Rental property with low cash on cash return and cap rate

4 Replies

Hello real estate investors,

Newbie here with newbie questions - please bear with me! I am looking to invest in a 2 bed 2 bath condo with my brother, who would live there and I'd rent out the second bedroom. It's in a quickly gentrifying area, and I'd own and be responsible for 40%. 

After some analysis, it seems like it'd be right around $0 in cash flows. The overwhelming BP sentiment seems to be to run for the hills... but isn't there value in building equity? With my conservative assumptions, if we sell for the same price 5 years down the line, my estimated return will be around 10%, and would increase if we held it longer. We're planning on a relatively small down payment - less than 5%. 

So my question comes down to the value of investing in a mortgage and delaying returns until selling. It seems to me that even given the potentially negative cash flows, this would be profitable - not to mention the hands on experience. What am I missing here, BP?

Thanks!

Max

If you plan on being an investor with lots of properties and cash flow. Ask yourself if this will get you there. How many of these type of deals can you do with zero return. My guess is not many. If you plan on being a mom& pop investor with one property and work a day job this property will be fine. But since you are onBP I doubt that is the case.

@Maxwell Shipp the quick answer is that you are not missing anything and that you definitely will be building equity. It is the same as most people in the country who just buy and live in their one single family house. It costs them money to live there but are building equity.

The reason that this is looked down upon by the real estate investor is that we are looking to make as much money as possible on our investments. That profit can help find the next investment. Why buy something that loses money per month or breaks even when there are plenty of properties that will make money each month? You and your brother could buy a 4 unit building and live for free while renting out the other units. This would be a better investment than the condo as it makes you monthly income plus you are building equity. It is all about the rate of return!

Originally posted by @Maxwell Shipp :

Hello real estate investors,

Newbie here with newbie questions - please bear with me! I am looking to invest in a 2 bed 2 bath condo with my brother, who would live there and I'd rent out the second bedroom. It's in a quickly gentrifying area, and I'd own and be responsible for 40%. 

After some analysis, it seems like it'd be right around $0 in cash flows. The overwhelming BP sentiment seems to be to run for the hills... but isn't there value in building equity? With my conservative assumptions, if we sell for the same price 5 years down the line, my estimated return will be around 10%, and would increase if we held it longer. We're planning on a relatively small down payment - less than 5%. 

So my question comes down to the value of investing in a mortgage and delaying returns until selling. It seems to me that even given the potentially negative cash flows, this would be profitable - not to mention the hands on experience. What am I missing here, BP?

Thanks!

Max

 No, I wouldn't do it.

I can predict whether or not a property will cash flow at a 95% rate.  You cannot predict appreciation.  Investing for cash flow is investing....Investing for appreciation is speculation.

If you invest in enough deals for just appreciation ($0 cash flow), there's a much better chance you'll likely end up in bankruptcy.  You'll also run out of $$$ to do deals very quickly.

Originally posted by @Maxwell Shipp :

Hello real estate investors,

Newbie here with newbie questions - please bear with me! I am looking to invest in a 2 bed 2 bath condo with my brother, who would live there and I'd rent out the second bedroom. It's in a quickly gentrifying area, and I'd own and be responsible for 40%. 

After some analysis, it seems like it'd be right around $0 in cash flows. The overwhelming BP sentiment seems to be to run for the hills... but isn't there value in building equity? With my conservative assumptions, if we sell for the same price 5 years down the line, my estimated return will be around 10%, and would increase if we held it longer. We're planning on a relatively small down payment - less than 5%. 

So my question comes down to the value of investing in a mortgage and delaying returns until selling. It seems to me that even given the potentially negative cash flows, this would be profitable - not to mention the hands on experience. What am I missing here, BP?

Thanks!

Max

Max,

What you're missing is a good chance you'll receive any positive return from your efforts...I don't know about you, but I don't work for FREE.

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