Purchasing A 4 Unit Property With Negative Cash Flow. Bad Idea?

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Purchasing A 4 Unit Property With Negative Cash Flow. Bad Idea?

Steven Smith
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? 

What are your thought?

Thanks everyone!! 

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Lindsey Iskierka
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!
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  • Mark Dolfini
    Specialist · Lafayette, IN · Member since 2018 · 24 posts · 29 votes
    7y

    Having been down this road before, about 12 years ago, my answer is a resounding NO!  You buy for cash flow.   Appreciation is nice, but Cash Flow is what keeps you alive.  I have been in deals where cash flow was skinny, but to get into a deal where you know you're going to be upside-down even after repairs just flat doesn't make sense.  I see a lot of people right now chomping at the bit to get into a deal, so much so that they will sacrifice common sense.  I don't know how to say this tactfully except to say it: 

    DON'T BE A MOTIVATED BUYER!

    Best of Luck...

    1Reply
  • Ellis HammondPro Member
    Investor · Leawood, KS · Member since 2017 · 178 posts · 108 votes
    7y

    @Steven Smith it seems like from your responses the reason it doesn't cash flow is bc you are using a VA loan with very little down. A four unit in CA that doesn't cash flow with zero down is well pretty common haha. Seems like its could be good deal as you build equity in the property and there are lots of room to increase rents.

    Only thing I would add is just have a 5-7 year plan. Can you get to a place ever where you don't have to come out of pocket each month? And how can you get there? Honestly, i don't even mean make a ton of cash each month, but at least break even. This could be a property you own for a long time and just use as something to borrow against for future properties and enjoy the tax benefits. 

    Most ppl on here prob have spent $24k on a course and still haven't bought anything. Not recommending you buy bc i don't know enough but sure would be a great course in RE education!

    0Reply
  • Evan Hooks
    Rental Property Investor · Spotsylvania, VA · Member since 2018 · 21 posts · 20 votes
    7y
    @Steven Smith To me, it sounds like a no-no. That’s from a numbers perspective. As a (previous) lifetime renter, I know most people expect rents to go up some when ownership changes. That alone will gIve you leeway to you raise it a bit. Since there isn’t much of a value add, you should consider a lot of minor cosmetic upgrades as you continue to raise rents. It would give the renters the impression of constant improvement and help “justify” the increases to them. Ijs
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  • Jim Thomas
    Contractor · Atlanta, GA · Member since 2018 · 32 posts · 14 votes
    7y
    @Steven Smith Sounds like you are buying to live there and have income to offset that cost. Normally, the only reason to invest in any asset is to make money. It cashflows or it increases in value until you sell or refinance. Don't buy it unless you get it below market value.
    0Reply
  • Steven Smith
    OP
    Castro Valley, CA · Member since 2018 · 14 posts · 19 votes
    7y

    I've thought about this for the past few days ( I actually thought of nothing else) and listening to all the great advice, I've come to the conclusion that I AM thinking about this all wrong. I strongly agree with @Russell Brazil, @Joe Splitrock, and others. This is not a typical investment property with 20% down. It would CF strongly if I put that down. As others have stated, I can't expect great CF from a property so highly leveraged. (Remember VA loan). I will be living on the property for at least 2-3 years and I can move it in a positive direction during that time. I'll re-evaluate this in 5 yrs, then again at 10.

    Since I don't happen to have $120K free money just lying around, I feel I can make this work with what I have. I have sufficient cash reserves to handle the inevitable repairs/replacements that WILL come up. I will manage the property myself for a while just because I want to learn that part of this.  

    Thanks everyone for the advice. I'll move forward with this unless the appraisal comes back in a bad spot. I'll be sure to come back to BP for any future investment advice.  

    You guys are great! Feel free to connect with me because I sure could use some help. :-)

    4Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    7y

    "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?"

    ----------------------------------

    My first impression is that anybody who leaves out crucial information from an investment post should not be investing at all. Why? Because the poster hasn't thought the matter through, or is making assumptions that will blow up in his face.

    Your post has the measure by which you can make a decision, so there really is no need to post. I have not read the responses to your post, but I bet they come down to this:

    a. Is the property appreciating more each month than the cash flow is negative?

    b. Assuming the appreciation is greater each month than the cash flow is negative, does the amount of appreciation exceed your forgone opportunity cost?

    c. Can you carry the net drain until payoff?

    'Nuff said.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Steven Smith:

    I've thought about this for the past few days ( I actually thought of nothing else) and listening to all the great advice, I've come to the conclusion that I AM thinking about this all wrong. I strongly agree with @Russell Brazil, @Joe Splitrock, and others. This is not a typical investment property with 20% down. It would CF strongly if I put that down. As others have stated, I can't expect great CF from a property so highly leveraged. (Remember VA loan). I will be living on the property for at least 2-3 years and I can move it in a positive direction during that time. I'll re-evaluate this in 5 yrs, then again at 10.

    Since I don't happen to have $120K free money just lying around, I feel I can make this work with what I have. I have sufficient cash reserves to handle the inevitable repairs/replacements that WILL come up. I will manage the property myself for a while just because I want to learn that part of this.  

    Thanks everyone for the advice. I'll move forward with this unless the appraisal comes back in a bad spot. I'll be sure to come back to BP for any future investment advice.  

    You guys are great! Feel free to connect with me because I sure could use some help. :-)

     I agree with your assessment to purchase.  I am confident that if you still own in 10 years you will be very glad you made the purchase.

    RE is local.  What makes a good purchase in the Midwest does not necessarily make a good purchase in CA and vice versus.  Different strategies.  

    For those who use the analogy of the stock market and state that they would not purchase stocks under this condition, they simply do not understand leverage and cost of money.  If I could pick my stock and purchase $600k stock (selling price) for $24k and pay $300/month (negative cash flow) to have more than $300 (equity paydown) applied to the debt I would do it in a moment.  Anyone who states otherwise has a lot to learn about money and leverage (that is virtually free money).  Note in this scenario a 1% increase in value in the first year provides a return significantly over 20% on investment   

    Good luck

    1Reply
  • Alpesh Parmar
    Investor · Dublin, CA · Member since 2016 · 344 posts · 228 votes
    7y
    @Steven Smith I live in Bay Area as well and I don’t invest in CA because of no cash flow. This doesn’t seem like a good deal as investors in Bay Area mostly make money from appreciation and I don’t see this property getting appreciation in near future. People are already dropping 10% off of list price in most of the Bay Area and I think the market here has already reached the peak. If you plan to keep it for at least 10 years, you may see some appreciation.
    0Reply
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