I bought a negative cash flow property, and it's a good thing I did!

[Mike Sattem]

First off a few notes:

1. My area would be considered remote by most (the closest town with over 15,000 people is 80 miles).

2. My area is considered low income, as most folks work for less than $15 per hour at the Lumber Mill or Travel Trailer Manufacturing Plant.

3. The 1% rule is great if you can find it, and the 2% rule is impossible to attain.  Most 1 Bedroom Apartments in my area rent for $400.

So, with that in mind I will get started. I just finished rehabbing a four plex I bought for $150K (Yellow Letters do work, FYI). The building was vacant when I bought it, so doing a full on rehab was easy. 4 New water heaters, 19 New windows, 4 units worth of carpet and paint, and $2,000 worth of appliances.  I did almost all of this work myself, but still ended up spending close to $10,000.

I am now placing tenants and earning some money. Yay for me! I bought this property with $0 down (another yay for me!) however this means that my payment is pretty high; $1,052 monthly plus $150 in taxes and insurance. So, when it is all said and done I actually lose $50 per month once I take out 10% for vacancy and 10% for CapEx/Maintenance. What a mess!

Here is why this is a great problem to have: 

1. Because I bought this property with $0 down I only have my fix-up money invested.

2. Because all the money I normally would have used as a downpayment went into improvements, my property is sitting pretty with a value closer to $200K.

3. Because of my new found equity I can now refinance with a local credit union, saving 2% on the rate, and flipping my negative $50 cash flow to a positive $300 cash flow with a 30 year note.

In closing, when evaluating a property remember what your end goal is, and all the different ways you can get there. Most folks I have worked with would have rather found a $150K rent ready property and put $10K down, which is a great plan if you can find it. I chose to find a junker property and spend that same $10K improving the property, thereby making a cool $35K in equity for later on down the road. Even at this point most folks would have never done this deal because they would see the negative cash flow. But Real Estate is more like Chess than Checkers, so looking two steps ahead is a must. 

I bought a junker property that has negative cash flow, and it just might be my best deal to date.

[Marcus Johnson]

@Mike Sattem   I would prefer option 2 every time, because what I do with real estate is I want to get them paid down quickly which reduces risk, which we all should be calculating for.   When the market tanks and renters become scarce, the person who put nothing down and has the larger mortgage payment is going to be in a worse financial position then someone who pays down the balance and has a much lower mortgage payment.  Plus the equity is much great with cash in the game should you need to sell in an emergency.   I believe most people don't calculate for risk and leave that out of their calculations with the impression that things can only go well.