Is Cash Flow Necessary For LTR?

Question

Hi everyone! I want to get others thoughts on whether or not cash flow is necessary for them when investing in long term rentals? Over the past few months while looking through Zillow, I've seen properties that have been recently purchased at a price that would make it difficult for it to cash flow and wonder what the thought process is behind purchasing a property that doesn't initially cash flow. Thanks!

Eliott Elias · Answer

Depends what your play is and what market you're in. Appreciation is the name of the game. What if you negative cash flowed for 2 years but your house went up 100k in value? Does it have to cash flow? Know your market and trust data

Amy Shutes · Answer

@Isaac Lane

I think everyone said it all.  You also can’t loose on someone else paying down your mortgage for you while your property continues appreciate.  Win win.

Jonathan Stone · Answer

There are many reasons people buy Real Estate.  It is very possible that a property wouldn't cashflow for you with 20 or 25% down and a 8-10% management fee.  However if you bought it cash or financed at <2% and owned the management company or had say a 5% management fee. The deal could work.  We all have different criteria for what we need to pull the trigger on a deal.  There is a lot of big money out there trying to find a decent return.

Wale Lawal · Answer

@Michael Hill Great explanation!

Michael Hill · Answer

Hi Isaac, the logic for purchasing a LTR property that does not initially cash flow is that the property will have good future appreciation. It can be really hard to find SFH that will cash flow at all in some markets due to how hot the housing market has been with rising housing prices. It really depends on what your long-term personal investing strategy is, but for me I think it is okay to buy a LTR property that will at least break even on cash flow after taking all of the expenses, cap-ex, vacancy, etc. into consideration. You can still make a lot of money in the long run by buying a property that might have negative cash flow if you buy in the right area, but I just wouldn't want an asset taking money out of my pocket every month and taking money away from my next deals. It would also be a little more risky because then you are relying on price appreciation and rent increases, which even if those are likely, it is not always a guarantee in the short-term. Because of these things, I try to avoid properties that will have negative cash flow, but will not shy away from deals with no initial cash flow if every thing else looks good.

Is Cash Flow Necessary For LTR?

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