How much negative cash flow is too much
Member since 2023 · 13 posts · 10 votes
How much negative cash flow is too much
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147 Replies
- Member since 2023 · 13 posts · 10 votes3y
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes3y
quite an opportunity to assume debt that loses you 1K a month WITH a renter. Yikes.
We can probably skip the usual "cash flow vs. appreciation" debate on this one but I'll play:
what is the current market value of the property and what are you assuming the appreciation will be? Dying to hear.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
- Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes3yYes, so don't buy just to be buying something. Invest in something else. All the best.
Quote from @Bradley Shuhart:
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThis is what should be a "first rule" of REI, but unfortunately isn't. Too many REI think you have to buy something, just to buy something, and they give in to the numbers. Don't. If the numbers don't work, don't change the numbers so they do. Just don't buy, until you find a property where the numbers "do" work.
Quote from @Eric Gerakos:
Yes, so don't buy just to be buying something. Invest in something else. All the best.Quote from @Bradley Shuhart:
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThen change your market...or wait until that market does cash flow.
Quote from @Bradley Shuhart:
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Bradley Shuhart:
I have an opportunity to assume a loan at 2.5% in a HCOL SoCal community. Even at that rate I will still be losing about $800-$1000 per month with a renter due to HOA & Mello Roos. I'm ok with a negative cash flow for a couple of years because its in an area that should continue to appreciate. My question is how much is too much negative cash flow? Is there a general rule of thumb or is it based on personal tolerance. Thank you!
Better to save the money into into high-dividend option derivative ETF like SVOL that would give 15% annualized cash-flow.
If RE projected appreciation is greater than 4% and negative cash flow for $100, I may be still okay, but negative $1K is too much especially if it is condo, and condo HOA has its own lousy risk as well.I would do -$500 if it's used for my kid education though. But for rental, no way.
- 3yBrady MullenPro MemberDenver, CO · Member since 2021 · 59 posts · 100 votes
Quote from @Bill B.:
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
This is very helpful way of looking at it. If I could buy $1,500 worth of any viable asset/investment for $1,000 month after month, I'd consider it (I didn't say I'd definitely do it, all you cash flow junkies - I just said I'd consider it).
If you could purchase a business for 33% off, wouldn't you at least think twice about it?
Cash flow is important, of course, because liquidity is a vital metric, but it's not the only thing that matters.
- 3yBrady MullenPro MemberDenver, CO · Member since 2021 · 59 posts · 100 votes
High HOA's can be NASTY. It's an operating expense that you have very little (if any) control over, and they SO OFTEN make awful financial decisions with your money, and you have very little power to oppose them.
Also, it seems like the possibility of assuming such a low interest rate debt might be making it hard for you to look at it objectively.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes1 - $1500 asset for $1000/month you would consider it? Why? What's the rest of the story?
Quote from @Brady Mullen:
Quote from @Bill B.:
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
This is very helpful way of looking at it. If I could buy $1,500 worth of any viable asset/investment for $1,000 month after month, I'd consider it (I didn't say I'd definitely do it, all you cash flow junkies - I just said I'd consider it).
If you could purchase a business for 33% off, wouldn't you at least think twice about it?
Cash flow is important, of course, because liquidity is a vital metric, but it's not the only thing that matters.
2 - 33% for a business. Why? 33% off of what? The asking price? Again, what's the rest of the story?
3 - Cash flow isn't the only metric, but it's important enough that you shouldn't buy without it. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
1 - $1500 asset for $1000/month you would consider it? Why? What's the rest of the story?Quote from @Brady Mullen:
Quote from @Bill B.:
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
This is very helpful way of looking at it. If I could buy $1,500 worth of any viable asset/investment for $1,000 month after month, I'd consider it (I didn't say I'd definitely do it, all you cash flow junkies - I just said I'd consider it).
If you could purchase a business for 33% off, wouldn't you at least think twice about it?
Cash flow is important, of course, because liquidity is a vital metric, but it's not the only thing that matters.
2 - 33% for a business. Why? 33% off of what? The asking price? Again, what's the rest of the story?
3 - Cash flow isn't the only metric, but it's important enough that you shouldn't buy without it.ya lets say you have 200k , rather than buying rental that is negative 1k a month , I would sell my current home for 500k (lets say 100k profit) and then purchase 700k house using 200k money that I can rent the house partially (househack) so I don't need to pay mortgage or at least I can reduce my mortgage. Been doing that as well.
Negative 1k for condo is too awful even with 2 percent rate. It also means the top is near (less appreciation).
- 3yTimothy ChiBusiness MemberReal Estate Agent · Anchorage, AK · Member since 2018 · 88 posts · 45 votes
I think sometimes it's important to consider the whole picture outside of just cash flow. Cash flow is important and I certainly factor it in however there is more to my decision making criteria than just that. Cash flow is the tip of the ice berg but there is still more underwater that you have to uncover.
Personally, I wouldn't do a buy and hold deal that cash flows -1000k a month. However I would try and find opportunities to improve that. Is there a hospital around the area that lets you offer it as a mid term rental? Any opportunity for STR? Any opportunity for value add that you can use to force appreciation and sell some day? If the answer is no to those things, then I would definitely not do it. If the answer is yes, then I'd recalculate my numbers and decide accordingly.
Consider other factors that real estate benefits you: appreciation, principle paydown, depreciation, other tax benefits, etc. If appreciation is 4% a year (assuming), then convert that into a dollar amount and add it to your equation because it's "hidden income" that you won't be access until you sell or refi. Same thing with principle paydown. Consider depreciation. If you are REPs status, imagine the tax benefits this gives you.
I am considering a duplex that cash flows -100/200 a month but I could use it to lower my taxable income by a significant amount. When I consider all the other benefits, it is worth looking into based on my criteria. Yes, putting money into a property isn't ideal because technically it can't run itself, however I would happily choose to put $100 less into my 401k and instead into a tangible asset that I have complete control over.
Hope this helps.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes3y
"How much negative cash flow is too much"?
Anything greater than zero.
Remember:
Appreciation puts $0 in your pocket unless you can borrow it out still not "feed an alligator" (cash flow negatively).
"Investing" for appreciation is NOT investing, it's speculating (read: gambling).
Be VERY clear what you're doing and why BEFORE you do it!
If it was me, hard pass.
My $0.02 ...
- Investor · Member since 2021 · 591 posts · 695 votes3y
Negative $800-1k per month AND an HOA? ...no way.
In addition to the problems of HOAs that others already mentioned, an HOA could potentially ban renting (many HOAs have already banned STRs, and a decent chunk won't even allow LTRs)...honestly, I'd be pretty wary of buying a cashflow positive deal in an HOA, and I wouldn't touch a cashflow negative HOA property with a ten foot pole...
As we've discussed many times on the forums, in today's market, successful investors don't "find" cashflow, they create cashflow--which is a topic worth studying up on...
Good luck out there!
- 3yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Quote from @Joe Villeneuve:
Then change your market...or wait until that market does cash flow.Quote from @Bradley Shuhart:
Or stay in the same market and get creative
The McKernan Group4.954 Reviews - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
Lately I’ve been accused twice of insulting people when I ask questions, so right up front. This is not an insult, it’s a real question.
You say: "Investing" for appreciation is NOT investing, it's speculating (read: gambling).
Are you saying almost all stock investing, which is almost entirely based on appreciation is gambling? I certainly feel that way about bitcoin and probably silver/gold, and at least a little about stocks. It’s always bothered me when people won’t invest in real estate without cash flow but they’ll GLADLY invest in stocks with NEGATIVE cash flow, praying for appreciation.
This is the exact reason I stopped investing in stocks. There was no way I could buy enough stocks to generate enough cash flow to live on. When I retired I didn’t want to “hope I died before I spent all my savings”. That and having zero control over if they went up or down each day or even over time got me to real estate and changed my life.
Again, honest question and not aimed solely at you. I’d be happy to hear anyone’s opinion, you were just the latest to say it and I thought you might still be online.
- Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes3y
have you considered doing STR or MTR to up the monthly cashflow?! in either case, there's only one answer to your question: how much negative cashflow is too much? HOWEVER MUCH YOU CAN HANDLE. a deal with neg cashflow isn't always a bad one. sometimes the annual appreciation / debt paydown / tax benefits for you personally, are more than enough to outweigh the cashflow deficit. look into just how much wealth you could be building considering those factors, and see if the -1k/mo would be worth it for you.
- Member since 2023 · 13 posts · 10 votes3y
Quote from @Bill B.:
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
Thank you for the response! It's a new construction that's only about 18 months old so right now only about $1200 is going towards principle. It would only be for LTR purposes so no house hacking. I've reached out to PMs in the area and believe I could get enough in rent to cover about 85% of the mortgage/HOA.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Bradley Shuhart:
Quote from @Bill B.:
How much of the payment is lowering your principle?
The only negative cash flow deal I ever bought was almost $800/mo negative. But it was paying off $1,500/mo in principle day 1 and only got better. So over 6 years it went from me paying $9,600/yr to pay off $1,800 to the debt being paid off and cash flowing $28k/yr. And yes, that was the icing on the cake as it appreciated about $280k.
Is this a property you could see yourself living in and doing a house hack? That’s how I got started as I had never paid rent before and didn’t like the idea of it. Or when the current lease expires raising the rent $3-400/mo and if they move out renting it by the room while staying in your current place? (A little harde, might need one roommate to play on-site property manager for discounted rent.)
Thank you for the response! It's a new construction that's only about 18 months old so right now only about $1200 is going towards principle. It would only be for LTR purposes so no house hacking. I've reached out to PMs in the area and believe I could get enough in rent to cover about 85% of the mortgage/HOA.
Aha, so it's new construction. I know what you meant , new construction is very risky in these environment
Also the appreciation for new construction is questionable at this time as usually the PSF is bit in high side, they can offer 2% because the builder own this land for long time already and the price has been markup.
If you want you can invest to older home that may be negative 200 bucks but would appreciate much more than those new construction.
I see new construction is very lousy these days for rental, the only way I can purchase them is only if it's primary or for my own family. - Member since 2023 · 40 posts · 34 votes3y
Thank you for sharing your story on the BP forum and asking the community for further guidance. I agree with the majority in this forum that anything beyond a $1 loss is not satisfactory even in high appreciating markets. Here are the following reasons why:
(1) Variable Costs
In your underwriting, you assume all costs remain fixed. As we all know, especially in this high-inflation economy, goods and services tend to tick upward, including HOA, insurance, and maintenance costs. As a result, your estimated $800-$1000 monthly loss will increase.
(2) Insufficient Reserves
Have you accounted for maintenance, vacancy, and reserve funds? No acquired properties are perfect and will need some fixes. Or does the HOA cover this? If you are underwriting this deal without these in mind, you are walking a dangerous path, as one major repair may cause your calculations to spiral.
(3) Unpredictable Future
Who's to say this renter stays here for a prolonged period? How long will it take you to fill the vacancy? Will the labor market tighten up, resulting in fewer potential renters for HCOL units? In "The Psychology of Money" by Morgan Housel, he discusses the room for error. An investor should provide themselves with enough margin to safely cover unforeseen errors or events (e.g., a recession, capital expenditures for repairs, or tenant property damage).
Solution:
The majority of the forum members are against your real estate due to "speculating," whereby an investor bets that the property will appreciate more quickly compared to their losses. Yes, I agree with the forum @Joe Villeneuve @Carlos Ptriawan @David Dachtera on that premise, but let's provide you with some solutions!
(1) House Hack
I am unsure if you secured the loan with either a 2.5% down payment or interest rate (which I highly doubt, especially in this market). If you paid a 2.5% down payment, the loan is most likely owner-occupied, which means you can rent one unit and the renter lives in the other. Consequently, you are paying $800-$1000 in "rent" towards your own property. In the case of SoCal, this is a fantastic deal!
If you secured this property with a 2.5% interest rate, it's futile because you are not saving or increasing positive cash flow; instead, you are losing money each month. The primary purpose of lower interest rates is to increase your positive cash flow, not to reduce your losses.
(2) Short-term or Medium-term Rentals
I suggest you look into short-term or medium-term rentals as they tend to have higher cash flow compared to long-term rentals. This method will allow you to cover the loss with increased cash flow and enjoy the appreciation.
---------------------------
As David Greene states, 'Cash flow is a defense mechanism when things take a turn.' I hope this helps, and please feel free to send me a PM if you have more questions!" - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
When reaching out to those pm’s ask them how much they think they could collect in rent, what they charge and what you would net. Then you’re going to want them to guess at annual rent increases, is it 2%, 5% or 10%, that’s going to be a big factor. In 5 years will you be collecting 5% more rent or 50% more. Is it high end of the market where you’re going to reach an affordability problem.
Your numbers don’t excite me. I think your personal finances will probably have to be the tie breaker. Would an extra $1,600/mo in your pocket change your lifestyle at all? (Being positive $800 vs negative $800.) Many/most people would say yes, those people probably shouldn’t take this deal. To somewhere between 5 and 20% of BP members, based on a percentage I just made up, that’s not life changing money. They can/might buy this property based on future returns or plans.
As I’ve said elsewhere on my negative $800/mo cash flow property. It was much less than I had been putting in to my retirement accounts, which certainly didn’t cash flow. And I was treating it as a tax advantaged retirement account, not a cash flow account. I was able to do that because that $800 wasn’t life changing, because I had other properties that were cash flow accounts.
Good luck. And let us know what you decide.
- Member since 2022 · 405 posts · 455 votes3y
Quote from @Joe Villeneuve:
This is what should be a "first rule" of REI, but unfortunately isn't. Too many REI think you have to buy something, just to buy something, and they give in to the numbers. Don't. If the numbers don't work, don't change the numbers so they do. Just don't buy, until you find a property where the numbers "do" work.Quote from @Eric Gerakos:
Yes, so don't buy just to be buying something. Invest in something else. All the best.Quote from @Bradley Shuhart:
I agree with @Joe Villeneuve. If it does not Cash Flow, do not buy. Look at different markets, wait until your market changes, change investment strategies. But don't buy a liability, especially in this situation. The deal does not work with a 2.5% rate and you won't be getting lower than that anytime soon.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Bill B.:
When reaching out to those pm’s ask them how much they think they could collect in rent, what they charge and what you would net. Then you’re going to want them to guess at annual rent increases, is it 2%, 5% or 10%, that’s going to be a big factor. In 5 years will you be collecting 5% more rent or 50% more. Is it high end of the market where you’re going to reach an affordability problem.
Your numbers don’t excite me. I think your personal finances will probably have to be the tie breaker. Would an extra $1,600/mo in your pocket change your lifestyle at all? (Being positive $800 vs negative $800.) Many/most people would say yes, those people probably shouldn’t take this deal. To somewhere between 5 and 20% of BP members, based on a percentage I just made up, that’s not life changing money. They can/might buy this property based on future returns or plans.
As I’ve said elsewhere on my negative $800/mo cash flow property. It was much less than I had been putting in to my retirement accounts, which certainly didn’t cash flow. And I was treating it as a tax advantaged retirement account, not a cash flow account. I was able to do that because that $800 wasn’t life changing, because I had other properties that were cash flow accounts.
Good luck. And let us know what you decide.
It seems there's more story to this. If I'm not wrong this is the typical way of home builder playing with price.
So what OP should do is the following:
1. Measure the PSF of this new construction
2. Measure the PSF of 10 year old stock 1-2 mile apat>
3. Measure the PSF of 30 year old stock house
Compare to PSF, I would not surprise if the new construction PSF is higher 30-40% than FMV of older house in neighborhood.
In one of our area, with the same PSF, lets say 30 yo house is selling for $300K, the new construction is like $500k and lakefront is $700 !
It's the way they make money, even the lake is man made to hijack the price. And this is the very reason why price is negative 800 bucks even with two percent rate which seems illogical to me.
The problem with this approach is, no cash flow and future appreciation is also questionable unless you know the area.
It's risky but quite brain simulating as well, if the area is full of tech company or located in top touristy area, I 'may' reconsider looking with 20 years investment outlook. If not, I would run away. - Member since 2023 · 13 posts · 10 votes3y
@Zachary Ware@Bill B.@Tommy Nguyen@Carlos Ptriawan@Jessie Dillon@Peter Mckernan @Leo R. @David Dachtera@Timothy Chi@Joe Villeneuve@Brady Mullen@Eric Gerakos@Jonathan R McLaughlinThank you everyone for your responses and advice. I'm admittedly new and REI is something I've always wanted to get into but didn't have the means. I'm finally in a position to bein this journey but it's a difficult to find cash flowing properties. This one seemed like a good deal and I was a little enamored with the 2.5% rate in a high appreciating market. But once all the numbers came in, that negative $800-$1000 monthly was eye opening. I am surprised by the comments saying any negative cash flow is a deal breaker though, especially in high appreciating markets.
Again, I appreciate all the feedback and advice. If I have to ask stupid questions to learn, so be it.
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