Assuming negative cash flow -Does it make sense?

Question

I have an opportunity to assume a loan on a SFH for very low cost, maybe a few thousand in fees to transfer. The issue is that the property will not cash flow as a rental. If I can get the house for essentially free does it make sense?
2000ish build 3B3B SFH. current loan is at market value and around 6%.
PITI around $2,800. Long term Rent around $2,300.

Here are my thoughts:

1 This is not a deal, cashflow is king.  Don’t buy a loser. Pass.

2 If the out of pocket costs are so low vs buying a comparable with 20% down both will be negative for +5 years anyway right? if I put $80k down to make $500 a month or lose $500 a month with no down payment until rents catch up to current market. It’s just a function of finance and Net Present Value. Either start $80k in the hole with +$6k cashflow or start $0 in the hole with -$6k cash flow.
This also preserves my cash to still find more opportunities.

What do you think, can I make a deal out of this? Which chain of thought makes sense here?

Michael C. · Answer

@Jaron Walling

Yes motivation will be tough if something expensive breaks and it just looks like a big bill. I haven’t had that happen yet though. Mortgage balance will drop about $500 a month with each payment also so it’s not completely going in the trash. I can put $80k in corporate bonds and make $500 a month in cashflow. This still leaves the $80k principle relatively accessible. I would obviously have reserves.

It really is just a gamble if the market will keep inflating or if it will drop this would show if a long term hold would work or not.

@Ned J.

Hi Ned thanks for the reply, yes I understand, it’s not my first time around the block. I’m trying to explore out of the box options because with current rates and prices nothing looks good. I would be relying on rents to increase, wasn’t considering a refi as it’s already a little below current rates. If rates drop prices will start going up again. Rents haven’t caught up to current borrowing costs. So everything is a little out of wack.

Melissa Nash · Answer

how quickly can you increase rents? National average is 3%- so you can probably raise the rents to cover expenses in a couple years. So, I would say YES to a free house bc if you had to put 20% down on this same house-- lets assume thats about $40-50k then you covering the $300-400 a month is like you are paying the 20% down over time---- so Hell yes! Grab it

Edward Dean · Answer

What are the comps looking like? Does this make sense as a potential flip? Doesn't seem to make sense as a rental unless but make sure you are considering all angles.

Ned J. · Answer

Your negative cash flow is not $500/month. Cash flow is not just rent minus PITI..... you need to factor in maintenance /repairs, CapEx (long term stuff- roof, water heater HVAC, etc etc), vacancy, turnover costs etc etc etc. There are A LOT more expenses you have to account for to truly know what you will be making/losing on a property

You are also gambling on rents continuing to rise at the rate they have been in the past..... being able to finance to a lower rate.... thats speculating... not investing.

Jaron Walling · Answer

@Michael C. I'm throwing $80k into the deal.

Without skin in the game (time, money, sweat) are you really investing? What's the incentive to accept -$500 per month and stay motivated? ZERO motivation in my opinion. At minimum you need cash for reserves and surprise expenses. Anyone buying rental property without a safety net is taking risks. I suppose you'd still have the $80k, but it's not the same feeling. It's not ear marked for this property, this strategy, or this goal.

Refinancing to lower rates could change everything. But you can't control the FED. Nobody here can predict if/when rates will come back down. In my opinion were sitting around 5-7% for years... we were near zero for too long. It's time for the economy and people (first time buyers, etc.) to accept that reality.

Wait, you're in Colorado. +$500 per in cash-flow has to be good. That's more than we're making on our properties in the mid west.