Never invest in a cashflow negative property?

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Never invest in a cashflow negative property?

David Campbell
Investor · San Diego, CA · Member since 2017 · 190 posts · 117 votes

I invested in a property in property in San Diego in 2015, whose numbers were indicating it was going to be cashflow negative by a couple hundred dollars per month. I was a little surprised at the near universal advice I received which was along the lines of "never, never, invest in cashflow negative properties." Whenever I hear the term "always" or "never" as a rule, I become suspect. I bought anyway. As I just sold it, I wanted to post the stats here to get people's opinions.

Purchase year: 2015

Purchase Price, etc: $585k, 0% down (va), 30 yr fixed at 3.825%

Cashflow negative amount per month: $300-400, but let's call it $400.

Total cashflow negative when I went to sell in 2021: $31,200 ($4,800/year x 6.5 years of ownership)

Sale year: 2021

Total left on loan when it sold: $480k

Sale Price: $1,006,000

Gross gain: $526,000 

Net gain: $465,000

So, it would have been smarter to forego this acquisition and the net gain in order to save $31,200? Or did I miss something.

While I agree that generally cash flow negative properties should be avoided, be careful when people advise you in absolutes. 

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
5y

I'm in the "never" camp.

A rising tide raises all boats.....but when the tide goes out, you see who is swimming naked.

Only a moron lost money in real estate between 2015 and today, so having made money isn't necessarily a sign of a good decision. 

While we haven't had one in a while, cash flow protects you against protracted downturns.  You don't get that protection with negative cash flow.   While it is better to be lucky than good, I find if I make good decisions, in the long run, I am luckier.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y

    I'm in the "never" camp.

    A rising tide raises all boats.....but when the tide goes out, you see who is swimming naked.

    Only a moron lost money in real estate between 2015 and today, so having made money isn't necessarily a sign of a good decision. 

    While we haven't had one in a while, cash flow protects you against protracted downturns.  You don't get that protection with negative cash flow.   While it is better to be lucky than good, I find if I make good decisions, in the long run, I am luckier.

    19Reply
  • David Campbell
    OP
    Investor · San Diego, CA · Member since 2017 · 190 posts · 117 votes
    5y

    @Greg Scott agreed definitely that these past few years have been a very unusual (read advantageous) time for investors. I just think in REI absolutes is too binary for me. I think most times there's shades of gray in there

    4Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @David Campbell:

    I invested in a property in property in San Diego in 2015, whose numbers were indicating it was going to be cashflow negative by a couple hundred dollars per month. I was a little surprised at the near universal advice I received which was along the lines of "never, never, invest in cashflow negative properties." Whenever I hear the term "always" or "never" as a rule, I become suspect. I bought anyway. As I just sold it, I wanted to post the stats here to get people's opinions.

    Purchase year: 2015

    Purchase Price, etc: $585k, 0% down (va), 30 yr fixed at 3.825%

    Cashflow negative amount per month: $300-400, but let's call it $400.

    Total cashflow negative when I went to sell in 2021: $31,200 ($4,800/year x 6.5 years of ownership)

    Sale year: 2021

    Total left on loan when it sold: $480k

    Sale Price: $1,006,000

    Gross gain: $526,000 

    Net gain: $465,000

    So, it would have been smarter to forego this acquisition and the net gain in order to save $31,200? Or did I miss something.

    While I agree that generally cash flow negative properties should be avoided, be careful when people advise you in absolutes. 

    I am not surprised that a purchase in 2015 was initially cash flow negative.  However, I am surprised that you could own a property purchased in 2015 and it would still be cash flow negative.  Rents have averaged over $100/month increase going back almost 10 years.  Did you not raise the rents?

    I do not care the source of the return.  I have never purchased a property that projected negative cash flow, but I would do so without concern if my pro forma reflected a good return.  

    As for @Greg Scott assertion that cash flow provides a protection, this was not shown to be true in all markets in the Great Recession.  Markets like Detroit had its cash flow vanish.  In addition the units had not appreciated such that the owners had equity to extract.  This resulted in many foreclosures. 

    As for the assertion that the last 6.5 years have been great, what would you say that there is not a single purchase date this century where San Diego’s average appreciation is appreciably under $2k/month when held until today.   This includes having purchased at the height of the market before the Great Recession.

    I do not understand treating one source of return different than another except for prioritizing return that can lower the invested amount.  Therefore, I value value adds and appreciation over cash flow.  Today, I have only investment with any of my money still trapped in it.   Minimizing the invested amount has 2 big advantages 1) it increases the percent of return 2) it allows scaling, especially when all the invested amount has been extracted. 

    There is a saying cash flow pays the bills but appreciation builds the wealth.  if you need the cash flow to live, I can see the need for cash flow properties.   If you do not need the cash flow to live, you should concentrate on the wealth building.  

    The OP did awesome with his purchase. It should have had positive cash flow in 6.5 years even if it was initially cash flow negative. The appreciation was Awesome. Because he had virtually nothing invested (100% LTV) he achieve virtual infinite return (same as I have achieve on every purchase except for my last). the reason I used the words "virtual infinite" is because the OP may have had some closing costs.



    7Reply
  • Regina Wang
    San Diego, CA · Member since 2015 · 1 post · 0 votes
    5y

    Hi Dan and David, SD resident here too. Are you two still investing in SD after this massive appreciation? What is your take on the current SD market? 

    0Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    Nice Job! Long term buy and hold in San Diego is a safe investment as history has shown.  San Diego is a great place to invest for not just long term appreciation but also cashflow, through increase in rents in the market as well as through value adds.  Much more wealth will be gained through appreciation than through cashflow, but you can have both here locally, in the long term.

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    1Reply
  • Paul Smythe
    Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    5y

    Well sure, if you know the property is going to double in value over the next five years then negative cashflow is fine. If you don't have a crystal ball, though, you're just speculating at that point.

    Way too much risk on most negative cashflow deals in my opinion. Your only successful exit strategy is the market improving to allow you to rent/sell for a higher price. If the market is stagnant or declining, you're in a pickle.

    5Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    5y

    I only invest in cash flowing properties.  You only have to know people that bought in 2004-2007 to understand what happens when property values tank and you can't make the payments.  There was an adage years ago that real estate never goes down until it does.  No one has a crystal ball and there's a lot of risk in buying something that loses money in its operations.  It really comes down to risk tolerance.  

    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Bruce Runn:

    I only invest in cash flowing properties.  You only have to know people that bought in 2004-2007 to understand what happens when property values tank and you can't make the payments.  There was an adage years ago that real estate never goes down until it does.  No one has a crystal ball and there's a lot of risk in buying something that loses money in its operations.  It really comes down to risk tolerance.  

    I purchased a SFH in 2004 in San Diego county. It has appreciated $4.2k/month over its 17 year hold. Do you think I regret that purchase regardless if it had negative initial cash flow? Regardless of when you purchased in San Diego, if you own the property today you have experienced great appreciation.

    The Great Recession showed that cash flow is not guaranteed.  Many areas in the country experienced increased vacancies and declining rents (many areas did not have negative rent impacts - it was location specific).  

    The part of the post I agree with is that it is important to not be over leveraged.  Virtually the only RE investors not to make a great return in San Diego are those that had to sell at an inopportune time.  

    4Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @David Campbell:

    I invested in a property in property in San Diego in 2015, whose numbers were indicating it was going to be cashflow negative by a couple hundred dollars per month. I was a little surprised at the near universal advice I received which was along the lines of "never, never, invest in cashflow negative properties." Whenever I hear the term "always" or "never" as a rule, I become suspect. I bought anyway. As I just sold it, I wanted to post the stats here to get people's opinions.

    Purchase year: 2015

    Purchase Price, etc: $585k, 0% down (va), 30 yr fixed at 3.825%

    Cashflow negative amount per month: $300-400, but let's call it $400.

    Total cashflow negative when I went to sell in 2021: $31,200 ($4,800/year x 6.5 years of ownership)

    Sale year: 2021

    Total left on loan when it sold: $480k

    Sale Price: $1,006,000

    Gross gain: $526,000 

    Net gain: $465,000

    So, it would have been smarter to forego this acquisition and the net gain in order to save $31,200? Or did I miss something.

    While I agree that generally cash flow negative properties should be avoided, be careful when people advise you in absolutes. 

     How was it cash flow negative after 3 or 4 years if the rent was at market rate?

    1Reply
  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    5y

    Properties like that are riskier. As others said when things hit the fan you'd be in a tough spot. Anything in 2016 will have a major up swing in appreciation. Also most investors want to utilize the cash flow to hit a certain threshold so this wouldn't work for them. Doesn't mean properties like this are bad but not for everyone

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y
    Originally posted by @Regina Wang:

    Hi Dan and David, SD resident here too. Are you two still investing in SD after this massive appreciation? What is your take on the current SD market? 

     We are always on the lookout for good deals. I believe good deals are rare on the MLS. We purchased a quad 9 months ago. I have slowed down the effort I extend in pursuit of RE. This is not based on the hot market, but where I am in my RE investing path. We have quite a few units and self manage virtually all of them. Four units that I had management assistance with, we are currently doing 100% of the management. We are considering selling this property; we never sell local properties. 

    We have done great with our local RE investments. At this point I would take a lower return for a more passive route. This does not mean that I believe the route we took is not appropriate for those still desiring to accumulate significant wealth. Value adds, extracting the value, reinvest the extracted value is likely still a great path to significant wealth.

    I believe there are few good deals on the MLS. Competition is such that unless you are skilled at seeing value adds that others miss, any good deal listed on the MLS will sell pretty much at value. Our last 2 purchases have been off market (we also had an off market purchase previously - but it was basically at retail).

    I know an investor (he is on BP, I do not tag because I do not know if he wants to be public with his current project) that purchased recently an off market property in Poway. It had a permitted detached living space. The price was basically the value of the primary structure in its current shape. He is rehabbing the primary structure (adding value) and getting the permitted detached living space converted to an ADU (I do not know if he has considered SB9, but SB9 would extend his time line significantly), the ADU (which can be rented independent of the primary) is further value add but as important in his case will allow him to hold it as an investment (versus flip) so he can 1031 it if he decides to sell (provides an alternate exit option). He has ~$400k value add. It took effort to find the property, purchase it, rehab primary, and get additional unit classified as ADU. It is not passive.

    My point is that local RE investors are still finding good/great investment properties. It does take effort. The MLS is easy, but that is one reason it is so hard to find deals off the MLS.

    Good luck

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @David Campbell in general I think it is a bad idea to invest in cashflow negative properties. Your situation is different for two reasons:

    1. You had a 0% down loan. Most investment properties are purchased with 20-25% down payment. Had you placed even 20% down, that would have been $117K out of pocket and the property would have cash flowed. The true test of cash flow is if a property would cash flow with 0% down and many would not. Any property cash flows if you put enough cash into it.

    2. You are in a high demand and high appreciation market. San Diego has arguably the best climate in the continental United States and that is not changing any time soon. Although there is risk of volatility in high appreciation markets, they generally recover over longer periods of time. 

    Still there is a good reason to avoid negative cash flow. The property is a cash drain on your finances. Assuming you have other income or savings, it may be fine for a period of time. If for some reason you lost your income, that would place added financial strain. The other risk is price volatility when you need to sell. These high appreciation markets can have large price swings. For example, someone who purchased a property in 2006 that was forced to liquidate in 2010, may not have seen the same appreciation you did.

    Condos are also more risky because they are the first to lose value in a down turn and last to recover. The other wild card is the HOA which could mismanage finances or put restrictive rules in place.

    I am not a fan of condos or negative cash flow, but I am a fan of selling at the right time, which you did in my opinion. Nice job!

    I agree that "never" and "always" are dangerous. You will find exceptions and outliers to every rule.

    4Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes
    5y

    @David Campbell

    You got lucky, which is good. But what if the market was 2008 and noone was buying, you cashflowed negative, and the house depreciated?

    It is a crazy market now. Houses have appreciated 50% in 1 year. This is abnormal.

    0Reply
  • Tanner Crawley
    Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes
    5y

    @David Campbell

    I agree. Cash flow is actually riskier than appreciation. Appreciation is inevitable. Even if you bought in 2007, your property values would have recovered in 6 years in most markets. Everyone mentioning 2008 also has a gross misunderstanding of current market fundamentals. There is a reason smart money (institutions) are placing big bets on real estate.

    Cash flow is unpredictable, you could get a bad tenant who damages your property, you have to evict, eviction moratorium, major repairs, etc.

    Appreciation and cash flow have an inverse relationship. I could go invest in plenty of dying cities with negative population growth and get an amazingly high cap rate. But I also would likely have my property depreciating.

    I am somewhere in the middle and prefer to be at least cash flow neutral, but if you are a high earner with strong DTI and capital reserves there is no reason to be scared of negative cash flow.

    3Reply
  • Tanner Crawley
    Realtor · Lone Tree, CO · Member since 2017 · 139 posts · 112 votes
    5y
    Originally posted by @Curtis Mears:

    @David Campbell

    You got lucky, which is good. But what if the market was 2008 and noone was buying, you cashflowed negative, and the house depreciated?

    It is a crazy market now. Houses have appreciated 50% in 1 year. This is abnormal.

    2008 was also abnormal. Everyone likes to throw around the black swan event an example. Zoom out and look at the entire history of the housing market. There is nothing lucky about betting on appreciation, especially when we are chronically underbuilt and the fundamentals are so solid:

    • Huge undersupply
      Rock-solid mortgage origination and all-time high credit score per $ originated
      Rising building costs

    0Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Paul Smythe:

    Well sure, if you know the property is going to double in value over the next five years then negative cashflow is fine. If you don't have a crystal ball, though, you're just speculating at that point.

    Way too much risk on most negative cashflow deals in my opinion. Your only successful exit strategy is the market improving to allow you to rent/sell for a higher price. If the market is stagnant or declining, you're in a pickle.

    Just keep in mind that in some markets (like the one for the OP) monthly loan amortization could easily be $500/m on a triplex ... if the negative cashflow is $300/m, he's not actually negative.  That doesn't necessarily make it a *good* investment relative to others, but it's still a profitable one independent of market-based apprecation.

    3Reply
  • Jeff SchemmelBusiness Member
    Real Estate Agent · Saint Paul, MN · Member since 2014 · 384 posts · 401 votes
    5y

    although I agree with Greg, I may also consider buying a property that may not cash flow "right now", but I had a 2-year plan to make it happen.  I looked at Quads in st. paul with low rents and long-term tenants that, given 1-2 years of house hacking and, cycling tenants, and rehab would be a pretty nice buy and hold.  When I run deal analysis I run it three ways...1.) owner-occupy because I house hack, 2.) Non-owner occupy, and 3) year three cash-flow with necessary rehab projects and rent progression.


    2Reply
  • Karen Gordon
    Member since 2021 · 10 posts · 8 votes
    5y

    I have a related question and please forgive any obvious naivete because I'm a newbie. I am a single mom, a couples therapist, and when my daughter completes high school in 2024 I expect based on my current savings rate that I will have 100K saved. I am planning to purchase my first property in San Diego - house hack ideally a fourplex that I can get an FHA loan on. I have been just looking at some of these triplexes and quads on Zillow to run the numbers and get a sense of it and it seems like based on the 50% rule that with every one of these deals, I'd end up paying at least $1500 per month to live there - in other words the numbers don't seem to work in a way that the other rents would be covering my mortgage and I could live for free.

    My question is - is this because San Diego is such an expensive market and house hacking only works when you get an off-market deal or a deal in an up-and-coming area? And my follow up question, which is related to this thread, is - would it still be worth it if I were spending $1500 a month on rent for a house hack if I intended to hold the property long-term and use it to take out equity asap and do a BRRRR?

    My intention is to become an investor to build wealth and pay off my own and my daughter's student loans as soon as I can, but I am stuck here in Sebastopol, CA until she graduates before I can move, save up enough money, and do the house hack thing, which seems like the path of least resistance to get into the market. Any thoughts appreciated! 

    0Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 827 posts · 810 votes
    5y

    This type of thread will always get the same responses. Those who don't invest in high cost locations will say never accept negative CF, and those who invest in high cost locations say appreciation is better form of wealth generation than meager mid-continent CF strategies.

    While some will fundamentally never accept appreciation as a value driver, I seldomly see a sophisticated investor who can build their own IRR model (vs relying solely on simple CoC calculations) say never to negative CF. Defining an exit or long term hold strategy is important for high cost markets.

    I would not likely invest in a negative CF coastal property when we are nearing the top of an economic cycle, but i would be all-in on negative CF coastal properties when markets contract. 

    4Reply
  • Karen Gordon
    Member since 2021 · 10 posts · 8 votes
    5y

    whoops reposted by mistake sorry

    0Reply
  • David Campbell
    OP
    Investor · San Diego, CA · Member since 2017 · 190 posts · 117 votes
    5y

    @Regina Wang I am not, at least not currently. Maybe when it cools off a little! haha.

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    5y

    Kudos to @David Campbell for the good financial deal. However as mentioned, it is San Diego and you could hardly do wrong there for many years. That said, in other markets it could have gone the other way, No, PCF is not the ultimate deal maker but it sure can't hurt.

    1Reply
  • David Campbell
    OP
    Investor · San Diego, CA · Member since 2017 · 190 posts · 117 votes
    5y

    @Michael Plante and @Dan H. , in regards to the rent question, the reason I was never able to raise it a significant amount is the rent prices actually did not increase hardly any in that neighborhood during that time. I know it sounds crazy. I also think the rent on my very first tenant who was in there for a few years was a moonshot and way above market at the time. Eventually the market did catch up to a point but I didn't want to break the ceiling that I did with the first tenant (with whom I believe I was lucky.)

    0Reply
  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
    5y

    @Karen Gordon : you have to do the math and create your criteria. Some people do their numbers as if this is 5 years later when you move on to the next property: Will the rents cover the full payment or will the property cash flow if and when you rent out all the units? The bank will serve as a "checks and balances also, bc they will take the other rents and use them as income for you to see if the property can sustain itself (with your DTI ratios). You have to decide if paying $1500 per month is good enough for you. Consider that if you don't buy a property like that, you will have to pay rent and it will exceed $1500. So you are way better off lowering your cost of living by buying than renting. You could look at other options: ie SFR + ADU or Duplex etc

    For the intended post here... @David Campbell Congrats... but def. got lucky... All of my clients that bought in the last 10 years almost, gained a lot of equity. You can always sustain even a negative $1k per month... but is that the goal. Most of us do not want to add a burden to ourselves on top of our regular expenses. Any one of us that qualifies could go right now and buy a $1 M dollar property that has a $3k negative cash flow.... hoping that the market keeps going up.... who will do it? Not many of us. Will the market correct, probably. By how much... who knows... 

    You just have to make sure that you have emergency funds incase something happens, you have to make sure you can afford the home and not over leverage, you can be creative and force equity into the home with renovations, additions and extra units to hedge against a market correction, and we all have to decide if we will own for the short term or long term. I try to buy off market deals or on market under market deals, I buy homes that need renovations, we add square footage and add units (ADUs) and make sure that the property cash flows $500 to $1000 at the end of it all while having 20% or more equity. 

    The question becomes, could you buy 5 or 10 + properties that have a negative cash flow? Can you sustain that? Can you sustain the headaches? If you can, Good For you! and you will make $500k gains if you hold these properties over 15 to 30 Years, 99.9% guaranteed. ;) 

     (lastly, who ever is ok with negative cash flow :) I have about 1,000 properties ready to sell you!) Let me know : kidding but serious too 

    1Reply
  • Jim Spatzenfeld
    Investor · NorCal · Member since 2015 · 282 posts · 240 votes
    5y

    How did you get a 0% down VA loan on a rental property? I thought that's only available for owner occupied?

    1Reply
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