Never invest in a cashflow negative property?

Chris John

Member since 2020 · 671 posts · 937 votes

@David Campbell

You should definitely plow those earnings back into 4 or 5 like properties, go negative 2k+ a month, and make some real money!

Thanks for your service.

2 Reply

Tavis Moore

New to Real Estate · Flowood MS · Member since 2021 · 25 posts · 20 votes

@Greg Scott

exactly!!

The bull goes up the stairs slowly and the bear jumps out the window!!! -Robert Kiyosaki

Owen Brown

Specialist · Kelowna, BC · Member since 2018 · 34 posts · 15 votes

@David Campbell

Totally agree with you on the absolutes, especially when it come to investing! What is wrong or right for one person may not be for the next one.

Congratulations on your investment!

OP

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

@Jim Spatzenfeld We initially had it as our primary residence

OP

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

@Chris John haha definitely like the first part, not necessarily the second. Will definitely be rolling it into bigger deals, ideally all cash flow positive, but based on this most recent experience even if the initial projected cashflow is negative, I will be giving it a once over before just brushing it off.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

Expensive markets are an equity capture and balance sheet game.

My last few little green house purchases were not great on the c.f. front, but by purchasing off market from semi-motivated sellers, the equity going in is not only years worth of $300-$400/mo standard cf, but ensures I can exit unscathed if necessary.

In expensive markets, it's the red hotels that cash flow. 3 green houses, roll the equity up to a 'red hotel'.

I haven't seen buying below market value mentioned. We should always try to do that, but it is essential in expensive, equity-focused markets.

3 Reply

Justin Sullivan

Real Estate Agent · Phoenix, AZ · Member since 2019 · 158 posts · 140 votes

@David Campbell

I feel like there is different types of investing. There is investing for cashflow which is common with beginners and even intermediate investors looking to get more monthly cashflow to replace there income. But to me I feel once you’ve reached a level of financial independence you can take a risk on an appreciation investment which is exactly what you did. You look at market trends and other factors to determine that the peoperty will go up in value at least enough to cover the $50k loss over 5 years. I ageee with what you did. If you have the funds to cover the loss and it doesn’t hurt you then go for it but just keep in mind there is a chance of a loss. I am buying a personal home right now in a new market which I believe will appreciate enough to cash put in two years so I can build a custom home for my Family. It all depends on your risk level. You were willing to take the risk and it paid off for you. Great deal I would have done the same thing looking at the market trends of San Diego!! Now put that money to good use!!!

Karen Gordon

Member since 2021 · 10 posts · 8 votes

@Dan H.

@Dan H.Thank you so much for your thorough and thoughtful reply. I really appreciate it and value the information!

OP

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

@Justin Sullivan I definitely agree with you on this. I hope you knock it out of the park with your personal home!

Chad McMahan

Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 754 posts · 504 votes

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.

There is no such thing as "never". There are opportunities everywhere. Some of the best deal out there are larger income producers that are not performing. Sometimes no cost or low cost solutions are all that are needed, to turn them around. For most smaller dollar income producers, though, if they cannot get it to produce, it may be the wrong thing to invest your time, energy and money into.

Jonathan G.

Investor · Marietta, GA · Member since 2015 · 382 posts · 258 votes

@David Campbell

I also share a never say never/always. Congrats on the profits but it’s like patting someone on the back who just won at the Black Jack table if you’re strictly depending on appreciation . Stay at the “cash flow negative casino “ for too long and the House may very well get its money back and then some. Conversely, no one has a crystal ball and I’ve been seeing posts about “being at the top of this Cycle “ here on BP for 5 years now. Eventually, someone is going to be correct. Glad to hear most of us are still turning positive returns.

Bruce Runn

Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes

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.

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Podcast Guest on Show #222

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.

And cash reserves and ability to make money outside of your rentals.. if your solely relying on the performance of the asset to keep you from having a bad day then cash flow is critical..

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2 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Podcast Guest on Show #222

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.

the other major issue back in those days or at least 07 to 2010 2011.. that really hammered rental owners in many markets was rents stopped coming in altogether.. Not all markets but many did. As well as the other thing I saw as I was getting loan requests in those days.. were perfectly good performing assets that had call loans IE either violation of the loan covenants or balloon payments you know the 20 due in 5 commerical loans.. I saw many of those go to foreclosure it was not a payment issue it was do you have the cash to pay the loan off and or forced to liquidate in a horrid selling market.. it was a falling knife.

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Ilan M Aliphas

Rental Property Investor · Milpitas, CA · Member since 2020 · 56 posts · 42 votes

@David Campbell good for you man. Taking a gamble and winning doesn’t make you a good investor… it makes you a lucky gambler.

I wish I were a lucky gambler. But because I am not, I try to be a good investor instead.

May your luck never run out my friend 👍

2 Reply

Bruce Runn

Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes

@Jay Hinrichs

Running your investments as a business is essential- your point of having sufficient cash reserves, cash flow and being willing to make it through good and bad is crucial. If people only have experience the market when it’s going up, they don’t know anything else…

Sean MonahanPro Member

Real Estate Agent · 21224 · Member since 2018 · 98 posts · 61 votes

@David Campbell it comes down to risk reward. Can you handle the risk of cash flow negative in a promising appreciating market? If you can do it all day. If you can’t…seek out a safer market. Congrats but it’s all situational.

David Song

Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes

@David Campbell nice job. This is not abnormal, but actually happening to many people buying in CA coastal areas, whether for primary residence or investment. Location is key to investment, not cash flow. Many novices can not really understand this at all.
I only invest in SF Bay Area. Period.

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

A different scenario in SFO north of you below avg neighborhood. 4 br SFH, 2 bath rented out all 4 brms.

Potential rent declared in 2018: $6,000 per month, paid $1.5M 30% down and $1M+ mortgage. Actual rent rec'd since 2020: $750 per month, 2 tenants pays 25% (3Kx25%), other 2 tenants declines to pay any rent ($0 x2=$0). Landlord pays utilities. Sold this summer for $1.29M with 4 problematic tenants inside.

One can work out the arithmetic since the landlord is now so far behind with tax, mortgage. SF City has the highest uncollectable rent followed by LA and Central Valley where 15-20% tenants claim they are suffering from the pandemic.

Llewelyn A.

Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes

@David Campbell

If you read through a lot of my previous posts, you will see that what you did and achieved in this "Negative Cash FLow" Investment Property has been done many times by myself since I have started investing in Brooklyn, NY since 1997, which was 24 years ago.

Missing from the Majority of the commenters on this site in general is that they fail to understand that CASH FLOW is not a Characteristic of the Investment.... it is a Characteristic of the INVESTOR.

Let's say you didn't finance the Investment at all. You bought it all Cash. The property will Cash Flow.

However, because you CHOSE to buy it with 100% Finance, the Investment went NEGATIVE Cash Flow.

So, what is it? Is this a Negative Cash Flowing Investment or is it a Positive Cash Flowing Investment?

The Reality is that an Investment is NEITHER Positive or Negative. It's the Investor that makes the Investment either Positive or Negative Cash Flowing.

When an Investor realizes this, it is up to their Risk Tolerance to determine if they can handle a Negative Cash Flowing situation that they have put themselves into.

For those that also commented on saying that David was "Lucky", yes, we are all Lucky, even if you achieve a profit with a Positive Cash Flowing Situation.

You just have to understand what is Luck. Luck has 2 parts to it:
1) You have to be PREPARED to Buy the Opportunity, which means you have to have the funds for it
2) You have to RECOGNIZE the Opportunity so you can buy it

Without both of these, you cannot get "Lucky."

You may have the Money but if you can't recognize the Opportunity, you can't get lucky.
You may recognize the opportunity, but if you don't have the Money, you can't get lucky.

BUT, if you can do both, you have set yourself up to be lucky.

We ALL want to be lucky this way.

I have been doing what David did for 24 years in Brooklyn, NYC and my portfolio increased by over several Million $$.

The Cash Flow also increases dramatically as you can imagine what rents were 24 years ago and what it is now in Brooklyn, NYC.

It's almost impossible to compare the returns to any other investment other than the great stocks performers or high flying Crypto.

If one wants to achieve results that have the best "Luck", then you better have the Money and recognize the Opportunity.

Many here may have the money, but just won't recognize the opportunity so they can't get these "Lucky" deals.

6 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

Telling people that their properties did not go up in value, their stock market portfolio did not go up value, and that their monster cash flow properties do not cash flow when all of it actually happened, happened over decades, and continues to happen is ineffective commentary. We just need to keep on doing what NEVER happens for others. Lots of ways to make money in real estate.

Travis Frenchak

Investor · Butler, PA · Member since 2014 · 130 posts · 114 votes

Investing in speculation will catch up with you eventually, but if youre in the position to absorb the short term losses im sure you'll be ok. Congrats on the great gain though!

OP

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

@Chad McMahan Definitely agree!

OP

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

@Ilan M Aliphas Never claimed to be a good investor, or a bad one, or any type of investor for that matter. Simply providing a real life example as to the danger of listening to advice in the absolutes. There are very frequently exceptions (like my example) to commonly held "rules," like never investing in cash flow negative properties.