Is no cash flow okay if I put no money down?

15 Replies

I'm looking for some constructive feedback on whether this makes any sense or not. I am looking to purchase a 12 unit apartment building in Ohio and I am putting no money down out of my pocket. I have done the analysis and after setting aside 5% for vacancies 5% for repairs 5% for cap X and paid all of the expenses and loan payback money on a monthly basis from my from my investment account that I am leveraging for my down payment loan, I will have no cash flow technically. I am leveraging my investment account with a loan from my investment company for my entire down payment so technically I have no cash going out of my pocket. Does this make sense to still go through with even though I will have no cash flow initially and I will still be able to add a 12 unit apartment property to my portfolio that is presently consisting of one triplex? I obviously want to maximize my cash flow and return but I'm having difficulty finding a highly cash flow oriented property that is within my price range of 300000 to $400000. So this seemed like a reasonable option. Would appreciate any thoughts and feedback here. Thank you,

Hey Chris,  no cash is tough.  

I will make my  $10,000 for my reserve account in 11 months by doing my 5% hold backs for vacancy cap X and maintenance. After  I hit my $10,000 mark I planned to put the 15% towards another account for cash flow.  No cash flow is based off of one vacant unit if I am able to fill that unit I will cash flow $400 per month. The 1st year will be tight financially but then it should open up a decent amount. The big question is it worth it to get into the 12 unit building for the long term play of holding for retirement passive income or not pursue it and and try something else that may or may not work out. The only reason I am even considering this is because I have no money out of my pocket into the entire transaction.  I do have some personal funds that I could utilize in the 1st year if needed. 

Investors don't all have the same criteria or goals. I have made far more money while losing my shirt monthly than I ever have from cash flow. It depends on where you are geographically and what your bet is. Investors make and lose money every day and in every facet of REI!

I'm ok with this as long as I'm buying below market value in a compressing cap rate environment, I am self-managing effectively and I have enough reserves to cover any cap ex AND a margin call. 

When the sky high Dow 35k music stops you will get a margin call.  You know that right?

What is the market cap for this class of asset and area?  What cap rate are you buying at? 

@Ernie Sturzinger not really understanding how you're rationalizing that you have no cash in the deal, yet the cash for the deal is coming from another investment?...who's cash is it?

This is a very high risk scenario and it could end your career...the asset you are looking at is likely a problematic property that needs a turnaround and stabilized...assuming this is a low-income location...likely C/D class location with some vacancy and below market rents...lots of deferred maintenance? There has to be a stabilization period...meaning your up front costs will be quite high...if you are not entering this deal with a stabilization plan, you'll be sunk within the year, wondering how your deal went south...

What has your agent and property manager advised on this deal?

@Ernie Sturzinger I guess to answer your question...not taking cash from the deal is perfectly fine and even a wise decision...this means the building needs to generate cash flow...you just need to leave it in reserves or make planned improvements...long-term equity is much more important than monthly cash flow.

Our properties do not have an amazing monthly cash flow.  We prefer the equity when we sell, so I don't mind your scenario above.....with one exception that @Steve Vaughan brought forward.

"When the sky high Dow 35k music stops you will get a margin call. You know that right?"

I would be very cautious on "using" margin to finance another investment at this moment!

@Ernie Sturzinger 1) I don’t see how using money drawn from another investment account for the down payment makes it “no money down”. 2) I’m personally fine with neutral cash flow IF capex/maintenance and repairs are very conservatively accounted for, there are adequate capital reserves to cover unforeseen issues as needed, the property is being purchased under market value with built in equity, the location has great appreciation potential, value-add is possible in the near term by making improvements and increasing rents, the investment horizon is long, etc. If it’s in a strictly cash flow type market with limited appreciation potential and uncertain ability to increase rents to create positive cash flow and add value within a year or two, I wouldn’t do it.

I would say this is a bad idea, but especially in Ohio, where you can certainly find cash flow. The only way I would consider this, is if it was in a good location, but had very poor management, with high vacancy and low rents. 

@Ernie Sturzinger , there are a few things about this, but the one I will add to it is: why?  "I will still be able to add 12 unit apaertment to my portfolio".  Are you trying to grow your track record as a property managers, where units add to credibility?

From a purely investment standpoint, without a clear ability to make money, this isn't an investment.  Making money doesn't mean necessarily mean cash flow, but there should be a clear path to strong appreciation if there is no cash flow.  If there is no cash flow, and no appreciation, all you are doing is working for free and exposing yourself to a lot of risk, which is not investing.

Originally posted by @Ernie Sturzinger :

I'm looking for some constructive feedback on whether this makes any sense or not. I am looking to purchase a 12 unit apartment building in Ohio and I am putting no money down out of my pocket. I have done the analysis and after setting aside 5% for vacancies 5% for repairs 5% for cap X and paid all of the expenses and loan payback money on a monthly basis from my from my investment account that I am leveraging for my down payment loan, I will have no cash flow technically. I am leveraging my investment account with a loan from my investment company for my entire down payment so technically I have no cash going out of my pocket. Does this make sense to still go through with even though I will have no cash flow initially and I will still be able to add a 12 unit apartment property to my portfolio that is presently consisting of one triplex? I obviously want to maximize my cash flow and return but I'm having difficulty finding a highly cash flow oriented property that is within my price range of 300000 to $400000. So this seemed like a reasonable option. Would appreciate any thoughts and feedback here. Thank you,

 Come to Columbus and you'll find plenty of cash flowing assets in the 200-400k range.

I would do it if you don't have any money out of pocket and you have time to wait it out. I am not sure what condition the buildings are in though. I would just make sure to have a healthy reserve account. Anything, where you can put no money down, is tempting for me right now as well... Good Luck! I'm a newbie but love to talk these things out! I am located in CA but am looking into OH as well. Feel free to reach out if you ever want. :) 

@Ernie Sturzinger

Let me make sure I'm getting this right. 

You have the opportunity to buy a 12 unit that currently has 11 units filled and 1 vacant. You will get some sort of "normal" loan, for the sake of argument 20% down. To fund the down payment you will take a margin loan on your investment account that will cover the 20% down payment. 

At the properties current run rate, after accounting for Operational Expense [ taxes, maintenance, turnover costs, advertising] and Debt servicing [ the principal and interest on the normal loan and some sort of payback on the margin loan] your cash flow is break even. 

If those facts are correct here are my questions. 

1. What are your goals? Do you need the cash flow or can you rely on the other three wealth generators [ debt pay down, appreciation, and tax savings] to generate your return? 

2. If this is an appreciation play, how do you intended to add value? If you intended to simply buy and hold for 15-20 years? If that's the case, when will your major CapEx events come? Two years, five years, ten years ect?

3. When will you start to cash flow and what assumptions have to hold true for that to happen? Will rent growth be that driver and if it is can your tenant base sustain the rent increases? What would your cashflow be if you didn't use a margin loan? 

3.b When will you pay off the margin loan? Are you just paying of the interest portion of have you set up your own amortization schedule? 

4. this is where BP's favorite calculation, Cash on Cash flaws woefully short. Since you have $0 out of pocket, your CoC is infinite. So you'll need another return metric. My first filter would be comparing the cap rate of the property [this is basically the operating margin of the asset] with your weighted average interest rate [ for example if you borrow $80k @ 3% and $20k @ 9% your effective interest rate is 5%] If your effective interest rate is higher than your Cap Rate, the investment doesn't make sense, at least in the short term. If it passes that test you'll have to some sort of NPV calculation to figure out how much you'll make from all the wealth generators.

5. As @Steve Vaughan alluded to, what will the house surplus on your margin account be? If you getting the loan takes you all the way to the house limit, then any drop in the value of your portfolio will result in a margin call. How much can your portfolio fall in value before you get called?  If you can fall 50% then that's a much different than if its 10%

In short, I'd think about this in two parts. First the deal. On its own does it meet with your return requirements and does it fit within your strategy. Second, I'd think long and hard about your financing strategy and how it supports or adds risk to your operational strategy.

There isn't enough info to comment on the quality of the asset, but your financing adds lots of complexity, which isn't bad per se, as long as you understand how putting no money down impacts your plan. The tools commonly talked about on BP aren't enough to figure that out, so you'll have to get a bit more advanced.  But none of that matters if the asset is a POS to start with. 

@Ernie Sturzinger - There have been many helpful comments above, but I'll add the following:

Really account for all of the expenses you will have for the 16-unit, including those that are unforeseeen.  A drunk driver just drove into one of my properties that I financed in a similar way - fun!

There has to be some solid plan for getting a value-add from the investment for a no-money-down scenario to make sense.  Can rents be raised?  Are you leaving yourself a cushion in case you have to list it and sell it?

Make sure you can lock-in the rate on your securities-backed line of credit / margin loan at a rate where you are at least break-even with cash flow.  

Consider diversifying what you do with the securities-backed line of credit / margin loan (i.e., lend some funds to an experienced flipper, flip a property), that way you don't have all your eggs in one basket.

I agree with Bjorn and others.  It really depends on your market and how long you plan to hold it.  If you sold it 5 years down the road for the same price you bought it for now, after factoring in all the closing costs, rents, paying down the loan, etc...where do you come out?  Many area will have appreciation, but don't count on it.  Also remember you should raise your rents each year.