How much negative cash flow is too much
Member since 2023 · 13 posts · 10 votes
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!
Appreciation puts $0 in your pocket unless you can borrow it out
I think we're talking about it differently. I (almost) always invest based on assumed appreciation, and it's always worked for me. But I mean, you have to know the area inside and out and be absolutely sure that the property is going to have HUGE appreciation very quickly (meaning you have the intent to sell and reap the appreciation from profit).
Otherwise I agree with you.
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.
It is certainly legal for minors to own stocks and options. Not sure where you're getting that from. And stocks are legitimate ways to invest wealth.
While there is nothing wrong with buying good company stocks, day trading and options trading are different animals - very risky and akin to gambling.
We have to accept that finance is a very nuanced topic. It doesn't have to be an argument about whether real estate is better or worse than stocks. They have different pros and cons.
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they’ll need a parent or guardian to open a custodial account for them."
From Stilt:
"The legal age to start investing in stocks is generally 18, but some states have higher age restrictions."
From investmentU:
"Specifically, you have to be at least 18 years old to invest in stocks in the United States. This includes other investments such as bonds, cryptocurrencies, exchange-traded funds (ETFs) and mutual funds."
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.
There's a reason it's called "The Wall Street Casino". :-)
Im at -$500/mo for the first two years. Its not the best, but hopefully for a bigger payoff
Appreciation puts $0 in your pocket unless you can borrow it out
I think we're talking about it differently. I (almost) always invest based on assumed appreciation, and it's always worked for me. But I mean, you have to know the area inside and out and be absolutely sure that the property is going to have HUGE appreciation very quickly (meaning you have the intent to sell and reap the appreciation from profit).
Otherwise I agree with you.
ya for me appreciation put 6 digit number in my wallet, can pay off 30YFRM in ten years, all with smart appreciation investing. LOL
I live for free now due to appreciation.
for me appreciation and mortgage is even more important than w2 job, cash flow maybe the third
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.
It is certainly legal for minors to own stocks and options. Not sure where you're getting that from. And stocks are legitimate ways to invest wealth.
While there is nothing wrong with buying good company stocks, day trading and options trading are different animals - very risky and akin to gambling.
We have to accept that finance is a very nuanced topic. It doesn't have to be an argument about whether real estate is better or worse than stocks. They have different pros and cons.
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they’ll need a parent or guardian to open a custodial account for them."
From Stilt:
"The legal age to start investing in stocks is generally 18, but some states have higher age restrictions."
From investmentU:
"Specifically, you have to be at least 18 years old to invest in stocks in the United States. This includes other investments such as bonds, cryptocurrencies, exchange-traded funds (ETFs) and mutual funds."
@Bradley Shuhart
First, ignore everyone who hasn't invested in CA as they don't understand some fundamentals. Second, I highly suggest avoid properties with HOA. HOAs are built in inefficiencies that you can't control.
Third, I presume this is SFH? If so, then I suggest avoiding negative CF for SFH properties. If this is MF, then I would ask how far below market rent each unit are. Many properties in socal have low in-place caps because owners don't keep pace with rent changes. This gives you an opportunity for value-add.
Many CA investors go from negative CF to highly positive CF, so don't be dismayed by the all the feedback - just be cautious if you're looking at SFH.
I don't believe in cashflow etc I believe if you have the income to support a property while being able to grow the rental portfolio then you should do it. Its amazing to me to see people don't hesitate to spend $1500 on a Mercedes but god forbid they have to fork out even $500 out of pocket for a property that will appreciate in value, all of a sudden their having a hernia over it, priorities.
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.
It is certainly legal for minors to own stocks and options. Not sure where you're getting that from. And stocks are legitimate ways to invest wealth.
While there is nothing wrong with buying good company stocks, day trading and options trading are different animals - very risky and akin to gambling.
We have to accept that finance is a very nuanced topic. It doesn't have to be an argument about whether real estate is better or worse than stocks. They have different pros and cons.
To start investing in stocks on their own, your kid will need a brokerage account, and they must be at least 18 years old to open one. They can start earlier than this, but they’ll need a parent or guardian to open a custodial account for them."
From Stilt:
"The legal age to start investing in stocks is generally 18, but some states have higher age restrictions."
From investmentU:
"Specifically, you have to be at least 18 years old to invest in stocks in the United States. This includes other investments such as bonds, cryptocurrencies, exchange-traded funds (ETFs) and mutual funds."
@Bradley Shuhart not sure why you would tolerate any negative cash flow.... when there are certainly markets and asset classes out there where you can go in with positive cash flow.
@Bradley Shuhart as strictly an investment, I wouldn't do -$1k/month. The only savior seems to be appreciation (aka gambling).
What if we get recording inflation, FED raises rates 4 more times, and the housing market tanks? Does this invalidate your whole investment?
Is there more to the story? As in you have a ridiculously high income and desire to own this specific building? If so then, sure, I guess go nuts.
If not don't let FOMO talk you into losing at least $12k/yr. Aka, subsidizing your renters lifestyle.
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.
All stock investing is not speculation, but I agree with you most people it is. Thats why most people cannot beat the market or do not get the returns they think they will. If you buy the index, S&P, it pays you 1.8% every year, but if you look at the individual companies you can buy companies in there that are more fairly valued, that have better financials and pay a higher dividend. If you invest in financially healthy companies that pay a dividend that also grow their dividend you can beat the market over a long period of time. Problem like investing in CF properties is it is slow it's not sexy and you won't get rich overnight. You can beat the S&P market index just buy buying an equal weighting by 1-2% or buying the index based on fundamentals by 3-4%
Let's look at two big examples of speculation Nvida and SF RE. Nvida is trading at over 119 P/E ratio. If you are buying that stock, you are buying it literally just b/c you think someone will pay more for it tomorrow, Greater Fool Theory. When you buy SF RE w/ negative CF you are betting on appreciation continuing to climb and you being able to hold it w/ a negative carry every month. This is speculating that someone will pay more for the asset then you did. Yes, it can work out and you can make money, but it is gambling.
@Bradley Shuhart
In terms of the original question I would not buy anything w/ a negative CF, unless it was b/c I was renovating it and a conservative analysis told me those futures rents can make me a decent return. In your example to lose $1k a month before any unexpected expenses come up, which they always do, is ridiculous. I especially would not be taking on risk w/ the yield curve inverted and us literally being on the precipice of a recession. Even if you think RE will not be affected can you say for certain your job and pay will hold? If you look at history buying any asset while the yield curve is inverted is usually not what you want to be doing. My advice would be sticking the money in a 6mo T-bill make your 5.5% and watch how things play out. If you really want to buy something watch how LD UST, $TLT, performs during a recession.
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!
I don't believe in cashflow etc I believe if you have the income to support a property while being able to grow the rental portfolio then you should do it. Its amazing to me to see people don't hesitate to spend $1500 on a Mercedes but god forbid they have to fork out even $500 out of pocket for a property that will appreciate in value, all of a sudden their having a hernia over it, priorities.
if you don't want it send it my way ill gladly take it
@V.G Jason @Varinder Kumar
The reason you do not want negative CF is b/c of the risk involved. It is also not a model you can replicate. Every property you buy puts you in worse position financially. When this recession hits even if housing is not affected, which is unlikely, you run the risk of having your hours cut/losing your job which would make it hard/impossible to pay the debt. If you can’t pay the debt you will lose your asset and all equity in the building.
I don't believe in cashflow etc I believe if you have the income to support a property while being able to grow the rental portfolio then you should do it. Its amazing to me to see people don't hesitate to spend $1500 on a Mercedes but god forbid they have to fork out even $500 out of pocket for a property that will appreciate in value, all of a sudden their having a hernia over it, priorities.
What’s funny is I just replaced a whole engine of Mercedes 8 years old for only $3500 LOL
while my friend buying the same model in current year 5 times than my price and they pay a thousand for monthly payment LOL
I told them it is the whole smart appreciation investing package ….
but ya I have positive cash flows from all midwest to hawaii
It is just there are so many investing offering out there and we have to be a PHD on doing due diligence
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.
All stock investing is not speculation, but I agree with you most people it is. Thats why most people cannot beat the market or do not get the returns they think they will. If you buy the index, S&P, it pays you 1.8% every year, but if you look at the individual companies you can buy companies in there that are more fairly valued, that have better financials and pay a higher dividend. If you invest in financially healthy companies that pay a dividend that also grow their dividend you can beat the market over a long period of time. Problem like investing in CF properties is it is slow it's not sexy and you won't get rich overnight. You can beat the S&P market index just buy buying an equal weighting by 1-2% or buying the index based on fundamentals by 3-4%
Let's look at two big examples of speculation Nvida and SF RE. Nvida is trading at over 119 P/E ratio. If you are buying that stock, you are buying it literally just b/c you think someone will pay more for it tomorrow, Greater Fool Theory. When you buy SF RE w/ negative CF you are betting on appreciation continuing to climb and you being able to hold it w/ a negative carry every month. This is speculating that someone will pay more for the asset then you did. Yes, it can work out and you can make money, but it is gambling.
@Bradley Shuhart
In terms of the original question I would not buy anything w/ a negative CF, unless it was b/c I was renovating it and a conservative analysis told me those futures rents can make me a decent return. In your example to lose $1k a month before any unexpected expenses come up, which they always do, is ridiculous. I especially would not be taking on risk w/ the yield curve inverted and us literally being on the precipice of a recession. Even if you think RE will not be affected can you say for certain your job and pay will hold? If you look at history buying any asset while the yield curve is inverted is usually not what you want to be doing. My advice would be sticking the money in a 6mo T-bill make your 5.5% and watch how things play out. If you really want to buy something watch how LD UST, $TLT, performs during a recession.
Last year when SP500 falls 20 percent, my total portfolio that consists of lots of dividend rich ETF,MLP, and CEF ; is flat.
it has market gain something like -15% from equity valuation , but because it has high dividend yield above 8 percent , my dividend gain return is like +16% so my total return is like flat.
this is sample of when appreciation declining , cash flow can help.
when people says appreciation is gambling it just means whoever say this doesn’t understand math.
wppreciation is not gambling.
it is product of supply and demand ratio …., I researched this a lot.
highest 5% appreciation happened when demand outpace supply by factor of 3.
while 0 percent appreciation just means there are equal demand and supply in the market …
there is a way to measure that.
I personally have ZERO desire to consciously choose to acquire an asset that is losing me money. Not only would I be giving up my time (which is valuable) but I´ḿ shelling out capital for no apparent reason that can be deployed thousands of other ways. If this was the only way to get something in a good area the logic may make sense but I still wouldnt do it. There are investors that managed to get stuff in great areas all the time and not be proud they have $1500 in negative cash flow. That is just the base. With turnover, vacancies, repairs, maintenance and other stuff that would probably be $2500 to $3000. In one year this could be over 20k to 30k. What if it barley appreciates in 5 years? What if it´s massive recessions and housing busts? If I have to chose between a property where I´ḿ getting a 30k loss or maybe a 5k profit, I´ll opt for the later. Something else here that I´ḿ not connecting with is people who are cool with negative cash flow acting like the people who are not, there is something wrong with them or they are not understanding something. If that is your flow so be it but its not for me. I wont talk down to you about it; I just explained the reasons I cant get with it. I dont need Wall st investing terminology or numeric calculations to explain why I should lose monthly income. Not my style.
I personally have ZERO desire to consciously choose to acquire an asset that is losing me money. Not only would I be giving up my time (which is valuable) but I´ḿ shelling out capital for no apparent reason that can be deployed thousands of other ways.
This^^^^ A lot of investors forget to put a value on the most important thing we have - our own time. Following a lifetime of self employment, I always remembered to put a dollar amount on my time. I used $100 an hour, even way back in the day. Every time you think about, talk about or actually visit or work on your property, just imagine taking a $100 bill and throwing it away.
Not to mention my favorite saying - "Money is a renewable resource, time is not"....
Some comments:
According to Rentometer the average rent increase for San Diego 3/2 SFH in the past year was $700/month. This implies many units had more than $700/month annual increase. If the next 12 months are similar, your $800/$1000 cash flow could be cash neutral in a single year. https://www.rentometer.com/california-home-rents
Those that say purchasing for appreciation is not investing are not using the common definition of investing. They may be deriving their definition from Robert K and his teachings, but the common definition of investing is an expectation of profit. Note there is no source required for that profit or even an actual profit for it to be investing.
As for the appreciation not resulting in cash out, I do not mean this to be insulting but virtually every RE investor in San Diego has refinanced if they have owned the San Diego investment property at least 5 years. If they are not, I question their rationale. Cash out happens virtually automatically in San Diego.
I am getting far over 5 digits of appreciation monthy on my San Diego properties (slightly close to 6 digits of appreciation monthly - over half of the way there). I have one property that I purchased for $641K that by itself has averaged over 5 digits of appreciation monthly over the hold. My worse appreciating San Diego property has appreciated ~$2.3k/month (that is not only the worse, but by far the worse). I do not care what you call it, but the appreciation has allowed me to pretty much do whatever I want, whenever I want.
All my comments may lead you to believe that I am advocating for the purchase but I am not. The reason is that I do not believe it is optimal investment. I believe that better RE opportunities are present in San Diego and there are other investment options besides RE.
Good luck
but the common definition of investing is an expectation of profit. Note there is no source required for that profit or even an actual profit for it to be investing.
Bingo!
but the common definition of investing is an expectation of profit. Note there is no source required for that profit or even an actual profit for it to be investing.
Bingo!
In OP case what really happened is he is buying 2 percent cap rate in the market where cap rate is 4 percent, while offered two percent rate by seller or builder.
it is like buying 50k FMV car with 75k loan 2% rate.
@Carlos Ptriawan
Tell that to the people that invested in tech stocks in 2000. I’m not even talking about the ones that went out of business. Look at Cisco still down $20/share abt 35%. Do things always appreciate? Watch NVDA it’s about to crush a lot of investors. The market stocks, RE, whatever have to come back to fundamentals at some point.
What if you were up 20% b/c of appreciation in ‘06 and you had to sell the property in ‘11 you would have been down 40%. In the early 90s you would have been down to.
I agree long term the nominal value of things will go up but that doesn’t make it a good investment.