Should I Buy a Negative Cash Flowing Property?

Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes

Many times on BP I've read "buy a cash flowing positive property". What about a negative cash flowing property? I've read that you make your money when you buy, does this apply to a negative cash flow property? I'm sure it does but I want to hear fellow BPer feedback. Thank you in advance.

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Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

10y

There are only 2 ways to make money in real estate investing: either income, or capital gains. Thus, if you're not making positive cash flow, you better make sure you can make a bunch of capital gains. And, you better make sure that you can afford negative gearing for as long as it takes you to sell... Dangerous game indeed

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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
There are only 2 ways to make money in real estate investing: either income, or capital gains. Thus, if you're not making positive cash flow, you better make sure you can make a bunch of capital gains. And, you better make sure that you can afford negative gearing for as long as it takes you to sell... Dangerous game indeed
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Chris Soignier
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
How much liquidity do you have to cover the cash flow deficit? One of my rules for buy and hold is to only buy props that cash flow. If you're counting on future cap gains to offset neg. CF, it becomes more speculative than investment grade IMO.
I wouldn't do it, but that's not to say it won't work for others.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
Need to have deep pockets and buy right in the appreciation cycle for those equity gain only markets to have a chance at working.
People employing this strategy should only have a small percentage of the overall portfolio dedicated to it. This way your total real estate portfolio should outperform the break even to negative cash flow (in theory) from the appreciation only play properties.
There are too many other properties out there where you do not need this strategy. If I had some valuable land to hold for commercial redevelopment that was happening in the next year or so I would consider it.
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Ayodeji Kuponiyi
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Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Ben Leybovich @Chris Soignier if a property is negative cash flowing due to: low rents and/or vacancy yet the rents can be increased once the property has been rehabbed and/or re-rented with better tenants, wouldn't it make sense to purchase the property? Appreciation and Capital gains aside of course.
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Originally posted by @Ayodeji Kuponiyi:

@Ben Leybovich @Chris Soignier if a property is negative cash flowing due to: low rents and/or vacancy yet the rents can be increased once the property has been rehabbed and/or re-rented with better tenants, wouldn't it make sense to purchase the property? Appreciation and Capital gains aside of course.
Yes, but you didn't ask that :)
Now you are describing a classic value add. Just be sure to discount for risk appropriately.
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Ayodeji Kuponiyi
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Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Ben Leybovich my apologies for leaving that out. Yes it's a value add property, I'm running the numbers and it's not performing well but I see that can turn around with the right rehabs and/or tenants.
With that said, "classic value add" properties that are negative cash flowing, but has potential to improve, are ok to purchase IF there's room for improvement?
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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Originally posted by @Ayodeji Kuponiyi:

@Ben Leybovich my apologies for leaving that out. Yes it's a value add property, I'm running the numbers and it's not performing well but I see that can turn around with the right rehabs and/or tenants.
With that said, "classic value add" properties that are negative cash flowing, but has potential to improve, are ok to purchase IF there's room for improvement?
Yes, but only if you're are very, very sure of your stabilized rents. Typically, I want to see as-is underwriting with 100% show CF of $100/door on 6-plex or more units. Smaller properties more. And not applicable to SFR. And, this is for doors that I can buy for $40,000 or less. Risk/reward is not good enough for higher priced units and I want to see higher CF as-is. And all of this is a function of significant value add. You can't stay at $100/door forever because over time CapEx and economic losses will eat you alive!
Read some of the stuff I've written on the blog here, and my site... Good Luck!
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Ayodeji Kuponiyi
Hi Ayodeji
I equate buying a negative cash flowing property to buying a business that loses money. Unless the business has some unique selling proposition I would not even consider it. People call negative cash flowing properties alligators because they will sooner or later eat you alive, usually sooner. I like to purchase for cash flow and appreciation is icing on the cake
Look back at last meltdown. Everyone was doing the opposite of this and you can see what happened. If your market does not permit you to buy with this criteria then look at other markets. I live in NY and I am investing in other markets because it is difficult to cash flow here due to high taxes and other expenses
Gino
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Ayodeji Kuponiyi
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Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Ben Leybovich thank you & I will read your prior posts and your website. Much appreciated
@Gino Barbaro when I mentioned "negative cash flowing" properties I was referring to "Value Add" properties. My apologies on not being clear. Like you I believe appreciation is icing on the cake. I wanted to confirm buying a "value add" property that cash flow negative can be a good purchase if the rent is lower than market rents & if rehab/new tenants can turn it positive
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
I agree but make sure you buy on actuals and the market will allow the rent increase
I hope you do not have to cash flow negatively too long. It is a risk worth taking because you will be adding value and forcing the appreciation
Good luck
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Ayodeji Kuponiyi
OP
Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Gino Barbaro thank you for your feedback and sharing your knowledge. All the best to you as well.
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Chris Virgil-Stone
Rental Property Investor · Cape Coral, FL · Member since 2015 · 206 posts · 83 votes
10y
Unless the property has been significantly under-managed no, no, no! I would not speculate the market to hope the value goes up. While that is typical over time your return is significantly less than if you have positive cash flow and increase equity. I know there a lot of investors on here that require cash flow positive of $200 per door. I require around $250-300/unit typically.
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Ndy Onyido
Toronto, Ontario · Member since 2014 · 615 posts · 172 votes
10y
Not sure I will ever get involved in negative cashflowing 'investment'...
Not even the so-called capital gains when I can get positive cashflowing property and still get capital gains....Why would anyone really opt for a negative cashflow investment?. How long would you sustain that? For me, its a drain pipe...
My one cent.
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Larry Turowski
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Ayodeji Kuponiyi:

@Ben Leybovich my apologies for leaving that out. Yes it's a value add property, I'm running the numbers and it's not performing well but I see that can turn around with the right rehabs and/or tenants.
With that said, "classic value add" properties that are negative cash flowing, but has potential to improve, are ok to purchase IF there's room for improvement?
As long as you are not paying for potential. It should be priced for how it is currently performing, not how it could perform.
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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Ayodeji Kuponiyi,
The "Classic" answer from me is, "It depends".
I didn't see a description of the property, though it looks like folks are assuming commercial multi-family.
If it's a single family home, however, it needs to be priced for its condition compared to the recent sales of similar homes.
In either case, if you can improve it enough to justify raising rents or do something to lower expenses you might go slightly positive.
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Ayodeji Kuponiyi
OP
Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Chris Virgil-Stone @Ndy Onyido @Larry Turowski @David Dachtera When I said negative cash flow property I meant a "value add" property that is under-performing and can be improved with rehab and and/or new tenants. With an increase in rent and low to no vacancy this can turn the negative to positive.
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Chris Virgil-Stone
Rental Property Investor · Cape Coral, FL · Member since 2015 · 206 posts · 83 votes
10y
if the numbers work out and you have comparables to back them up then sure. That is where some of the best opportunities exist , in underperforming investments.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
Theory is theory and we all can debate WHAT IF.
Try going out and doing these kind of turn arounds Ayodeji and you will see they are not easy. If you have already completed a few then congratulations. Remember if it was as easy as the seller makes it out to be they would have already done it.
If you are going to roll the dice on such a property the goal might be to limit cash as much as possible into the project and have non-recourse where you can walk away with nothing lost but time in the deal but valuable experience gained.
A seasoned seller will not allow this but as a seasoned buyer I also wouldn't agree to their terms on such a property. You need to figure conservative upside divided by your expected time in for a worst case situation to turn things around. Get a minimum return per hour and see if the work equals the upside.
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Larry Turowski
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Ayodeji Kuponiyi:

@Chris Virgil-Stone @Ndy Onyido @Larry Turowski @David Dachtera When I said negative cash flow property I meant a "value add" property that is under-performing and can be improved with rehab and and/or new tenants. With an increase in rent and low to no vacancy this can turn the negative to positive.
I understand it is a value add, but if it is a negative cash flow, they are pricing it for the potential, not for current ROI. If they were to bring it up to potential and it would still be worth what they are asking, then they are charging for work they haven't done yet.
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Ayodeji Kuponiyi
OP
Investor · King of Prussia, PA · Member since 2014 · 1k+ posts · 339 votes
10y
@Larry Turowski @Joel Owens @Chris Virgil-Stone @David Dachtera @Gino Barbaro @Ben Leybovich
You are right, it is overpriced. They are asking $479K and after running the numbers I came to purchase price of $183K. Below are the numbers (actual) not per forma obtained by the owner and agent:
5 Units + Garage: Total $3,540 ( Type: 4 (2bds/1bath) & 1 (5bds/1.5bath)
Revenues: Minus 20% of Vacancy: $2,852/month & $34,224/year
Expenses: Taxes (Annual) $10,614, Insurance (Annual) $2,678, Property Mgmt (8% of rent) $2,641.92, Maintenance/Repairs (Annual) $285, Utilities (Annual) $1,680, Cap Ex (5%) $1,651.20; Total: 19,550.12
NOI: $34,224 - $19,550.12 = $14,673.88
Valuation: NOI/CAP RATE = $14,673.88/8% = $183,423.50
I did this on my excel spreadsheet and when I ran the numbers on the BP calculator I got a negative cash flow. Probably because of the number I put down for vacancy.
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Kathy Stewart
Rental Property Investor · Dallas, TX · Member since 2015 · 243 posts · 70 votes
10y
You will have tax advantages that potentially put money in your pocket, and if you are in an appreciating market, that is a plus. However if at possible strive for cash flow from the inception.
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Karen Schimpf
Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes
10y
@Ayodeji Kuponiyi in order to make capital gains on a negative cash flow property, you will will need to be able to turn the property around. Usually it is an experienced investors that can do this but not an inexperienced investor. You would need to find a property in an area that is strong but the property was poorly managed. Next you are going to need a lot of $$$$ in reserves to float the property until it can be turned around. Also in order to sell the property you will need to get the property to cash flow so that you can sell it for a capital gain. Lastly managing and most likely rehabing an investment property is a lot of work! I would not recommend buying a non cash flowing property unless you are an experienced investor that has turned properties around.
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