Building a Portfolio with Zero Cash Flow Properties

7 Replies

Lately I've been doing a lot of research on Zero Cash flow properties. Where an investor purchases a property with an investment grade tenant (Walgreens, CVS, Jack in the Box, etc.) with a small down payment (12-15%) and uses 100% cashflow generated to pay off the note (hence, zero cash flow). At the end of the term, the investor owns the Walgreens free and clear and would possibly renew the lease or 1031 to another property.

I know this defeats the purpose of investing for cash flow. However, for a younger investor, this seems like a great way to build a portfolio. I find it more than risky considering factors such as tenant default (ex. Rite Aid Bankruptcy), time value of money, Inflation (due to fixed rent rate), etc. I have heard of people doing this, but nothing specific.

Has anyone here had experience investing in zeros? I would love to hear any and all insight and experience.

Thanks in advance,


Personally, I wouldn't call this "zero cash flow."

If you're generating enough cash to pay off the note quickly, you're generating plenty of cash flow, regardless of whether you're using it as cash reserves, using it to pay the note down or using it to buy cars and other toys.

Depending on your situation and goals, it may be very smart to a pay a note down quickly...just make sure you're taking all aspects of your long-term strategy and goals into account and ensure that you have a cash reserve cushion of several months in case you run into cash flow issues.

Obviously, you need to be sure that at the end of lease/loan you have a plan for your tenant/property. Often times the market changes and your tenant vacates. You will have to release which will most likely require major tenant finish. Granted, you will have a vacant property free and clear (or at least such a low LTV) that you can borrow against, just plan ahead.

The rate at which you pay down debt should be driven by your personal financial goals. If your goal is is not take income now, but want a free and clear property later, then the strategy could be a fit. My only thought is why not deploy this approach on a piece of properties with a more favorable exit strategy? Maybe residential income property or something along those lines. I am by no means an expert in commercial but it certainly seems more risky to me.

What you have described is basically like a zero coupon bond if you look at the cash flow pattern. You invest some money now, get no cash flows for several years, and then get a large "cash flow" at the end which you defer through an exchange.

There is simply no utility for the interim cash flows if you don't plan to use the money. Thus there is really no big utility for current yield in your case. However, you can likely find better uses for your cash than what you are exploring unless you are getting the investment at a large discount to start out with.

These are not designed for the inexperienced or poorly capitalized investor. They can be an excellent tool for the real estate pro who needs tax shelter. They can throw off lots of depreciation (non cash expense), which can be as good as cash flow for the investor in a high tax bracket.

As others like Jon have said, these triple nut jobs are not for the inexperienced or for those with shallow pockets. If you have money and a team around you that you trust and has experience here, I'd be more inclined to 1) buy the land and do a ground lease, 2) be involved in the development, or 3) both 1 & 2. Too much risk on the back end of these for a measly 6% or whatever walgreens, cvs, franchises, etc are paying today.

Jon, from what I've seen this is definitely for the more savvy investor where capital reserves are of the utmost importance in order to service the debt in case of tenant vacancy. As you have stated I have only heard of investing in zeroes to offset any income with a depreciable asset. With capital reserves in place, would this be a viable way to build a portfolio?

Bryan, In terms of cash flow it almost like a zero coupon bond. Later down the road you do have to worry about things like phantom income, however it would be very difficult to find these properties at a discount.

My goal would be to have my dollar work as hard as possible. leveraging the tenants credit rating to have the building free and clear at the end of the term.

15-25 years is along time to tie up capital. My question to you is what other investment alternatives would you suggest?

Thank you all for you replies and insight


Join the Largest Real Estate Investing Community

Basic membership is free, forever.