Buying rental with negative cashflow for the first 3 years
Member since 2022 · 4 posts · 1 vote
Buying rental with negative cashflow for the first 3 years
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Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
Why would you buy a property with negative cash flow, makes no sense? Why not buy them with 20% or better net caps and make money from day one. If it is already negative what if it depreciates now, you really have issues. I would never to into a situation where I am losing money from day one,
All the best
21 Replies
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes3y
I don't recommend the BP calculators because they over complicate a relatively simple math problem. I recommend using the same exact method that Grant Cardone does on a white board on his older videos. I also like how Matt Theriault anaylizes deals on Epic Real Estate youtube channel. Hint: Cap Ex is not applicable to a single family house and it is not an actual expense. Cap Ex is financial planning method to cover future expenses that haven't actually happened yet. BP overstates this category, which is mainly applicable in a commercial setting, like paving a parking lot or a roof on a grocery store.
- Real Estate Agent · Phoenix, AZ · Member since 2022 · 41 posts · 21 votes3y
Hi Luciano,
I personally don't mind a slight loss at first if the property will appreciate. I have the same mindset of refinancing to a lower interest rate and maybe pulling money out to purchase another property later. However, any major issues and you are hurting. Can you rent each room out? Use the garage as rentable storage space? Just a few ideas to increase the money coming in from the property.
- 3yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
It really depends on your market. As Michael said, some areas the homes will appreciate. The question is what are they not paying for themselves? High interest rate, can you increase the length of the mortgage, look in a different area? Also remember the tenants are paying down the principal on your mortgage, yes at first that is less as most of the payment is interest; and that refinancing comes at a cost.
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
If it's your first property, and you're buying this under your name and you intend to buy more do note that a negative cash flow may impact you when you go for lending again. Why after year 3? Are you speculating rates will go down by then?
If it's 1-2% negative cash flow, there's ways around that. You got to ask for a lower price, closing costs covering, temporary buy down. Something-- to get it barely positive, there's going to be a lot of avenues and soon enough a lot more of a market to where you can dictate that.
Quote from @Anthony Dooley:
I don't recommend the BP calculators because they over complicate a relatively simple math problem. I recommend using the same exact method that Grant Cardone does on a white board on his older videos. I also like how Matt Theriault anaylizes deals on Epic Real Estate youtube channel. Hint: Cap Ex is not applicable to a single family house and it is not an actual expense. Cap Ex is financial planning method to cover future expenses that haven't actually happened yet. BP overstates this category, which is mainly applicable in a commercial setting, like paving a parking lot or a roof on a grocery store.
It's absolutely an expense for a SFR. Go do your month to month calcs and never take out capex allocation. If you got a house thats 15 years old +, you'll lose all your profit when you replace that roof. You also got to cover appliances, likely. Dishwasher, fridge, stove, roof, electrical, plumbing are huge expenses that if you do not properly allocate for can wipe all your "profit" out. You can state it's a future expense, but so is vacancy. Do you not account for that? And who cares if it's a future expense? It's still an expense. It's money out, that's what matters.
- Real Estate Agent · NY · Member since 2022 · 111 posts · 48 votes3y
As many have already stated it depends. If the property is relatively cheep then IMO i would want a couple hundreds dollars in cashflow conservatively because the amount of equity i would be recapturing as the loan gets payed down would also be relatively low. But if your buying something over say 500K in a great market where it will likely appreciate and you are losing a hundred a month but gaining substantial equity over the long term i would go for it. Sometimes you have to lose 1 dollar to make 2 dollars. This all said i would only do this if you have a dependable income source to support the decision.
- Realtor · Chicago, IL · Member since 2019 · 274 posts · 191 votes3y
@Luciano Suehara- You've got some great responses so far! As most things are in real estate, this is a personal strategy decision. Most people that are buying right now are expecting to refinance when the rates go down- great idea.
Definitely consider whether this will impede your ability to get your next loan- as was mentioned by @V.G Jason. As also mentioned in that comment, there are usually things that you can do to get better numbers. It does not sound like you have the property under contract. Starting out, you can ask for a lower price and closing credits. After inspection, if something concerning comes up you can again ask for credits or money taken off of the purchase price.
It can be the case that you have a great job and taking a minimal loss for a few years would not be the biggest deal. Then sure! I would say go for it.
A solid, investor-friendly real estate agent can also guide and support you in this process. Good luck!
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
Why would you buy a property with negative cash flow, makes no sense? Why not buy them with 20% or better net caps and make money from day one. If it is already negative what if it depreciates now, you really have issues. I would never to into a situation where I am losing money from day one,
All the best
- 3yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
@Luciano Suehara there are lots of properties you can buy that have negative cashflow (most of them in fact). Why wouldn't you just keep looking and offering in a way that targeted positive cashflow?
As for those saying buy for appreciation. Well, before you go that route, just educate yourself on market history. You won't have to go back more than about 13-14 years. Or just take a look at what's happening now.
Quote from @Malcomb Stapel:
@Luciano Suehara there are lots of properties you can buy that have negative cashflow (most of them in fact). Why wouldn't you just keep looking and offering in a way that targeted positive cashflow?
As for those saying buy for appreciation. Well, before you go that route, just educate yourself on market history. You won't have to go back more than about 13-14 years. Or just take a look at what's happening now.
Past market appreciation doesn't mean future appreciation. You want to go where the puck is going, not where it's been per Wayne Gretzky.
- 3yMalcomb StapelPro MemberInvestor · Topeka, KS · Member since 2020 · 669 posts · 488 votes
Quote from @V.G Jason:
Quote from @Malcomb Stapel:
@Luciano Suehara there are lots of properties you can buy that have negative cashflow (most of them in fact). Why wouldn't you just keep looking and offering in a way that targeted positive cashflow?
As for those saying buy for appreciation. Well, before you go that route, just educate yourself on market history. You won't have to go back more than about 13-14 years. Or just take a look at what's happening now.
Past market appreciation doesn't mean future appreciation. You want to go where the puck is going, not where it's been per Wayne Gretzky.
@V.G Jason I think we're saying the same thing ?
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
Generally its probably not a great idea, but key to when it typically make sense is an overarching tax strategy where you can potentially use the losses to offset income at other properties. If you are early in your investing career than probably not a great idea - better to put more money down (like 30% or so) to make sure it cash flows probably
Harpoon Capital514 Reviews @Luciano Suehara two suggestions:
1. Assuming you don't have a huge net worth that can weather a loss on the property, don't buy a property that doesn't cashflow, or that you can't force to cashflow (which is a whole topic in and of itself--and one I'd suggest reading up on).
2. NOBODY knows what rates will do in the future. Your financial models should not depend on hypothetical future outcomes. Moreover, your financial models need to be able to withstand worst-case scenario stress tests. I keep seeing people say "when rates come down" as if it's a certainty. There is no guarantee rates will come down, when they'll come down, or how much they'll come down. If your financial model depends on hypothetical future outcomes, you're not investing, you're speculating.
Responsible RE investors hope for the best, but we prepare for the worst--which means using non-speculative financial models.
Now, having said all that, speculative purchases can be OK for some people who have very high net worths--if they can afford to lose the whole thing. Warren Buffet can afford to make a few speculative purchases because he can withstand big losses; losing a few million dollars is nothing to him...but a typical person doesn't have the net worth to withstand a loss on a speculative purchase.
Good luck out there!
- Investor · Lancaster, PA · Member since 2022 · 74 posts · 104 votes3y
If you are an investor, and you are going to invest, then you never take a bad deal, you find the right deal. Negative CF extends the years before you get a return, it never makes sense to take that risk.
- Member since 2022 · 4 posts · 1 vote3y
First of all, thank you for all the great feedback/tips/suggestions. Glad I found BiggerPockets and this great community. Based on the responses I found out other ways to analyze a rental property, in addition with the available tools. I believe the right opportunity will appear on the right time. In the meantime I'm constantly investing my time to understand more and more about investment properties. Appreciate again all the support.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
This isn't real estate investing, this is an asset that loses you money every month with the hopes of appreciation. This was a good strategy when we were in a bull market
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
there's no need to rush in real estate, especially in today's environment. You say you want to do refi in the future, then why not just wait to buy in the future year?
you invest to make money not to make realtors happy.
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes3y
Quote from @V.G Jason:
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
If it's your first property, and you're buying this under your name and you intend to buy more do note that a negative cash flow may impact you when you go for lending again. Why after year 3? Are you speculating rates will go down by then?
If it's 1-2% negative cash flow, there's ways around that. You got to ask for a lower price, closing costs covering, temporary buy down. Something-- to get it barely positive, there's going to be a lot of avenues and soon enough a lot more of a market to where you can dictate that.
Quote from @Anthony Dooley:
I don't recommend the BP calculators because they over complicate a relatively simple math problem. I recommend using the same exact method that Grant Cardone does on a white board on his older videos. I also like how Matt Theriault anaylizes deals on Epic Real Estate youtube channel. Hint: Cap Ex is not applicable to a single family house and it is not an actual expense. Cap Ex is financial planning method to cover future expenses that haven't actually happened yet. BP overstates this category, which is mainly applicable in a commercial setting, like paving a parking lot or a roof on a grocery store.
It's absolutely an expense for a SFR. Go do your month to month calcs and never take out capex allocation. If you got a house thats 15 years old +, you'll lose all your profit when you replace that roof. You also got to cover appliances, likely. Dishwasher, fridge, stove, roof, electrical, plumbing are huge expenses that if you do not properly allocate for can wipe all your "profit" out. You can state it's a future expense, but so is vacancy. Do you not account for that? And who cares if it's a future expense? It's still an expense. It's money out, that's what matters.
You are simply parroting what you have heard on BP. You obviously are not speaking from experience. Anything that costs less than $2500 is considered a repair for tax purposes and not a capitol expenditure. The money you put aside for a new roof is retained earnings (savings) and is taxable income if you did not use the money for a roof that tax year. I actually do this for a living. This is not a hobby for me, so don't try to tell me something you heard on a podcast that you actually haven't done.
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
All depends on your strategy.
If you are looking at Class A properties, it may take quite awhile to find one that cashflows from day 1.
Class B properties should give an investor a decent amount of cashflow and appreciation. Easier to find "deals" on also.
Class C properties are typcially all cashflow with almost no appreciation, the last few years have been an exceptoin though.
You'll also have better chance of finding a deal if you're willing to fix up an ugly property.
Logical Property Management4.9460 Reviews Quote from @Anthony Dooley:
Quote from @V.G Jason:
Quote from @Luciano Suehara:
Hi everyone, new member here and I'd like the opinion from the experts.
Im currently looking to purchase rental property and Im using the BiggerPockets tools (Rental Property calculator and Rent Estimator) to understand if it makes sense or not.
I've ran some simulations and the properties are showing negative cashflow (-1% -2%) for the first 3 years, but then after year 3, things start to go back up with positive cashflow.
I wonder if it make sense to take this risk, buy the home (with 20% down), maybe refinance later on (considering that the rates will go down) and eventually improve the cashflow?
Any strategy that you guys recommend in this case or better wait for the right opportunity?
Thanks
If it's your first property, and you're buying this under your name and you intend to buy more do note that a negative cash flow may impact you when you go for lending again. Why after year 3? Are you speculating rates will go down by then?
If it's 1-2% negative cash flow, there's ways around that. You got to ask for a lower price, closing costs covering, temporary buy down. Something-- to get it barely positive, there's going to be a lot of avenues and soon enough a lot more of a market to where you can dictate that.
Quote from @Anthony Dooley:
I don't recommend the BP calculators because they over complicate a relatively simple math problem. I recommend using the same exact method that Grant Cardone does on a white board on his older videos. I also like how Matt Theriault anaylizes deals on Epic Real Estate youtube channel. Hint: Cap Ex is not applicable to a single family house and it is not an actual expense. Cap Ex is financial planning method to cover future expenses that haven't actually happened yet. BP overstates this category, which is mainly applicable in a commercial setting, like paving a parking lot or a roof on a grocery store.
It's absolutely an expense for a SFR. Go do your month to month calcs and never take out capex allocation. If you got a house thats 15 years old +, you'll lose all your profit when you replace that roof. You also got to cover appliances, likely. Dishwasher, fridge, stove, roof, electrical, plumbing are huge expenses that if you do not properly allocate for can wipe all your "profit" out. You can state it's a future expense, but so is vacancy. Do you not account for that? And who cares if it's a future expense? It's still an expense. It's money out, that's what matters.
You are simply parroting what you have heard on BP. You obviously are not speaking from experience. Anything that costs less than $2500 is considered a repair for tax purposes and not a capitol expenditure. The money you put aside for a new roof is retained earnings (savings) and is taxable income if you did not use the money for a roof that tax year. I actually do this for a living. This is not a hobby for me, so don't try to tell me something you heard on a podcast that you actually haven't done.
How much does a new roof or hvac cost? Does that count as a capital expenditure?
I'll tell you what I want because I've replaced my own roof, my hvacs, and I've replaced all my appliances. Anyone foolish enough to not view capex as a significant source of cost is just playing with fire. Call it a different mechanism for taxes all you want, it's going to hit your bank account when you need to fix it. It's going to cost you, you pay to play with physical structures. Saying otherwise is reckless. Could care less if this is what you do for a living-- you're doing it wrong. Revert it back to a hobby.
- Rental Property Investor · Russellville, AR · Member since 2014 · 688 posts · 509 votes3y
I would pass on anything that was negative cash flow from day one. You also won't have any reserves in the event an emergent repair comes up. If your day job provides enough income to cover those things, then save for a few more months and make a larger down payment!
- Member since 2021 · 29 posts · 8 votes3y
Assuming the property appreciates, did you account for increase property taxes in year 3?
Most importantly, it depends on location within the DFW area. I would be more than happy to discuss and go through details with you
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