Purchasing A 4 Unit Property With Negative Cash Flow. Bad Idea?
Castro Valley, CA · Member since 2018 · 14 posts · 19 votes
Purchasing A 4 Unit Property With Negative Cash Flow. Bad Idea?
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Real Estate Agent · Long Beach, California (CA) · Member since 2016 · 73 posts · 43 votes
7y@Steven Smith
I’m in Long Beach, CA where multi family homes are expensive and finding an investment that cash flows right away is like trying to find a unicorn. I’m a realtor in the area as well so I’m really familiar with the local market.
If you think of “house-hacking”, it’s where you live in the property and utilize roommates or other units on the same property to help pay your mortgage. You either live for free or for cheap!
If you are living in the property and are only $200-$300 negative cash flow, I suppose that’s what you’re ultimately paying each month for your mortgage after rents. Over time, rents could appreciate and meanwhile you’re building equity, paying down your loan and living for very very cheap!
Just as a personal example, my husband and I bought a triplex in Long Beach in October 2016 for $750,000. Rents were below market and units needed to be updated. Over the last two years we’ve renovated all 3 units and raised rents while the market was still appreciating. When we first moved in, we were paying about $1800/month after rents (VERY cheap for our area!). Now we pay about $1400/month and if we were to move out and rent all 3 units we would be positive cash flow about $700/month.
So right away, it wasn’t a terrific deal but after renovations and increasing rents, it’s now a good deal and will continue to be a well-performing property for us. So if you are house-hacking have the expectation that you may not be cash flowing or living for free yet, but you may over time if you force the value of your property up through renovations and value-adds. I hope that helps!
84 Replies
- Rental Property Investor · Delaware, USA · Member since 2018 · 43 posts · 48 votes7y
That sounds like a liability to me. I'm new to this world, but everything I've read/listened to/etc at this point says that breaking even should be the bare minimum. Is there an upside on the value of the property through rehab?
- 7yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
You either cash flow or make $$ off appreciation....
Debt pay down and building equity play a roll in making it a "good" investment, but unless you are cash flowing or appreciating significantly (and feel confident that it will continue to appreciate), then no..... its not a good investment.....
Now if its a big value add opportunity where at first you may negative cash flow, but you have a solid plan to add value and increase NOI and then positive cash flow, then maybe. If you cant do something to flip it to positive cash flow in the near future, you are only playing the appreciation angle and that is a big risk
- Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes7y
It's not really an investment if it can't make money.
With it fully rented and the rents at market rate, it won't cash flow?
I don't see appreciation in multi-families like in Single Family in my area -- Large multi-family price is determined by cap rate and income and small multi uses comps more and appreciation typically matches inflation
- Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes7y
buying a negative cash flow property is a good idea in 2 scenarios. You can increase rents to make it a positive cash flow investment relatively soon. Or you can hope and pray that the market appreciates and you can sell at some point. You will have to be able to support the investment from your own pocket in both scenarios, with the first being shorter than the second. .
Increasing rents should not have substantial impact on home value, since 4 units are valued based on market comps.
You are not necessarily in a bad position, as many investors purchase in Cali and bank on the appreciation. Its been through the roof over the last decade. However, also be aware that one day it may crash and you don't wanna be the one left holding the bag.
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
Thanks @Ned J. and @Kevin Christensen
Currently the rents are way below market. I had planned to slowly take those up. All units have been rehabbed, (kitchens, bathrooms, floors) and the roof replaced 10 years ago. Not sure how much multi-family units appreciate Carmichael, CA.
Currently the expenses are what's causing the negative CF (Trash, sewer, water), plus the very high taxes.
Thanks for your replies.
- Rental Property Investor · Delaware, USA · Member since 2018 · 43 posts · 48 votes7y
@Steven Smith I would be real iffy about that if all of the units are already rehabbed. That means you can't really force appreciation, which tells me you are basically tying up your money for a slow equity leak that you have to contribute to. You could probably use that money much more effectively on a break even or slight cash flow property. Imagine what happens if you're tying up all that money, plus 200-300 per month and something breaks in the near future? Now you're REALLY putting out fires with cash. Doesn't seem like a great deal to me, but I'm basing that on just what you've said here.
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
@Dan Maciejewski, Yes they would, at market rent, but I won't be able to do that at this point for fear of running everyone out! :-)
Current owner hasn't raised them in a long time. Tenants get use that kind of stuff.
I'll take the slow approach.
@Andrew B. Those were my thoughts. I do have the capital to support it out of my own pocket (For now).
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
Hi Everyone,
I think I should add here that I'm getting into this property with only ~24K down. Not a LOT of money. lender is giving credit for most of the closing cost. I'm using my VA loan so I'd be living there for a spell.
Still not so good of a deal???
:-)I appreciate all the great replies!!.
- 7yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
IF there is no value add to the property by rehabbing and increasing the rent significantly, in short order, then this is a bad investment..... unless you feel like its going to appreciate due to location alone and you can wait to cash in on that $$ when you sell, then you will be bleeding $$...bad decision.
- Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes7y
@Steven Smith Whew! That's good that the market rents will eventually allow the property to support itself, at least. I'm not sure of the laws in your area or the current lease terms/duration -- you may consider bringing the rents up to market rate one-by-one, allowing the other rents to come in until each unit is re-rented. I don't love the idea of inheriting below-market tenants long-term, myself.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
if its quality area.. i bet within a few years you can get it breaking even and if your house hacking to start what better way to get into a 4 plex.. just make sure its a good area.. but having your tenants pay your home off is number one goal
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
Thanks @Ned J. @Dan Maciejewski @Jay Hinrichs
I do have a plan to make it eventually cash flow, it will just take a while. I posted this question to see if starting out with negative CF was a good idea. I hear you all loud and clear.
I really don't believe I need to add value to increase rents. They are well below the market rate to start with for that area.
House hacking is something I always wanted to do.
Thanks again everyone!
- Real Estate Agent · Long Beach, California (CA) · Member since 2016 · 73 posts · 43 votes7y@Steven Smith I’m in Long Beach, CA where multi family homes are expensive and finding an investment that cash flows right away is like trying to find a unicorn. I’m a realtor in the area as well so I’m really familiar with the local market. If you think of “house-hacking”, it’s where you live in the property and utilize roommates or other units on the same property to help pay your mortgage. You either live for free or for cheap! If you are living in the property and are only $200-$300 negative cash flow, I suppose that’s what you’re ultimately paying each month for your mortgage after rents. Over time, rents could appreciate and meanwhile you’re building equity, paying down your loan and living for very very cheap! Just as a personal example, my husband and I bought a triplex in Long Beach in October 2016 for $750,000. Rents were below market and units needed to be updated. Over the last two years we’ve renovated all 3 units and raised rents while the market was still appreciating. When we first moved in, we were paying about $1800/month after rents (VERY cheap for our area!). Now we pay about $1400/month and if we were to move out and rent all 3 units we would be positive cash flow about $700/month. So right away, it wasn’t a terrific deal but after renovations and increasing rents, it’s now a good deal and will continue to be a well-performing property for us. So if you are house-hacking have the expectation that you may not be cash flowing or living for free yet, but you may over time if you force the value of your property up through renovations and value-adds. I hope that helps!
- 7yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
Need some clarification....so are you sayin that after you raise the rent AND you move out, you will still be negative cash flow at $200-300/month? That's what I was getting from your original post.....
I don't see how that can be a good investment no matter how you spin it unless its gonna appreciate a lot..... with likely rent increases in the next several years you will break even and then cash flow down the road...how far down the road depends on your market rent. In CA it may not be that far down the road
Now if you are raising rent and still house hacking and negative cash flow at $200-300/month, then yes, its a good deal now and a great deal when you move out...
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
@Steven Smith as a general rule negative cash flow is bad, but in your situation it may be fine for these reasons:
- Carmichael, CA market appreciation is strong good market (location, location, location)
- Lower down payment - if that down payment was 20%, would it be cash flow positive, probably
- House hack means instead of paying rent, you are buying into an investment property
- In my opinion, better to buy local in California, than to go out of market for some cheap piece of junk house in the midwest
- First rental property which is a huge hurdle to overcome, buying local and gaining experience live-in is a great way to start
- Interest rates are still ok for owner occupied so good time to lock in long term
- Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes7y
So @Steven Smith, just to summarize or to see if I understood this deal...
1. There is no value add (meaning you're not renovating the place to increase its value)
2. You will live in one of the units now and even if you move out and rent all the units and increase the rent 8%, it will still be negative $300/month cashflow?
3. The only profit in the deal is IF the value goes up (which may happen but what if it does not happen - let's pretend it's 2007 now and a lot of people told you, the price will go up)
If it were me - NO, I will not buy it. There are still deals out there, even in your market that should at least breakeven from a cashflow standpoint, or negative cashflow NOW but you can do a value-add and sell it at a higher price.
Now, if you are buying it to live in one of the units and live cheaper than living in a house - sure, do it. Otherwise, don't.
- Madisonville, LA · Member since 2018 · 125 posts · 71 votes7yIf you were getting market rent on all 4 units how much would you cash flow? If it is that far below market rents it may be worth raising rents to get you closer to where it needs to be. I know you mentioned being scared the tenants will leave but if you are in a good area then you should be able to fill them quickly if the current tenants move. Probably better to deal with some short term vacancy than a slow and steady drain on your cash flow
- Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes7yWALK ..The deal has to stand on its own legs . Would you buy a stock knowing you’ll lose money each month on every share ? Would you put 24 grand In a saVIngs account that cost you 300$ in monthly fees at the bank instead of earn you interest ? investing is supposed to make you money not lose it every month.
- Rental Property Investor · Halifax, NS · Member since 2018 · 55 posts · 103 votes7y
Hey @Steven Smith,
Good for you for taking the leap and taking action on something! Many people don't get past the fear of taking the first step. That being said any successful real estate investor needs at least two of these three things: knowledge, hustle, money. Getting into the right deal depends on a lot on your knowledge and how well you can analyze a property. My investment style is that it NEEDS to have strong cash flow (at least $150/door/month) in order to get a decent cash-on-cash return. Personally, I would never invest in this property unless it was making money from day 1.
If you re-read what @Ned J. said in his original post there's a ton of great info in there!
My next point, is why be afraid of losing your current tenants to make more money with new tenants? If it's done correctly you shouldn't even miss a single month of rent. Our local laws require that we give 4 months notice of a rental increase and the tenant must give 3 months notice before ending a year-to-year lease. This gives the tenant 1 full month to decide if they want to stay and pay the higher rent or give you their 3 month's notice to quit. This gives you plenty of time to advertise and find new tenants who ARE willing to pay fair market rent.
Last point, there's 4 ways to make money at real estate (5 if you count tax advantages).
1) Cash Flow (from rent, storage/laundry/parking)
2) Forced Appreciation (through improvements and renovations)
3) Principle Recapture (increasing equity as your mortgage is paid down)
4) Passive Appreciation (property values increasing, this is not something you want to count on as they can and will decrease in value at some point)
You're trying to make this property work as in investment, but you only have one (maybe two) income streams available to you right now. I'd rate this as a poor investment that could potentially turn into a disaster if property values fall and you're forced to sell at a loss.
If you really want to go through with it, don't take the slow route of increasing your rents. If you don't have rent controls I'd jack those right up to fair market rent immediately, and get new tenants if you have to.
I hope that gives you something to think about and was helpful. Good luck my friend!
T :)
- Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes7y@Steven Smith If it makes sense to you buy it.
- Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes7y
I think the issue here is that you are putting so little down that negative cash flow is kinda expected. If you put 20-25% down, I assume it will cash flow much more.
Carmichael is a good location. Personally, I would never buy a negative cash flowing property unless we can get into the black within 6 months through value add and increased rents. AND then there is more upside after that.
On the other hand, since this your first deal, you could learn alot about REI from this experience.
You said expenses are what's causing negative cash flow (trash, water, sewer). Pass those costs to the tenants! If it's not individually metered, implement RUBS.
re-run the numbers and see where you are at.
I disagree with someone here saying that there is no upside since it's all fully rehabbed. There are 2 ways to make money in MF - value add through rehab and value add through management. The best properties have both opportunities in play.
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
@Lindsey Iskierka Wow 750K, I thought my deal was high at 600K.
I was thinking of raising rents anyway. The apartments have already been renovated so there's not much value add.
The rent is very low right now, so the only way to move this towards the positive end is to do just that.
The $200-$300 is after all (including me), pays rent. Only until I raise rents to the market rate for the area will I see cash flow.
@Ned J. Yes, I will be living in one of the units. I will be for a time being be paying higher rent than the rest of my tenant, but I will own the joint! :-)
@Joe Splitrock Yes, if I had 120K (20%) to put down, it would cash flow like crazy and we wouldn't be having this nice little conversation. :-)
- Coppell, TX · Member since 2015 · 485 posts · 310 votes7y
1) what is the cash flow when you do the math, with you not living there? 4 x market rents, minus capex, taxes, insurance, repairs etc. is that positive? factor in property management as well as a percentage of the rents.
2) if that cash flows, work backwards and see how much you have to contribute for your unit's "rent" to cover mortage + expenses. that will be your cost of living. if it is not well below market rents, it's not a good house hack.
if (1) barely cashflows, it's now a good deal.
if you are paying 300 on top of market rent to break even it is a HORRIBLE house hack.
- Castro Valley, CA · Member since 2018 · 14 posts · 19 votes7y
So many great responses I can't answer them all!!!
To hit a couple of good point I've seen.
Carmichael seemed like a nice area. I went twice to look a properties before deciding to invest there and my brother who's lived in the town for years vouched for it.
I would have to raise rents ~20% to get them to market prices. You can see my apprehension to do that all at once. It would very much cash flow at that point around $250/month.
I could also put more money down on the deal. That would bring monthly cost down. I'm considering that before closing. (I was trying to hold on to a much cash for future troubles).
Since starting my real estate investing dreams, I've always wanted a 4 plex (Don't ask me why). In this area decent ones are hard to find. I've been searching for months, only to be disappointed again and again when I arrive only find the nice pretty pictures on the internet don't even come close to reality.
My Real Estate agent told me (Which I already knew), There are more than one way to invest in RE. Pay down to add equity, appreciation, value add (not one of my options at the moment), and cash flow. I plan to hold on to this property for at least 10 yrs (unless it turns south), so there's room to grow.
Thanks for all the great advice, to walk away, not walk away, make it work, It's your money so crack on, etc, etc.
I'll take the next few days to think things through.
Thanks everyone!!
- Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes7y
Originally posted by @Steven Smith:
Hello Everyone.
I'm in the process of closing on a 4 unit building in CA in which I will live in one of the units. I will be raising rents about 8% since the current owner hasn't raised rents in a long time. Even if I eventual move out and make it investment property, I'll still be negative CF of at least $200 to $300 a month. I know that BP has guidelines about cash flow being the driving force in buying investment property.
Would this still be a good investment since equity would grow from rents collected?
What are your thought?
Thanks everyone!!
It depends. Is that accounting for everything cap ex and everything else. Can you raise the rents 75 dollars a piece? That makes it break even. So you just need to raise it 175 bucks a piece over the next year or so to make money. But that's only if you are accounting for everything already. If not it could be a horrible investment
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