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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  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    @Bryce Renicker no! Move on.

    0Reply
  • Simon Castillo
    Rental Property Investor · San Antonio, TX · Member since 2016 · 48 posts · 16 votes
    4y

    @Bryce Renicker  Sounds like a deal with negative cash flow is speculative meaning you are banking on some things happening in your favor like rents going up. If you are investing that means the deal has some cash flow. If you have the funds, it may be safer to go larger down payment in order to cash flow. But what is the cash on cash return you are getting if you do that? And what is your risk tolerance?

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  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y

    It is never wise to invest in a property with a negative cashflow. Find an Investor-agent that can guide you though the market. Don't settle! 

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  • Christopher Gathe
    Rental Property Investor · coeurd'Alene ID · Member since 2020 · 20 posts · 25 votes
    4y

    @Bryce Renicker That's not good you need to analyze more Deals definitely has to cash flow when you move out. I purchased a duplex and am house hacking 3.5% down my cash flow will be around a 1000 a month so it's definitely doable

    0Reply
  • Barney Davis
    Rental Property Investor · Jackson, MS · Member since 2019 · 33 posts · 9 votes
    4y

    @Bryce Renicker I’ve never heard of a business deal that doesn’t make money being a good thing….

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

    @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. 

    John thanks so much for your reply. It's helpful to hear that other people go through this same process!! My understanding is that after 1 year in the home I can repeat the process with another FHA loan which is incredibly appealing to me!

    0Reply
  • Bryce Renicker
    OP
    Member since 2021 · 31 posts · 11 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.    

     Thanks for your reply Ricky! I really like the idea of finding an older investor who is looking to get out, it can be a win win for both parties! 

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Bryce Renicker:

     Be careful not to take advantage of these seniors.....some can be very vulnerable and not great at decision making. ANd i'm sure you wouldn't want to profit off of another's misfortune.... :-)

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    4y

    To all the responders on this thread who state it is never a good idea to invest in a negative cash flow property. SO if it cash flows, it must be a good deal, right? Forget appreciation, forget amortization, forget depreciation.

    There seems to be a strong opinion to the statement of NO to negative cash flow, yet all of the opinions fail to mention some very important factors. In other words, if it cash flows, it is a green light to purchase. - WRONG

    For any buy and hold (or even flips for that matter), there exists many data factors that a savvy investor will look at to help make the decision. In fact, some will take that negative or break even cash flow deal as opposed to the cash flow deal if the other important factors exist.

    If I am buying to hold, I expect to have a 10 year hold window (give or take a year or 2 and possible even keep it for 20+) and my deciding factors to purchase it will be based on the following: Population growth statistics for that specific area, crime rates (are they up or down), income growth, jobs growth, and home price appreciation statistics. If I find a property that does not cash flow at purchase but is in an area with top statistics in these 5 factors, I must consider it very closely and perhaps it is a much better deal than the cash flow positive in a city where those statistics are poor.

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  • Isaac S.
    Member since 2018 · 563 posts · 562 votes
    4y

    @Will Barnard is giving the most complete thought process and considerations, IMHO

    ALSO< FYI...if it was up to me... I would just YOLO your 3.5% into bitcoin and that will grow into enough capital to just buy the duplex with no debt, in about 5 days.

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