Is it worth taking on negative cash flow multi family starting out ($-200 a month)?

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Is it worth taking on negative cash flow multi family starting out ($-200 a month)?

Alex Molina
Investor · Stamford, CT · Member since 2018 · 10 posts · 1 vote

Hello, 

I'm in the mist of buying a 2 unit multi family in CT (New Britain). The current market in this area is pretty hot due to low inventory levels. I plan on purchasing a property that will break even or produce negative cash flow ($-200) if I move out. This will be my second investment and I plan on housing hacking and living in the upstairs unit. This current property that I have under contract has a new roof (1 year old), new furnace (1 year old), and a remodeled unit w/ new appliances. I'm thinking this would reduce CAPEX in the short term significantly and refinance when rates go down (Current rate 6.9%).

I need some advice on if this would be a decent situation to enter starting out to get some exposure to real estate investing. 

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
Quote from @Alex Molina:

Hello, 

I'm in the mist of buying a 2 unit multi family in CT (New Britain). The current market in this area is pretty hot due to low inventory levels. I plan on purchasing a property that will break even or produce negative cash flow ($-200) if I move out. This will be my second investment and I plan on housing hacking and living in the upstairs unit. This current property that I have under contract has a new roof (1 year old), new furnace (1 year old), and a remodeled unit w/ new appliances. I'm thinking this would reduce CAPEX in the short term significantly and refinance when rates go down (Current rate 6.9%).

I need some advice on if this would be a decent situation to enter starting out to get some exposure to real estate investing. 


 As with most answers "it depends" - have you run a proforma with an exit strategy? For exa,ple buying an asset with no money down with $200 negative cash flow is different than buying one  with $50k down and negative cash flow.

Cash flow is just one metric in investing, when a developer buys an asset to upgrade it they are negative cash flow early on then they get to positive and can exit the property. If the property is at its peak value  and you think rents will not go up significantly in the next few years and your only thing that can go right is interest rates come down - you are putting all your eggs in that basket. What if the values go down and you have to contribute more equity to get a loan?

There is a lot to unwind here and the asset needs to be looked at more thoroughly in order for someone to provide a response. Hope this helps

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y
    Quote from @Alex Molina:

    Hello, 

    I'm in the mist of buying a 2 unit multi family in CT (New Britain). The current market in this area is pretty hot due to low inventory levels. I plan on purchasing a property that will break even or produce negative cash flow ($-200) if I move out. This will be my second investment and I plan on housing hacking and living in the upstairs unit. This current property that I have under contract has a new roof (1 year old), new furnace (1 year old), and a remodeled unit w/ new appliances. I'm thinking this would reduce CAPEX in the short term significantly and refinance when rates go down (Current rate 6.9%).

    I need some advice on if this would be a decent situation to enter starting out to get some exposure to real estate investing. 


     As with most answers "it depends" - have you run a proforma with an exit strategy? For exa,ple buying an asset with no money down with $200 negative cash flow is different than buying one  with $50k down and negative cash flow.

    Cash flow is just one metric in investing, when a developer buys an asset to upgrade it they are negative cash flow early on then they get to positive and can exit the property. If the property is at its peak value  and you think rents will not go up significantly in the next few years and your only thing that can go right is interest rates come down - you are putting all your eggs in that basket. What if the values go down and you have to contribute more equity to get a loan?

    There is a lot to unwind here and the asset needs to be looked at more thoroughly in order for someone to provide a response. Hope this helps

    7e investments53 Reviews
    WebsiteView Page
    3Reply
  • Alex Molina
    OP
    Investor · Stamford, CT · Member since 2018 · 10 posts · 1 vote
    3y
    Quote from @Chris Seveney:
    Quote from @Alex Molina:

    Hello, 

    I'm in the mist of buying a 2 unit multi family in CT (New Britain). The current market in this area is pretty hot due to low inventory levels. I plan on purchasing a property that will break even or produce negative cash flow ($-200) if I move out. This will be my second investment and I plan on housing hacking and living in the upstairs unit. This current property that I have under contract has a new roof (1 year old), new furnace (1 year old), and a remodeled unit w/ new appliances. I'm thinking this would reduce CAPEX in the short term significantly and refinance when rates go down (Current rate 6.9%).

    I need some advice on if this would be a decent situation to enter starting out to get some exposure to real estate investing. 


     As with most answers "it depends" - have you run a proforma with an exit strategy? For exa,ple buying an asset with no money down with $200 negative cash flow is different than buying one  with $50k down and negative cash flow.

    Cash flow is just one metric in investing, when a developer buys an asset to upgrade it they are negative cash flow early on then they get to positive and can exit the property. If the property is at its peak value  and you think rents will not go up significantly in the next few years and your only thing that can go right is interest rates come down - you are putting all your eggs in that basket. What if the values go down and you have to contribute more equity to get a loan?

    There is a lot to unwind here and the asset needs to be looked at more thoroughly in order for someone to provide a response. Hope this helps

    Thanks for your response. I'm using a FHA with 3.5% down on a 2 unit multi family (315K). I don't think rents will increase significantly in this area. It's seeing a lot of appreciation value recently due to low inventory levels. I do believe that property values will continue to increase as many individuals in CT are looking for areas were housing costs are lower. Thus, Hartford County is a place people are turning to compared to other areas in CT. I'm thinking I could offset my negative cashflow with cashflow I'm receiving on another property. And eventually sell this asset in 5-10 years to buy in a more desirable area. 
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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    It never makes sense to negative cash flow. 

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    3y

    @Alex Molina it is a bad idea. There may be limited situations when it makes sense but if you are asking this isn't one of them. 

    0Reply
  • Michael Doherty
    Real Estate Agent · West Hartford, CT · Member since 2016 · 449 posts · 476 votes
    3y

    @Alex Molina Congrats on getting this one under contract. I know New Britain well and it's taken off. I used to house hack in New Britain and here's what I think. If you are only putting 3.5% down then your LTV is high... numbers would cash flow more by putting 20% down as required with a non owner occupied loan. So you are sacrificing cash flow but also not putting a lot down. If you goal is cash flow to become financially free then this isn't a great deal. You are paying a premium for a 2 family. If your goal is to keep working a W2 and have a couple deals on the side and build equity and not 'need the cash flow' keep it. With that said you can always sell down the road and capture the increased equity and then use the profits as a BRRRR so this could be a great starting point. Additionally, by house hacking you will only be coming out of pocket 1,000-1,200 most likely for 'rent'.... I don't know how the inside looks but you cant find many decent places to rent around here for much cheaper.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    I would do something like this ONLY if you were positive that there was massive appreciation heading your way. Like the property is in a gentrifying neighborhood and will increase in value by 30 -50% in a very short time, 3-5 years......

    0Reply
  • Andre TaylorPro Member
    Rental Property Investor · Chicago, IL · Member since 2017 · 221 posts · 181 votes
    3y

    I agree with alot of the other investors... first I would see if there are ways to increase your NOI...also looking ahead if you see the area has a history of appreciation then maybe its a long term play but using the FHA loan is great if rates are low and values are low but in this climate you gone have to put 20-25% down to get that cash flow you are looking for.

    0Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    3y

    It depends. I don't mind it if the long term play goes something like this:

    - Avg local appreciation over the last 10yrs: 7+%

    - Avg local rent increase 7%+ YOY

    In year 3 through 5, the property is well seasoned. With fix rate loan it will cash flow quite well and the equity build is well on its way to 2x.

    2Reply
  • Obed Calixte
    Real Estate Agent · St Petersburg, FL · Member since 2019 · 321 posts · 182 votes
    3y

    what are all the expenses that you are including in your proforma? (ie, CAPEX, Mgmt Fees, owner paid utilities, lawn care, vacancy, taxes, insurance etc)

    Also have you considered all of your income opportunities? (is the area viable as a MTR, can a shed be rented out for additional storage, etc)

    In general you want it to cashflow as an LTR but asking as there may be other items that should be included, removed or changed that can help you make a more concrete decision. 

    0Reply
  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y
    Quote from @Julien J.:

    It depends. I don't mind it if the long term play goes something like this:

    - Avg local appreciation over the last 10yrs: 7+%

    - Avg local rent increase 7%+ YOY

    In year 3 through 5, the property is well seasoned. With fix rate loan it will cash flow quite well and the equity build is well on its way to 2x.


     Totally agree- I've done plenty of deals that weren't great for the first few years...then I was able to quit my job, so I'm a believer. 

    1Reply
  • Julien J.
    Investor · CO · Member since 2016 · 757 posts · 1k+ votes
    3y

    @Corby Goade

    Sounds like we have a similar story. 

    1Reply
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