Hi guys. I'm in the process of purchasing a property, but I just realized it has negative cash flow when I factor in the maintenance and vacancies. However, I think one of the main reasons it has negative cash flow is because I'm going fha and I am putting a small out of money down, which makes the principal and interest payment higher than it would be if i had put down 20% in a conventional loan. I think the deal could improve over time if I refinance into conventional down the line and put more money down. What do you think? Here are the numbers: purchase price is 270,000 property is a triplex with all 3 units already rented to long term tenants. the bottom tenant is moving out and that is where I will be living for a year. Principal and interest is 1300.00 taxes are 2400 a year insurance is 1800 a year rents come out to 2100 per month total for all three units. down payment is 3.5% Here are a few bonuses the property is in a really good neighborhood that is up and coming and this is a neighborhood I personally would want to live in for the next year. Also, the units are outdated: old kitchens, carpet, etc. With some rehabbing, I could raise the rent so that the total rent for all three units is about 2500 per month. So after i move out and get my unit rented. I think I'm looking at about a negative 169 a year or so. but if I refinance, pay down the mortgage and get rid of the PMI, things could look better. Is this doable? Is this a bad deal? what are your thoughts on this?

To the people making the numbers work by the doing repairs yourself and doing the PM yourself just realize when you go to sell that most buyers will use retail trade averages for ongoing repairs and having a PM manage the property. If you look for buyers that do not include those things you will severely limit your resale value and the buyer pool to sell too. Also do not talk yourself into " If I can just rehab and get the rents higher THEN the property works! " You DO NOT pay for potential in the buy price that the seller has yet to work for to achieve. Either the seller does it and you think of paying for it or there is a discount for the buyer doing it. Think about why would a homeowner buy a house that needs 15,000 worth of work for 150,000 when they can get one that has all those problems fixed for 165,000?? The buyers all things being equal will go for the finished product and avoid the unnecessary work. Now if the buyers bought for 120,000 and put in 15,000 for 135,000 and it's worth 165,000 then the 30,000 upside might make it worth going through all those repairs and updates. Do not buy something just to try and invest. Yes maybe you put 3.5% down BUT if that deal goes bad you have a ton of debt around your neck dragging you down. I have seen people buy the wrong property and be stuck for years and years trying to get rid of it. This would be a NO to me. Even if you had a really strong rental market where it might eventually get you cash flow positive those markets do not stay at that level forever. If a market is going up by 8 or 10% a year the odds of it staying that way for 5 or 10 years is slim. More realistic is maybe a few good years and then goes to 2 or 3% a year. The rents could even deflate as the hot markets tend to go to cold. Some markets look like a roller coaster on a graph and other have a small incline and a small decline. I like the more average markets with good steady returns because losses are more limited in a downturn. The highly volatile markets might be good for quick re-sales but holding long term might prove risky. Every investor has to decide what they like and do not like.

You can raise the rent by a total of $400 a month by rehabbing. How much will rehabbing cost? $3000+ per unit? It will take short of a year to recoup that investment for one door at a $400 month increase. In that year, somebody could move out destroying the carpet and you have to start all over again. It sounds like you fell in love with the property or the idea of being an investor. It's a bad deal.

@David Jay Is the first person with a reasonable non knee-jerk response to this question. First of all when you live in a property, its not an investment property. Its your home. You may rent out a part of your home, but its still your home. I guess basic arithmetic does not include percentages, variability and confidence limits on statistical projections. Therefore the $167/year loss on a projection reads to some as "NEGATIVE CASH FLOW" RUN! If she is getting to break even not counting principal pay down with only 3.5% down in a potentially appreciating market, that is by no mean a dead deal! I don't know the details of the area or the comps or anything but if there is any decent growth in that market and you can get essentially break even with 3.5% down, its at least worth looking at.

That's just a rationalization for negative cash flow.

There are experts on BP that know far more than I do when it comes to analyzing deals. All I know from my experience is just your description above makes my blood run cold. I am having flash backs here to my last hellish REI experience in VA, thanks a lot!!!! :) I am kidding with you. Trying to make a point. I would never EVER do this. Want to end up with sleepless nights and a chapter 7 in your future? If not, I would reconsider. Maybe other experts here can shed more light than I can. I am only speaking from personal experience of dealing with rentals with thin profit margins. Sounds like to me that you want to be an investor but you lack the cash to get into your market. Either save up cash or find another market, or another way to invest in your market that allows you to make some money. I consider one of my main missions in life now to warn other new investors from doing deals that will make their lives a hell of negative cash flow, paying out of pocket to keep your bad investment afloat (can you IMAGINE THAT? Buying a property to make money, and now you have to pay your hard earned money to keep it going? I've been there. It is horrible), sleepless nights, collection calls and bankruptcy. good luck.

You know I think BP should have a HORRIBLE DEALS DON"T DO IT section. A mod could pick out obvious trainwrecks in the making and post them in that section. Not to beat up kay in any way! I mean this in a compassionate way to help her and others to warn them from doing crazy deals that will lead to misery.

Here is a two question test: Q1: Are you an investor, or a buyer? I'll give you a hint, ...Investors make money. Q2: How many "negative cash flow" properties does it take, to screw a REI into the ground...as in go broke?

Could this be a good deal even though it has negative cash flow?

Kay H.

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chicago , IL · Member since 2014 · 61 posts · 3 votes

Could this be a good deal even though it has negative cash flow?

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