What financial rules do you follow when buying? Negative cash flow?
Member since 2024 · 10 posts · 2 votes
What financial rules do you follow when buying? Negative cash flow?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
2yThis is a really important concept to understand especially as rates have risen.
If a property has a tenant in it paying, it is not negative cash flow in and of itself.
What most people call negative a negative cash flow property, is in fact cash flowing....but it is the debt against the property, the leverage, that is causing them to lose money on a monthly basis. This is important to understand that the risk of leverage, is completely independent of the risk of the property. One investor might buy the property in cash and have 0% leverage. Another investor might have 100% leverage. So the risk of the 2 investors leverage is drastically different.....but the risk inherent in the property has not changed whatsoever.
District Invest Group545 Reviews
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- Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes2y
It depends. Most would say no, seems too risky. If you like the area and long term growth then do it. If you do buy a negative cashflow deal you'll need money in reserves and money to float the property for a few years. Just run the numbers and be conservative. You don't want to dig a hole that you can't get out of because you are hoping it'll grow.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
This is a really important concept to understand especially as rates have risen.
If a property has a tenant in it paying, it is not negative cash flow in and of itself.
What most people call negative a negative cash flow property, is in fact cash flowing....but it is the debt against the property, the leverage, that is causing them to lose money on a monthly basis. This is important to understand that the risk of leverage, is completely independent of the risk of the property. One investor might buy the property in cash and have 0% leverage. Another investor might have 100% leverage. So the risk of the 2 investors leverage is drastically different.....but the risk inherent in the property has not changed whatsoever.
District Invest Group545 Reviews - 12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes2y
Hey Matt ! My name is Jacob with Lendbright and would love to answer any questions for you that you may have in the analysis of your project . Sometimes for example a couple hundred dollars a month negative cashflow for few years can turn into a 50k or 100k or however much of a rise in value it may be in an up and coming area . It all depends on the scenario . When is a good time for us to connect and discuss ?
- Member since 2024 · 10 posts · 2 votes2yI am considering buying my first property at around 700K, mortgage is around 4K, plan to rent half the duplex for 1600 and rent one room in my side for 800, leaving me about 16-1800 per month. I plan to live there so I find a negative cash flow understandable to start. Rent is below market, which is about 2K, so theoretically, when I move out in a. Year or two, the mortgage should be just about covered as I plan to increase rents. Vacancy rate is low and growth rate is high. Just a little worried about all of the numbers, but I imagine the house should pay for itself after 3 years or so. Overall thoughts? No financial advice, just thoughts.
Quote from @Jacob Sherman:
Hey Matt ! My name is Jacob with Lendbright and would love to answer any questions for you that you may have in the analysis of your project . Sometimes for example a couple hundred dollars a month negative cashflow for few years can turn into a 50k or 100k or however much of a rise in value it may be in an up and coming area . It all depends on the scenario . When is a good time for us to connect and discuss ?
- Real Estate Agent · Atlanta, GA · Member since 2020 · 1k+ posts · 1k+ votes2y
@Matthew Mclean, negative cash flow on a house hack deal is acceptable. It's the norm nowadays with market conditions. The strategy of house hacking is to offset living expenses while building equity. You'll likely never find a cash flow-positive house hack deal unless your strategy is very creative. What market are you in? What does rent look like for a 1 bedroom/1 bathroom? Probably close to $1,600-$1,800 a month if I had to guess. If you're currently renting elsewhere, your question is simple. Buy the property.
- 12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes2y
Quote from @Matthew Mclean:
I am considering buying my first property at around 700K, mortgage is around 4K, plan to rent half the duplex for 1600 and rent one room in my side for 800, leaving me about 16-1800 per month. I plan to live there so I find a negative cash flow understandable to start. Rent is below market, which is about 2K, so theoretically, when I move out in a. Year or two, the mortgage should be just about covered as I plan to increase rents. Vacancy rate is low and growth rate is high. Just a little worried about all of the numbers, but I imagine the house should pay for itself after 3 years or so. Overall thoughts? No financial advice, just thoughts.Quote from @Jacob Sherman:
Hey Matt ! My name is Jacob with Lendbright and would love to answer any questions for you that you may have in the analysis of your project . Sometimes for example a couple hundred dollars a month negative cashflow for few years can turn into a 50k or 100k or however much of a rise in value it may be in an up and coming area . It all depends on the scenario . When is a good time for us to connect and discuss ?
Yup really depends on how long you're there etc
Quote from @Russell Brazil:
This is a really important concept to understand especially as rates have risen.
If a property has a tenant in it paying, it is not negative cash flow in and of itself.
What most people call negative a negative cash flow property, is in fact cash flowing....but it is the debt against the property, the leverage, that is causing them to lose money on a monthly basis. This is important to understand that the risk of leverage, is completely independent of the risk of the property. One investor might buy the property in cash and have 0% leverage. Another investor might have 100% leverage. So the risk of the 2 investors leverage is drastically different.....but the risk inherent in the property has not changed whatsoever.
This. People need to read it.
But to address the topic, you guys on this board leverage a HELOC for a downpayment, spend probably $500/mo on a car note, and have student loan debt. I'd happily subsidize a very good property in a very good area for $200/mo, and own the underlying asset with higher leverage than skip on the asset. Most of you folks don't skip on the car, took that college loan, gladly max out a HELOC. But you worry about the cash flow differential on a (performing) asset?
The logic is just unreal. My recommendation is to eliminate all debt prior to investing, and then let some subsidizing be okay with higher leverage amounts(if you're comfortable) for very good properties. Buy less properties, but buy better one's. If you're doing well with no debt, and have 3 really good houses and are paying $500/mo to keep them. That's money well spent, you would do the same in an equity portfolio that pays (minimal) dividends. I am not saying stretch beyond belief, but don't pass on a good house because numbers do not work today. It's a long-term investment.
- Cleveland, OH · Member since 2022 · 826 posts · 578 votes2y
Quote from @V.G Jason:
Quote from @Russell Brazil:
This is a really important concept to understand especially as rates have risen.
If a property has a tenant in it paying, it is not negative cash flow in and of itself.
What most people call negative a negative cash flow property, is in fact cash flowing....but it is the debt against the property, the leverage, that is causing them to lose money on a monthly basis. This is important to understand that the risk of leverage, is completely independent of the risk of the property. One investor might buy the property in cash and have 0% leverage. Another investor might have 100% leverage. So the risk of the 2 investors leverage is drastically different.....but the risk inherent in the property has not changed whatsoever.
This. People need to read it.
But to address the topic, you guys on this board leverage a HELOC for a downpayment, spend probably $500/mo on a car note, and have student loan debt. I'd happily subsidize a very good property in a very good area for $200/mo, and own the underlying asset with higher leverage than skip on the asset. Most of you folks don't skip on the car, took that college loan, gladly max out a HELOC. But you worry about the cash flow differential on a (performing) asset?
The logic is just unreal. My recommendation is to eliminate all debt prior to investing, and then let some subsidizing be okay with higher leverage amounts(if you're comfortable) for very good properties. Buy less properties, but buy better one's. If you're doing well with no debt, and have 3 really good houses and are paying $500/mo to keep them. That's money well spent, you would do the same in an equity portfolio that pays (minimal) dividends. I am not saying stretch beyond belief, but don't pass on a good house because numbers do not work today. It's a long-term investment.
This is a great point and really puts it into perspective. Most people don't hesitate to take on bad debt like the ones you mentioned.
- Cleveland, OH · Member since 2022 · 826 posts · 578 votes2y
Quote from @Michael Dumler:
@Matthew Mclean, negative cash flow on a house hack deal is acceptable. It's the norm nowadays with market conditions. The strategy of house hacking is to offset living expenses while building equity. You'll likely never find a cash flow-positive house hack deal unless your strategy is very creative. What market are you in? What does rent look like for a 1 bedroom/1 bathroom? Probably close to $1,600-$1,800 a month if I had to guess. If you're currently renting elsewhere, your question is simple. Buy the property.
On the money. If you can pay less than you would renting, it's a no brainer. You're also getting a landlording and real estate education while living in the property.
- 2yEric DeNardoPro MemberReal Estate Agent · Denver · Member since 2020 · 366 posts · 151 votes
I agree with what others have said that if you like the area and believe there is a long-term growth, then it can be worthwhile. Especially if you believe you can refinance for a lower rate that may bring you cash flow.
None. I start with my long term strategic goal and back into what I need on each project.
In my experience rules have way to hide opportunities.
- 2yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 675 votes
Is there enough data to support this growth in rent in the coming months? I would never buy something that was underwater completely unless the equity was insanely good and I could flip or wholesale. Why are the rents so low? Maybe a reno deal first to bring units up to snuff and bump rents after? Look at the rental rates in the market and ask yourself even if you were to make this the best unit possible in your area would these numbers eventually make sense on your proforma.
ProAlpha Capital56 Reviews - Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
How is cash flow negative "risky"? Buying a cheap property in the hood has all sorts of risks, buying a quality property with negative cash flow is very predictable. You know what it is going to cost you every month.
Great point @V.G Jason - how is it okay to have a car payment but worry about $200 on an appreciating asset!
The longer I do this, the more I think of my RE as a "collection" with a focus on quality. I just got another AO yesterday, just before we are getting into early spring market. It was not cheap, but it is in great condition, good school district, perfect back yard - I could have bought another one for 40k less down the street that needed some work, on a corner lot and no back yard - can't fix that. Cheap for a reason.
- 2yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
Even though many would likely say negative cashflow is not ok in any circumstance, I would personally say it depends on the location and the financing.
For instance, when I started out here in san diego I purchased properties for house hacking with low money down that I was initially a couple of hundred dollars or so negative on after moving out but I had high leverage and the property was retail and in decent shape and I was ok with that. Each year I would increase rents until I broke even and even cash flowed a bit....and then 1031 exchanged those properties into multifamily as they appreciated hundreds of thousands of dollars.
Some people thought I was not investing correctly since I was ok with negative cashflow and I always compare it to those same people investing into their negative cash flow investment called a 401k.
Compass5122 Reviews - Member since 2023 · 158 posts · 96 votes2y
This is a great question and one that's at the heart of many investment strategies. The decision to accept negative cash flow depends on several key factors:
It's crucial to conduct thorough research on the local real estate market. Look for trends indicating strong potential for property appreciation. Consider factors like economic growth, employment rates, infrastructure developments, and population trends.
Are you looking at a short-term investment or a long-term hold? For a long-term strategy, appreciation and rent increases might offset the initial negative cash flow. However, it's important to have a clear timeline and understand the risks involved.
Can you sustain the negative cash flow without straining your finances? It's important to have enough reserves to cover not just the negative cash flow, but also unexpected expenses that might arise.
While rents may increase over time, it's not always guaranteed. Analyzing historical rent trends in the area and understanding the factors that drive rent growth is crucial.
Have a clear plan for if things don't go as expected. This might include selling the property or converting it into a different type of investment.
Every investment carries risk. Assess your comfort level with the potential downsides, such as prolonged negative cash flow or slower-than-expected appreciation.
negative cash flow means two different things depending on the person. 1 rent doesn't cover PITI, second rent doesn't cover PITI + expenses (vacancy, maintence, capex). I probably wouldn't do the first but I am definitely willing to do the second, especially since I will likely see float there.
What I actually do is estimate the rent distribution, the expense distribution and the appreciation distribution and try to get total returns which are likely to be in the 18-20% with downside protection near 10% (over the first 5 years). I also try to invest in areas which have significant upside which isn’t necessarily captured in my appreciation distribution (since I want that to be conservative). I went lower on my first deal because it will be in that 18-20% upon refinance (8.5% note) but is currently in the 11-15% range.
- Member since 2022 · 405 posts · 455 votes2y
I think it depends on what your specific goals are and what position you are in. If I had multiple cash-flowing properties then I might be ready to move into an appreciation play. If I lost my current salary for any reason and thought the other properties could support negative cash flow while waiting on the appreciation, it could be very profitable and "safe". If I were in the early stages of investing, I would not want to purchase a negatively cash-flowing property and be putting money into it every month for likely years. Just make sure you do enough research to be confident in your long-term goals with the property. Are you going to sell or refinance to pull out equity, and do you expect it to cash flow then?
Quote from @Twana Rasoul:
Even though many would likely say negative cashflow is not ok in any circumstance, I would personally say it depends on the location and the financing.
For instance, when I started out here in san diego I purchased properties for house hacking with low money down that I was initially a couple of hundred dollars or so negative on after moving out but I had high leverage and the property was retail and in decent shape and I was ok with that. Each year I would increase rents until I broke even and even cash flowed a bit....and then 1031 exchanged those properties into multifamily as they appreciated hundreds of thousands of dollars.
Some people thought I was not investing correctly since I was ok with negative cashflow and I always compare it to those same people investing into their negative cash flow investment called a 401k.
>Some people thought I was not investing correctly since I was ok with negative cashflow and I always compare it to those same people investing into their negative cash flow investment called a 401k.
You pay a monthly expense on your 401k? I would more equate to it as cash neutral and not cash negative.
I agree with your sentiment but consider it of higher risk for those who do not have the reserves (like many REI newbies). In CA our property tax is near fixed rate, but this is not the case in most areas. If you purchase negative cash flow and rents flatten or fall and/or expenses rise, your negative cash flow can increase.
In San diego, virtually the only people who have lost money on RE were those forced to sell at the wrong time. This is usually a result over leverage coupled with negative cash flow. Nationally, the negative cash flow is increased risk because few markets have the historical rent growth of San Diego and/or near fixed property tax.
If you have proper reserves, a RE investment should be judged on total return. However, when reserves are small, the safe approach is to purchase cash flowing properties.
At my stage, cash flow is my least desired return. Why? Because it gets taxed annually. With the current rules, I never expect to pay taxes on my RE appreciation or value adds. No tax on equity pay down. No tax on tax advantages. Cash flow is unnecessary because I have large reserves and dislike paying taxes. My purchase underwriting is conservative and looks at all profit sources.
My last 2 purchases were 2 years ago (Dec 2021, shortly before rates started going up). If rates had not increased they would have been BRRRRs, but due to rate increase I chose not to refinance so they are only value adds. My cash flow on these suck, but I have made over $500k in value add and appreciation in 2 years. No way I could have done as well with good cash flow but no value add or appreciation.
For those without significant reserves, cash flow can be necessary to handle regular events (maintenance/cap ex, vacancy, property tax and/or insurance increase) as well as potential unexpected events (tenant not paying and not vacating, rent decrease, etc).
My answer to the OP's question is I believe investors with proper reserves have less need for cash flow. REI with poor reserves should prioritize cash flow.
good luckQuote from @Dan H.:
For those without significant reserves, cash flow can be necessary to handle regular events (maintenance/cap ex, vacancy, property tax and/or insurance increase) as well as potential unexpected events (tenant not paying and not vacating, rent decrease, etc).
My answer to the OP's question is I believe investors with proper reserves have less need for cash flow. REI with poor reserves should prioritize cash flow.
good luckFor those without significant reserves, they shouldn't participate in physical asset speculation. Even if the asset is intrinsic, that's just for today, it can quickly go upside down on you. Go invest in equities what you can afford to lose, and stay out of this. This isn't a low barrier to entry investment anymore with the cost of capital and the rise in median house prices.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
IRR of 20+%. Active real estate is too much work to not achieve outpaced returns.
- 2yAlecia LovelessPro MemberMember since 2019 · 3k+ posts · 2k+ votes
@Matthew Mclean There are times it does make sense to buy with negative cash flow. However I’d make sure you have an exit strategy in place in case it ultimately doesn’t make sense anymore at some point and you need to sell.
If it’s a house hack and you’re lowering your cost of living, or even just building up equity while you’re living there then that’s probably going to make it a smart decision because you’ll also likely be getting tax benefits as well.
I’d recommend raising rents when the existing lease ends and you are able to raise rents if raising the other side to market rent is too much and you want to keep the existing tenants then make some effort to raise it part way to market whether that’s $100 or $150 a month. Every bit helps!!
Best of luck, and my little duplex deal that I’m house hacking ended up exploding in appreciation by almost 350% in 3 years, so you never know, you could end up with a great deal!
Quote from @Matthew Mclean:
Would you consider negative cash flow for a house that will appreciate and rents will increase?
I buy those types of deals all the time in Houston (well, not homes, but multi). But it's mostly situations where a building is 1/2 empty or some other type of issue. Under market rents, a good deal on a non performing property, etc.
How much cash flow has my BTC made me that I mined way way back?
I love all my cash flow properties, but unless you're gaining equity it's going to be hard to scale as it takes a lot of years of cash flow to get that next building.
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