factors in buy and hold real estate such as amortization, depreciation, cash out refi (non taxed money), forced appreciation (can be from lower expenses, raising rents, value add opportunities, etc.), market appreciation, etc. On top of that, your tax exposure can be very much limited to non existent with the right buy and hold plan and cash flow of a few hundred dollars for each door is nothing compared appreciation over 10 years.

    Speaking about CA RE only, any person can take data from any 15 year hold period and find results that prove that the market appreciation alone with beat the best cash flowing cities in America hands down. Does that mean nobody should buy cash flow properties anywhere else? Of course not, to each his own is a huge factor here. There is no right or wrong answer here generally speaking, although many of the posts above are expressed that way. What is best for you and what pencils out best for you vs your risk factors, your desires, your abilities, get the point? It is great to hear other people's perspectives and once you sift through them all, the final decision on what will be best for you is left up to YOU, not us. Age is also a factor, for those who are older, cash flow for monthly income may factor in as a higher priority than negative cash flow with long term future appreciation plays, whereas a younger investor may go down the other road.

    In summary, take people's opinions and suggestions and use that to help gain a better understanding of the big picture, then make the decision that fits your goals and needs (along with your financial advisor/CPA). - Don't miss this important factor - get the opinion from your CPA with a side by side comparison of multiple avenues to see which is best for YOU.

    I have flipped a lot of properties, especially over the last 10 years and what I wouldn't give to do it again, only this time, keep 1 out of every 5. I would have made more money on appreciation of these homes in So Cal than all the flip money combined, especially when you factor in tax exposure.

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    4Reply
  • Bryce Renicker
    OP
    Member since 2021 · 31 posts · 11 votes
    4y
    Originally posted by @Michael Johnson:

    @Bryce Renicker

    I bought a 4 plex in Rogers Park 5 months ago. The top 3 units are 4 bed 2 bath, the garden is a 2/1. In the listing the rents on the owners unit alone were listed $500-600 under market. I converted one unit so far to by the bedroom model. PITI w utilities are $4900, gross income once I move out will be $6900 - you can find deals - I got this for 25k under asking! It was just over the FHA limit when listed so it didn't pop up on most of their searches. It worked out in the end because with seller credits I still ended up with only 3.5% down.

    Look for listings where you can raise rents or do a by the bedroom model. I may convert another unit to Airbnb and the last one to a by the bedroom - it’s at least easy to manage while house hacking.

    Dang this sounds like a massive win on your deal. Super cool to hear this! Did you find this on the MLS? Also, do you feel that a ‘by the room' model works for any size multi unit or really works better in a larger unit like your 4 bed units?

    0Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    4y

    If your only two options were to buy this property or sit on the sideline for another two years I would buy the property. In two years that property would’ve went up as well as the rents more than likely. Would principal paydown As well as appreciation out distance any small negative cash flow?

    At the end of the day hindsight is 20/20 as they say and only you can make the big boy Choice at this point in your game.

    2Reply
  • Bryce Renicker
    OP
    Member since 2021 · 31 posts · 11 votes
    4y
    Originally posted by @Dan H.:

    I agree with @Joe Villeneuve that paying more upfront to cash flow is purchasing the cash flow and at too high a price.  

    I do not agree that cash flow should be the only criteria or even a primary criteria.

    If you need the cash flow to make the bills, then cash flow is critical.  If that is not the case and you are in a position to be able to handle unexpected items such as an eviction moratorium that could result in a year of no rent, then the total return is how a RE should be evaluated.  I have the resources accumulated from RE investing that I do not worry one iota about cash flow if the total return meets my criteria.

    Here is the reality about cash flow: initial cash flow has a poor correlation to actual cash flow over a long hold.  In my poor initial cash flow market (San Diego), I have multiple properties at better than 2% rent to purchase ratio.  The best initial cash flow is in places that the market is anticipating poor appreciation or considers high risk.  This is because the RE market is efficient and based on numerous parameters with projected appreciation and projected risk being 2 of the more critical.

    There are numerous reputable references for historical appreciation and/or historical return on buy n hold RE (Case Shiller, neighborhood Scout, Zillow). Looking at these reputable references indicate that the best return is achieved in markets that had terrible initial cash flow. Case Shiller has the 3 top returns in the US for this century as San Francisco, Los Angeles, and San Diego. All 3 markets have poor initial cash flow. An average purchase in any of those 3 cities from 5, 10, 20, 30, 40 or 50 years ago would produce better ROI than an average purchase in the great initial cash flow markets.

    As indicated I have multiple 2% ratio properties (that would have outstanding cash flow if they had not had cash extracted, so they have OK cash flow), but what about the appreciation?  My worst appreciating property over the hold period is $1900/month.  The best is over $6K/month.  Do I think my purchases were outstanding?  some where, but most where normal purchases and 2 were slightly poorly timed purchases (both depreciated after purchase).  Even the poorly timed purchases have appreciated at least $1900/month.  I wonder how many properties with great initial cash flow have total returns that can match just the appreciation of my properties?  I suspect very few if they are small unit count properties.

    Cash flow gets taxed.  Minimizing cash flow minimizes taxes.  Appreciation gets taxed if you sell without a 1031.  If you die before you sell, the RE gets a new value base and the gain evaporates.  With the current laws I expect to never pay taxes on my RE profits.  The goal should be as much return with as little via cash flow as possible (at least until the rules change).

    Good luck

     Thanks for taking the time to reply Dan. I really am learning so much from all of this, and perspectives like this are so valuable. Your point about data for appreciation markets is excellent, I will be doing some digging into those websites later! On my first deal I’m looking to 3.5% house hack so it makes for an interesting decision. Best wishes 

    0Reply
  • Michael Johnson
    Investor · Chicago · Member since 2020 · 66 posts · 55 votes
    4y

    @Bryce Renicker It was listed on the MLS. The by the bedroom works better with larger units, especially if there is more than 1 bathroom - you don't want 3-4 rooms sharing a single bathroom. If you are willing to manage more tenants/leases to drive higher returns, its at least something you should consider.

    1Reply
  • Bryce Renicker
    OP
    Member since 2021 · 31 posts · 11 votes
    4y
    Originally posted by @Will Barnard:
    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 

     First off, I am going to touch on something nobody has done in this thread. Using a 5% vacancy factor is most likely your BEST case scenario and you or anyone else should NEVER use "best case" for underwriting your deals. Second, 7% maintenance - that is certainly a good number, many use only 5% but what is missing is capital expenses which should also be 5% for a total of 10%. You are also missing other expenses like accounting, legal (if and when you have an eviction or any need for legal fees), leasing fees (PM's will manage for the 10% you show but they also charge a decent portion of the first months rent for leasing fees too). All in all, your negative cash flow projection on this deal is too low, your negative will likely be greater.

    Now, with that said, I too will take a different approach than the majority consensus here with a caveat. Cash flow is only ONE income stream that stems from buy and hold investments in RE. There are a number of other factors in buy and hold real estate such as amortization, depreciation, cash out refi (non taxed money), forced appreciation (can be from lower expenses, raising rents, value add opportunities, etc.), market appreciation, etc. On top of that, your tax exposure can be very much limited to non existent with the right buy and hold plan and cash flow of a few hundred dollars for each door is nothing compared appreciation over 10 years.

    Speaking about CA RE only, any person can take data from any 15 year hold period and find results that prove that the market appreciation alone with beat the best cash flowing cities in America hands down. Does that mean nobody should buy cash flow properties anywhere else? Of course not, to each his own is a huge factor here. There is no right or wrong answer here generally speaking, although many of the posts above are expressed that way. What is best for you and what pencils out best for you vs your risk factors, your desires, your abilities, get the point? It is great to hear other people's perspectives and once you sift through them all, the final decision on what will be best for you is left up to YOU, not us. Age is also a factor, for those who are older, cash flow for monthly income may factor in as a higher priority than negative cash flow with long term future appreciation plays, whereas a younger investor may go down the other road.

    In summary, take people's opinions and suggestions and use that to help gain a better understanding of the big picture, then make the decision that fits your goals and needs (along with your financial advisor/CPA). - Don't miss this important factor - get the opinion from your CPA with a side by side comparison of multiple avenues to see which is best for YOU.

    I have flipped a lot of properties, especially over the last 10 years and what I wouldn't give to do it again, only this time, keep 1 out of every 5. I would have made more money on appreciation of these homes in So Cal than all the flip money combined, especially when you factor in tax exposure.

     Hey Will, many thanks for taking the time for a detailed reply. I appreciate the feedback on my vacancy and capex numbers and other costs, this is the hard data I don’t quite feel comfortable with yet so that is hugely helpful. 

    I love the thoughts on cash flow as well. It has really solidified a lot of the pros and cons I have weighed so far and overall this has made me way more comfortable going forward with my negotiations and with looking at other deals if this one doesn’t quite work out! 

    0Reply
  • Sean McCluskey
    Rental Property Investor · Newport Beach, CA · Member since 2017 · 218 posts · 138 votes
    4y

    @Bryce Renicker I’m going to go ahead and disagree with everyone.

    It’s true that buying a rental that doesn’t currently cash flow is not ideal. BUT, I agree with you that the low down payment is a consideration.

    Say you’re putting 5% down, and after you move out the property has negative cash flow equal to 0.5% down per year. What’s so bad about that?

    You’re basically going from 5% down to 5.5% down in year 1. But you get benefits:

    1) You got to live there first, saving rent.

    2) The potential for equity appreciation.

    3) Rents are very much likely to consider increasing over time.

    4) The fixed rate debt is wonderful in an inflation environment.

    5) When you get the chance to remove PMI, you may start cash flowing.

    If your alternative is to remain a renter for years while you try to save up more money or wait for a crash, then I think buying now and getting started is great.

    The main question I have for you is this: how reliable is your job? Are you skilled and in demand? Are you going to be getting promotions? If you get laid off, will you be able to get another job with similar or better pay?

    Because the main risk is that you need to be able to manage your money and pay the negative cash flow while you also live your life.

    4Reply
  • Natalie Schanne
    Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    4y

    @Bryce Renicker - A couple thoughts -

    1. House hacking the right property was a tremendous net worth creator for me. The first one I picked was a single family split level with a common level kitchen and a 3/2 upstairs and a 2/1 downstairs. Sharing a kitchen is not the end of the world.

    2. In my area rents went up about 20% year over year 2020-2021. Make sure your rental assumptions are up to date. I picked up a duplex that had been renting for 1800 and the landlord was paying water, sewer and heat. Now I’m renting it for 4200/mo and I pay no utilities.

    3. If you buy in a solid B or better area, the property should be able to manage itself because your tenants can handle letting in the plumber or whatever and calling you for your credit card.

    4. Why do you think you have to pay so much for water and common electric? I would plan to delegate all those expenses to the tenants. If it’s on one meter, split the cost by bedrooms or occupants. Like 40% / 60% or whatever.

    Good luck and get started. Remember the list price is flexible especially after 21+ days on market. Just got a duplex under contract at 50k below list.

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    4y
    Originally posted by @Bryce Renicker:

    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. 

     In my opinion- If your objective is to purchase a property that will cash flow when you move out then it makes no sense to purchase a property negative cash flow. You should either start looking in different locations or looking a 3 or 4 flats in lieu of duplexes.

    312-681-7487
    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    4y

    @Bryce Renicker I work through this issue with clients all the time. I took a quick look at your numbers, and right out of the gate you are building in property management for a property that you are house hacking. 2-4 units in Chicago rarely cash flow with the FHA loan/professional management combination, and that is ok! You aren't going to use a PM. Honestly, people rarely do until they get a ton of units under there belt and have to make decisions about keeping a job versus jumping in to manage full time. A 2 or 3 unit building will take you maybe 2-3 hours a month to manage... honestly would you be ok saving $100 per hour at this point in your journey?

    The other thing to remember is that your FHA loan is often times treated more like a bridge loan by most investors. Too many newer investors obsess over the interest rate and terms, and then try to refinance out of the loan in a year so they can buy another FHA deal. If you are able to see appreciation or pay down the loan (or a combination) to get your 20-25% equity, then you can refinance out. This saves you roughly $275 on the deal you have here! That is $3300 per year.

    This is where people need good advice from their team. If you buy a good building and have a solid business plan to get to healthy cash flow then yes it MIGHT be ok to take on negative cash flow for a while. 

    2Reply
  • Ricky Davis
    Investor · Searcy, AR · Member since 2018 · 52 posts · 39 votes
    4y

    NO WAY!! This market will eventually stumble!! I have read some crazy stuff on this thread!! A deal that does not work, does not work!! There will always be more deals!!!!! If someone even tells you to sniff it then send them a contract to use their money to buy the deal!! 100% sure they will forget you even exist!! You are here to make money you are NOT doing this for your health!! ALWAYS figure the worst outcome in the deal, if it works then, it is a winner. If you have to make it work then walk away!! Trust me deals are out there you just have to work for them. Go to every bank and talk with every officer about what you are looking for, senior citizen centers, nursing homes, local hardware stores, anywhere you can think of that might have an elderly person who might be ready to get out is who you are looking for. Heck you may find someone who will owner finance it for you since they don't want to pay that moron joe any taxes!! I can assure you there is someone out there who is old and has a deal that they are wanting to get out of because they are tired of it.    

    1Reply
  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    4y

    @Bryce Renicker - Is it a great deal maybe/ maybe not but I think it's good enough.  The way I always try to frame getting started house hacking and deciding on whether or not it's a go is simple - Am I paying less for a place to live than I would be otherwise paying rent to another landlord.   

    Almost 10/10 the answer is yes, it is less expensive - so when the key to getting ahead is just getting started - not finding the perfect deal - I always suggest just get started as soon as possible.  Let me know how I can help!

    Maybe offer $299k and see if that gets the conversation started

    [email protected]
    Quality Builders4.966 Reviews
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    1Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    With 3.5% down, you are going to have that problem.  The only way to get a rental with that low of a down payment is if you are living in it meaning your housing costs should go down and one of the units isn't being rented (because you are living there). Run the numbers if it is fully rented (including the unit you'd live in).

    0Reply
  • Brian Nally
    Investor · Austin, TX · Member since 2021 · 96 posts · 61 votes
    4y

    Run away. Find something that cash flows or save up until you've got the down payment for it to do so.  You'll get there!!!

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    4y

    Of course it is ok to negative cash flow!  cash flow is a function of down payments as you can see.....  if you put little money down you will have a larger payment which eats into your cash flow.   If you put more down you have a smaller payment.   

    And since this is a house hack it is FINE to have negative cash flow!  the whole idea is to get your foot in the door......  and house hacking is a great way to do this.   

    I am editing this to say I am glad to read that the experienced guys are all saying that that it can be ok.....   Cash flow is only one way to make money and like I said above it is a function of your downpayment.....  I absolutely believe that if it is in a good area, and is in decent condition that buying is better than not buying all things being equal....   

    ETA a good way to look at deal like this is to run the IRR... that will give you loads of info that may help you understand why this might be an ok deal

    1Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    4y
    Originally posted by @Ricky Davis:

    NO WAY!! This market will eventually stumble!! I have read some crazy stuff on this thread!! A deal that does not work, does not work!! There will always be more deals!!!!! If someone even tells you to sniff it then send them a contract to use their money to buy the deal!! 100% sure they will forget you even exist!! You are here to make money you are NOT doing this for your health!! ALWAYS figure the worst outcome in the deal, if it works then, it is a winner. If you have to make it work then walk away!! Trust me deals are out there you just have to work for them. Go to every bank and talk with every officer about what you are looking for, senior citizen centers, nursing homes, local hardware stores, anywhere you can think of that might have an elderly person who might be ready to get out is who you are looking for. Heck you may find someone who will owner finance it for you since they don't want to pay that moron joe any taxes!! I can assure you there is someone out there who is old and has a deal that they are wanting to get out of because they are tired of it.    

    How many house hacks have you done?   How many Elderly people have you taken advantage of by buying their home off market and basically stealing their equity??

    0Reply
  • David C.
    Accountant · NC · Member since 2017 · 64 posts · 26 votes
    4y

    @Bill Brandt

    This is a good perspective.

    1Reply
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