Castro Valley, CA · Member since 2018 · 14 posts · 19 votes
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?
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!
Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes
7y
BTW how are you calculating your cash flow? Are you taking 30% off of gross rents for expenses and reserves then taking debt service out (assuming you self manage)?
Also, is the $250/month cash flow per door or total for 4 units? If its total, that's not all that stellar.
Crestline, CA · Member since 2018 · 63 posts · 70 votes
7y
It sounds like a reasonable deal to me. Cash flow isn't the only way to make money in real estate, as we know here in California. If it works out and you want to grow your portfolio in the future, it can be helpful to show lenders you're already a landlord. So this sounds like a good place to start.
I say go for it, rather than sit on the sidelines.
Specialist · Tampa Bay Area, FL · Member since 2018 · 106 posts · 72 votes
7y
Hi Steven,
Thank you for your question!
In a broad reply to your post - this decision will ultimately be driven by your risk appetite, so there is no right or wrong here necessarily. In investor relations and the world of capital raising, there is an NBA player who is young and has just come into considerable wealth and wants to invest, and there is the teacher who has worked 30 years on a decent salary and is looking to invest retirement money. Both are potential investors, with presumably different risk appetites (high risk/high reward, low risk/low reward). In this scenario, perhaps you may ask yourself, "where is my risk tolerance on this spectrum?"
In conservative fashion - I recommend analyzing comparables in the area to help inform your decision (similar 4-plex, nearby or same neighborhood, similar condition, etc.). Assuming there is no rent control here, it may be appropriate to increase rents as quickly as the law permits after close. It is a 4-unit property, so it would be good to perform your underwriting of the deal before you provide a letter of intent, etc. This underwriting can provide you a glimpse of KPIs, and help better inform your investment strategy in your market.
I encourage you, most importantly again, to take inventory of your personal risk appetite, and then make your capital allocations accordingly.
Please feel at liberty to reach out to me directly should you want to continue the conversation. Happy to connect!
Castro Valley, CA · Member since 2018 · 14 posts · 19 votes
7y
@Bjorik Mutize Yes, all units are occupied. I'll be living in one of them. I'll be learning how to landlord before turning it over to PMs once things go positive cash flow.
Castro Valley, CA · Member since 2018 · 14 posts · 19 votes
7y
@Daniel Reyes I have a high risk appetite. I also invest in stocks and ETFs. I did analyze the area and while the price (600K), seems a bit high, the property has many improvements. The loan has been approved and in underwriting. I still have time to back out if II don't feel right about the deal.
I really feel this will be a challenge for me to turn this nice, low rent paying property positive.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
It is so interesting how folks who dont live in CA view CA investments. Many many millionaires have been made here off “ negative cash flow” real estate.
I dont think we have enough info to know if it is a good deal. What is the IRR? What is your hold period?
Also, any property can “cash flow” if you pay for it in cash ;) I am going to get a link to a post that will help the OP. Be right back.
Investor · Los Angeles, CA · Member since 2014 · 176 posts · 93 votes
7y
@Steven Smith
As-is its not a "Deal" if you're not profiting. You could possibly make the property into an investment depending on many factors but not every available property will necessarily be a good investment. Appreciation, although likely in CA, is just speculation at time of purchase.
Investor · Omaha, NE · Member since 2014 · 2 posts · 0 votes
7y
Like others have mentioned I would caution against, only because it does not cash flow from day 1, but if it cash flows with the typical 20% down, and you are putting less down that down then you are effectively spreading out your down payment over the period you are holding it by contributing monthly to make up for the negative cash flow. I did this the first property I purchased. It wasn't the easiest first few years because my partner and I had to come up with cash almost annually to cover unexpected expenses, which there always will be. My suggestion is just understand that even though they have been updated all units require some work to turn when you are replacing a tenant, and if you are going to self-manage the property be active about getting filling vacancies. Empty units are one of the biggest hits to cash flows, and need to be filled as quickly as possible at market rents.
Investor · Beverly Hills, CA · Member since 2017 · 95 posts · 58 votes
7y
@Steven Smith
I don't have info to make a decision. Any CapEx repairs needed, income upside (laundry, storage, parking,etc), how's the neighborhood, historical annual repairs, etc
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
7y
@Scott R.
😀 Very true! I guess a bad investment can count!
As far as this one, I don't have anywhere near enough info to say whether this is good or bad.
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!
the real question that needs to be answered is "will this cash flow if you move out and charge all tenants market rent?" it sounds like that is the case. it also sounds like you plan to slowly bring rents to market over multiple years. if you have the cash to supplement your tenants rent for several years, this is not an earth shattering idea. however, you are leaving money on the table by raising rents slowly. the faster you get to market, the better off you are. your tenants know what market is, and you should be ok to get really close to it without anyone leaving. (why would they leave if all the new rentals will cost them more?) however, even if you expect tenants to leave, your turnover cost is likely to be the same as the amount you are planning on supplementing their rent for over the next several years. would you rather spend money now, or later?
Rental Property Investor · San Diego · Member since 2018 · 1 post · 0 votes
7y
@Steven Smith can you update the lease agreement to have the tenants pay utilities instead? If this area is anything like San Diego you are probably paying large water and electricity bills. You could also look into financing solar for the property and claiming that tax credit?
While I wouldn’t move on a property with negative cashflow - there could be other ways to make get it cashflowing. You could charge for Pet rent, add and charge for extra storage with tuffsheds, etc.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
@Steven Smith the thing that most people are ignoring is the down payment. Cash flow by itself is not the only measure. If I paid all cash for a property, the cash flow would be positive on ANY investment, but that doesn't make it a good investment.
@Dan Maciejewski was on the right track when he mentioned cap rate. Cap rate is how you can evaluate an investment without financing/down payment figured in. Example:
$100,000 purchase with 5% cap rate (not uncommon CAP in CA)
Cash purchase the cash flow is $416 per month
20% down payment, 5.5% interest, 30 years, payment is $454 and -$38 cash flow
0% down payment, 5.5% interest, 30 years, payment is $567 and -$113 cash flow
So is this investment a good deal? Change it to 8% cap rate and you are cash flow positive in both financing situations. My point is looking at cash flow by itself is not the only measure.