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!
I think it largely depends on where you invest. Where we live, if the proparty is purchased with a mortgage, a positive cashflow is almost unheard of due to extremely high real estate prices. We bought a condo in a very desirable area for 750K two years ago. Rented immediately. It had $600 negative cashflow the first year (against mortgage and HOA costs). Felt insane. This year it runs $400 negative cashflow. We had a modest rent increase because the tenants are incredible. If they stay, we will be cash flow positive in 3 years. If we get new tenants, we will become cashflow positive next year, as rents in this area grew ~ 700$/month over the last 2 years. >50% of the units in the building are investments, so I do not think there will be any changes in the condo rules. Condo appreciated 100 K over 2 years. While the negative cash flow was scary in the beginning, now it starts making sense.
I think it largely depends on where you invest. Where we live, if the proparty is purchased with a mortgage, a positive cashflow is almost unheard of due to extremely high real estate prices. We bought a condo in a very desirable area for 750K two years ago. Rented immediately. It had $600 negative cashflow the first year (against mortgage and HOA costs). Felt insane. This year it runs $400 negative cashflow. We had a modest rent increase because the tenants are incredible. If they stay, we will be cash flow positive in 3 years. If we get new tenants, we will become cashflow positive next year, as rents in this area grew ~ 700$/month over the last 2 years. >50% of the units in the building are investments, so I do not think there will be any changes in the condo rules. Condo appreciated 100 K over 2 years. While the negative cash flow was scary in the beginning, now it starts making sense.
Just curious, what that your original game plan? If so, what was the rational behind it? By the time you cash flow, excluding maintenance, turnover costs, repairs, and your time still you could be 50k in the hole. There are some C class communities you could buy a 50k property free and clear. Just by tracking the S&P you could turn that 50k into 75k in a reasonable amount of time as opposed to being in the hole. Was the original thought process to just have a very nice cool place in a cool area or was it a wealth move meant to play out over a few decades?
@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 think it largely depends on where you invest. Where we live, if the proparty is purchased with a mortgage, a positive cashflow is almost unheard of due to extremely high real estate prices. We bought a condo in a very desirable area for 750K two years ago. Rented immediately. It had $600 negative cashflow the first year (against mortgage and HOA costs). Felt insane. This year it runs $400 negative cashflow. We had a modest rent increase because the tenants are incredible. If they stay, we will be cash flow positive in 3 years. If we get new tenants, we will become cashflow positive next year, as rents in this area grew ~ 700$/month over the last 2 years. >50% of the units in the building are investments, so I do not think there will be any changes in the condo rules. Condo appreciated 100 K over 2 years. While the negative cash flow was scary in the beginning, now it starts making sense.
This too. Every single piece of real estate I have bought has been a trash investment, if that was my purpose. Before being an REI, I am speaking about. All were heavily intrinsic by year 2, latest by year 4. It tells me quality> quantity. You guys evaluate a long-term asset on quick monthly underwriting not on the full picture. Again, these low rates have blinded you. They make you miss the forest for the trees.
I am not saying go sink yourself, but prioritize yourself here. Don't fuss about $2400 of a projected annual loss to dissuade you. Pretty confident on a year 3 to 5 year proforma you'll be looking good. Heck, better areas actually move up rent quicker and have better tenants. I take that over these trash properties you guys like to scoop up and fuss about it the management of it.
I think it largely depends on where you invest. Where we live, if the proparty is purchased with a mortgage, a positive cashflow is almost unheard of due to extremely high real estate prices. We bought a condo in a very desirable area for 750K two years ago. Rented immediately. It had $600 negative cashflow the first year (against mortgage and HOA costs). Felt insane. This year it runs $400 negative cashflow. We had a modest rent increase because the tenants are incredible. If they stay, we will be cash flow positive in 3 years. If we get new tenants, we will become cashflow positive next year, as rents in this area grew ~ 700$/month over the last 2 years. >50% of the units in the building are investments, so I do not think there will be any changes in the condo rules. Condo appreciated 100 K over 2 years. While the negative cash flow was scary in the beginning, now it starts making sense.
It is making sense when the future is following our future trajectory in the past, seeing appreciation after FED increases money supply in 2020 is not something that’s unexpected.
BUt after FED increase rate and reduce money supply we definetely has to do more DD as our assumption model has changed.
Everything is so questionable these days , For me what I found to be more less risky investment is to stop buying renta, but then sell primary with large equity and buy flips with higher interest rate and then househack, more like BRRLR project ….so now I am mortgageless with income from STR and LTR is still flowing .
@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.
True to that, I left Cisco in 2001 btw.
my biggest lesson learnt to these day is I only purchase High yield Dividend ETF and don’t invest at individual stock.
what is interesting in high yield ETF compare to real estate :
While RE is hard asset classy that’s hardly going down in appreciation or almost always going up, it would have reduced cap rate year by year.
while stock is more volatile in nature but the volatility of underlying can be hedged with high dividend and/or DCA. Or even hedge it.
As @Mark Cruse said, you need to look at the big picture. Just because a property will have a positive cash flow one day does not make the deal worth it, This is really a long 'plus vs minus game', like a looong P&L statement (in my view anyway). So all of these months that you have a negative go into the minus category along with all other costs. Let's say in 5 years you finally achieve a positive cash flow....now you have to add together all the minuses...i.e., 60 months x $1000 a month = $60k in the hole starting out, That will take a long time to recover from, particularly when you could've just bought something else with your money...
Unless of course, as I believe, the appreciation factor is huge and pretty much guaranteed.
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!
A lot of advice and good insight already, but i'll add my $.02
1) First, as always ....it depends. What are your general and specific goals, what is your time frame for those goals, what is your individual financial position (job, income, expenses, expectations with those, etc).
2) Then, where is the "deal" with this property, is it a "deal" or just an attractive interest rate, what are the potential future outcomes with the property and area (i.e. what are the stats saying, increased population/income trends, new business moving in, etc).
3) And what are you expectations with this potential property/deal, how will it get you closer to your goals (see #1).
I am sure there is more stuff to be added above, that but I'll leave those there for now. On to some other insights.
* Most of us have probably heard this saying before, "Don't wait to be real estate, buy real estate and wait." I agree with that, but what is left out is HOW LONG DO YOU HAVE TO WAIT! In other words - most all real estate will appreciate over time, but how much time are YOU able to wait for that appreciation, if you happened to buy a relatively high price property at the top of the market, in a time with high demand and low inventory, in an area of a shrinking population you may be waiting a while (many years) for it to get back to even ...hopefully. FYI - I am not specifically speaking of any one area, this is just an extreme general example.
So, how do you think I know this! Yep, I have owned properties for many years and over a decade, which I was finally able to get rid of ...at a loss. A couple of them I had for about 18 years before I gladly dumped them at a loss. And, they cash flowed from day 1, but never made me any significant amount of money - cash flow or otherwise. They felt more of an anchor holding me back from some opportunities. My lesson there was I should of done more research on those local market trends. This was pre BP days and a lot less easily available data.
From reading many posts on BP, my guess is that many on here have only been through 1 market cycle, and most recently that was an unusually fast appreciation cycle. The downturn was about 14-15 years ago and things have mostly been up since then! And my guess is many on here, didn't experience the quick rise of the early 2,000's, only to see it implode later.
And even less so may be aware of the 1,990's where it took most of that decade to come back to normal. I personally participated in a losing transaction there also - bought at the height (1990) and sold at a loss just before things started to soar again (1997). So, if you think the market can only go up ...you're WRONG!
So, if you are buying a property at a monthly loss "hoping" it goes up at some point in the future, you may want to contemplate how other potential outcomes fit into your current, medium, and long term goals and plans.
Oh, and I have also owned rentals where the rents actually went down! So, I don't believe anyone that tells me that can't happen either. It's not normal, but is possible. But, guess what I have rarely seen gone down .....my home insurance, property taxes, maintenance, capex, etc.
By the way, all properties cash flow....if you put enough money down. It's the returns that are affected.
With all that said, I have had negative cash flow properties, but there were good fundamentals toward upward momentum in prices. In general, I would try and stay away from negative cash flow, in aggregate (the whole rental portfolio), unless there were some very strong indications of possibilities.
And in general, CA is at a historically low affordability rate. The challenge is predicting which factors which make up affordability are going to move where and when. Those factors are: prices, supply, demand, interest rates, incomes, and all the things that make up those (and some are specific to location). In the past when affordability went low, some upward movement in supply would lead to some softening in prices, assuming stable or lowering incomes. Now, we have many homeowners with the lowest interest rates in history, who are more reluctant to sell or move, as they would otherwise be, this in turn helps keep inventory low, possibly keeping a lower floor on prices or at least, making it more difficult to guestimate market reaction.
@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.
@Bradley Shuhart no one here knows what the market will be like in a couple of years. Maybe you’re market appreciates maybe it doesn’t but you individually control that. However you do control 2 things 1)picking a strategy that allows you to cash flow in your local market or 2picking a market that cash flows.
Best of luck
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!
A lot of advice and good insight already, but i'll add my $.02
1) First, as always ....it depends. What are your general and specific goals, what is your time frame for those goals, what is your individual financial position (job, income, expenses, expectations with those, etc).
2) Then, where is the "deal" with this property, is it a "deal" or just an attractive interest rate, what are the potential future outcomes with the property and area (i.e. what are the stats saying, increased population/income trends, new business moving in, etc).
3) And what are you expectations with this potential property/deal, how will it get you closer to your goals (see #1).
I am sure there is more stuff to be added above, that but I'll leave those there for now. On to some other insights.
* Most of us have probably heard this saying before, "Don't wait to be real estate, buy real estate and wait." I agree with that, but what is left out is HOW LONG DO YOU HAVE TO WAIT! In other words - most all real estate will appreciate over time, but how much time are YOU able to wait for that appreciation, if you happened to buy a relatively high price property at the top of the market, in a time with high demand and low inventory, in an area of a shrinking population you may be waiting a while (many years) for it to get back to even ...hopefully. FYI - I am not specifically speaking of any one area, this is just an extreme general example.
So, how do you think I know this! Yep, I have owned properties for many years and over a decade, which I was finally able to get rid of ...at a loss. A couple of them I had for about 18 years before I gladly dumped them at a loss. And, they cash flowed from day 1, but never made me any significant amount of money - cash flow or otherwise. They felt more of an anchor holding me back from some opportunities. My lesson there was I should of done more research on those local market trends. This was pre BP days and a lot less easily available data.
From reading many posts on BP, my guess is that many on here have only been through 1 market cycle, and most recently that was an unusually fast appreciation cycle. The downturn was about 14-15 years ago and things have mostly been up since then! And my guess is many on here, didn't experience the quick rise of the early 2,000's, only to see it implode later.
And even less so may be aware of the 1,990's where it took most of that decade to come back to normal. I personally participated in a losing transaction there also - bought at the height (1990) and sold at a loss just before things started to soar again (1997). So, if you think the market can only go up ...you're WRONG!
So, if you are buying a property at a monthly loss "hoping" it goes up at some point in the future, you may want to contemplate how other potential outcomes fit into your current, medium, and long term goals and plans.
Oh, and I have also owned rentals where the rents actually went down! So, I don't believe anyone that tells me that can't happen either. It's not normal, but is possible. But, guess what I have rarely seen gone down .....my home insurance, property taxes, maintenance, capex, etc.
By the way, all properties cash flow....if you put enough money down. It's the returns that are affected.
With all that said, I have had negative cash flow properties, but there were good fundamentals toward upward momentum in prices. In general, I would try and stay away from negative cash flow, in aggregate (the whole rental portfolio), unless there were some very strong indications of possibilities.
And in general, CA is at a historically low affordability rate. The challenge is predicting which factors which make up affordability are going to move where and when. Those factors are: prices, supply, demand, interest rates, incomes, and all the things that make up those (and some are specific to location). In the past when affordability went low, some upward movement in supply would lead to some softening in prices, assuming stable or lowering incomes. Now, we have many homeowners with the lowest interest rates in history, who are more reluctant to sell or move, as they would otherwise be, this in turn helps keep inventory low, possibly keeping a lower floor on prices or at least, making it more difficult to guestimate market reaction.
If national and regional index price moving up but your home is losing value after 18 years it just mean you purchase at the wrong market,
I know place like flint Michigan is losing money but nationwide speaking,real estate value follows the money supply distribution model which is always expanding
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!
A lot of advice and good insight already, but i'll add my $.02
1) First, as always ....it depends. What are your general and specific goals, what is your time frame for those goals, what is your individual financial position (job, income, expenses, expectations with those, etc).
2) Then, where is the "deal" with this property, is it a "deal" or just an attractive interest rate, what are the potential future outcomes with the property and area (i.e. what are the stats saying, increased population/income trends, new business moving in, etc).
3) And what are you expectations with this potential property/deal, how will it get you closer to your goals (see #1).
I am sure there is more stuff to be added above, that but I'll leave those there for now. On to some other insights.
* Most of us have probably heard this saying before, "Don't wait to be real estate, buy real estate and wait." I agree with that, but what is left out is HOW LONG DO YOU HAVE TO WAIT! In other words - most all real estate will appreciate over time, but how much time are YOU able to wait for that appreciation, if you happened to buy a relatively high price property at the top of the market, in a time with high demand and low inventory, in an area of a shrinking population you may be waiting a while (many years) for it to get back to even ...hopefully. FYI - I am not specifically speaking of any one area, this is just an extreme general example.
So, how do you think I know this! Yep, I have owned properties for many years and over a decade, which I was finally able to get rid of ...at a loss. A couple of them I had for about 18 years before I gladly dumped them at a loss. And, they cash flowed from day 1, but never made me any significant amount of money - cash flow or otherwise. They felt more of an anchor holding me back from some opportunities. My lesson there was I should of done more research on those local market trends. This was pre BP days and a lot less easily available data.
From reading many posts on BP, my guess is that many on here have only been through 1 market cycle, and most recently that was an unusually fast appreciation cycle. The downturn was about 14-15 years ago and things have mostly been up since then! And my guess is many on here, didn't experience the quick rise of the early 2,000's, only to see it implode later.
And even less so may be aware of the 1,990's where it took most of that decade to come back to normal. I personally participated in a losing transaction there also - bought at the height (1990) and sold at a loss just before things started to soar again (1997). So, if you think the market can only go up ...you're WRONG!
So, if you are buying a property at a monthly loss "hoping" it goes up at some point in the future, you may want to contemplate how other potential outcomes fit into your current, medium, and long term goals and plans.
Oh, and I have also owned rentals where the rents actually went down! So, I don't believe anyone that tells me that can't happen either. It's not normal, but is possible. But, guess what I have rarely seen gone down .....my home insurance, property taxes, maintenance, capex, etc.
By the way, all properties cash flow....if you put enough money down. It's the returns that are affected.
With all that said, I have had negative cash flow properties, but there were good fundamentals toward upward momentum in prices. In general, I would try and stay away from negative cash flow, in aggregate (the whole rental portfolio), unless there were some very strong indications of possibilities.
And in general, CA is at a historically low affordability rate. The challenge is predicting which factors which make up affordability are going to move where and when. Those factors are: prices, supply, demand, interest rates, incomes, and all the things that make up those (and some are specific to location). In the past when affordability went low, some upward movement in supply would lead to some softening in prices, assuming stable or lowering incomes. Now, we have many homeowners with the lowest interest rates in history, who are more reluctant to sell or move, as they would otherwise be, this in turn helps keep inventory low, possibly keeping a lower floor on prices or at least, making it more difficult to guestimate market reaction.
If national and regional index price moving up but your home is losing value after 18 years it just mean you purchase at the wrong market,
I know place like flint Michigan is losing money but nationwide speaking,real estate value follows the money supply distribution model which is always expanding
@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.
You are guilty of the same stuff you are accusing me of, I wrote a separate reply to this OP of this thread. Said at $1,000/mo just too much unless it's a really, really special circumstance. We're both on the same page about that. I am talking about the guys that immediately turn down a deal cause it's $200/mo out on day 1 and they can't understand it's a deal you're buying not instant cash.
And yes, we have different thoughts on investing. And that's perfectly okay.
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!
A lot of advice and good insight already, but i'll add my $.02
1) First, as always ....it depends. What are your general and specific goals, what is your time frame for those goals, what is your individual financial position (job, income, expenses, expectations with those, etc).
2) Then, where is the "deal" with this property, is it a "deal" or just an attractive interest rate, what are the potential future outcomes with the property and area (i.e. what are the stats saying, increased population/income trends, new business moving in, etc).
3) And what are you expectations with this potential property/deal, how will it get you closer to your goals (see #1).
I am sure there is more stuff to be added above, that but I'll leave those there for now. On to some other insights.
* Most of us have probably heard this saying before, "Don't wait to be real estate, buy real estate and wait." I agree with that, but what is left out is HOW LONG DO YOU HAVE TO WAIT! In other words - most all real estate will appreciate over time, but how much time are YOU able to wait for that appreciation, if you happened to buy a relatively high price property at the top of the market, in a time with high demand and low inventory, in an area of a shrinking population you may be waiting a while (many years) for it to get back to even ...hopefully. FYI - I am not specifically speaking of any one area, this is just an extreme general example.
So, how do you think I know this! Yep, I have owned properties for many years and over a decade, which I was finally able to get rid of ...at a loss. A couple of them I had for about 18 years before I gladly dumped them at a loss. And, they cash flowed from day 1, but never made me any significant amount of money - cash flow or otherwise. They felt more of an anchor holding me back from some opportunities. My lesson there was I should of done more research on those local market trends. This was pre BP days and a lot less easily available data.
From reading many posts on BP, my guess is that many on here have only been through 1 market cycle, and most recently that was an unusually fast appreciation cycle. The downturn was about 14-15 years ago and things have mostly been up since then! And my guess is many on here, didn't experience the quick rise of the early 2,000's, only to see it implode later.
And even less so may be aware of the 1,990's where it took most of that decade to come back to normal. I personally participated in a losing transaction there also - bought at the height (1990) and sold at a loss just before things started to soar again (1997). So, if you think the market can only go up ...you're WRONG!
So, if you are buying a property at a monthly loss "hoping" it goes up at some point in the future, you may want to contemplate how other potential outcomes fit into your current, medium, and long term goals and plans.
Oh, and I have also owned rentals where the rents actually went down! So, I don't believe anyone that tells me that can't happen either. It's not normal, but is possible. But, guess what I have rarely seen gone down .....my home insurance, property taxes, maintenance, capex, etc.
By the way, all properties cash flow....if you put enough money down. It's the returns that are affected.
With all that said, I have had negative cash flow properties, but there were good fundamentals toward upward momentum in prices. In general, I would try and stay away from negative cash flow, in aggregate (the whole rental portfolio), unless there were some very strong indications of possibilities.
And in general, CA is at a historically low affordability rate. The challenge is predicting which factors which make up affordability are going to move where and when. Those factors are: prices, supply, demand, interest rates, incomes, and all the things that make up those (and some are specific to location). In the past when affordability went low, some upward movement in supply would lead to some softening in prices, assuming stable or lowering incomes. Now, we have many homeowners with the lowest interest rates in history, who are more reluctant to sell or move, as they would otherwise be, this in turn helps keep inventory low, possibly keeping a lower floor on prices or at least, making it more difficult to guestimate market reaction.
If national and regional index price moving up but your home is losing value after 18 years it just mean you purchase at the wrong market,
I know place like flint Michigan is losing money but nationwide speaking,real estate value follows the money supply distribution model which is always expanding
Haha guy would upset if we say something like this but really , if you buy in rationale place, price could only going up because supply and demand ratio is matching.Low inventory is really the key.
in place like flint Michigan and some area in Indiana their demand to supply ratio is like 19 to 1.
Another place where there could be no appreciation : leasehold property in all Hawaiian island. , also some condo in Waikiki even with few simple , has lousy appreciation.
there are few areas in alabama that even until these days, there is almost no appreciation,
Even some part of Oakland california now has downtrend while other city in east bay is rising like meteor.
So investor need to measure supply and demand and select good investment carefully .
If your home losing value while MF cap rate decreasing ..:. It is like when SPY reach ATH but you invest at penny stock that’s crashing down.
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!
A lot of advice and good insight already, but i'll add my $.02
1) First, as always ....it depends. What are your general and specific goals, what is your time frame for those goals, what is your individual financial position (job, income, expenses, expectations with those, etc).
2) Then, where is the "deal" with this property, is it a "deal" or just an attractive interest rate, what are the potential future outcomes with the property and area (i.e. what are the stats saying, increased population/income trends, new business moving in, etc).
3) And what are you expectations with this potential property/deal, how will it get you closer to your goals (see #1).
I am sure there is more stuff to be added above, that but I'll leave those there for now. On to some other insights.
* Most of us have probably heard this saying before, "Don't wait to be real estate, buy real estate and wait." I agree with that, but what is left out is HOW LONG DO YOU HAVE TO WAIT! In other words - most all real estate will appreciate over time, but how much time are YOU able to wait for that appreciation, if you happened to buy a relatively high price property at the top of the market, in a time with high demand and low inventory, in an area of a shrinking population you may be waiting a while (many years) for it to get back to even ...hopefully. FYI - I am not specifically speaking of any one area, this is just an extreme general example.
So, how do you think I know this! Yep, I have owned properties for many years and over a decade, which I was finally able to get rid of ...at a loss. A couple of them I had for about 18 years before I gladly dumped them at a loss. And, they cash flowed from day 1, but never made me any significant amount of money - cash flow or otherwise. They felt more of an anchor holding me back from some opportunities. My lesson there was I should of done more research on those local market trends. This was pre BP days and a lot less easily available data.
From reading many posts on BP, my guess is that many on here have only been through 1 market cycle, and most recently that was an unusually fast appreciation cycle. The downturn was about 14-15 years ago and things have mostly been up since then! And my guess is many on here, didn't experience the quick rise of the early 2,000's, only to see it implode later.
And even less so may be aware of the 1,990's where it took most of that decade to come back to normal. I personally participated in a losing transaction there also - bought at the height (1990) and sold at a loss just before things started to soar again (1997). So, if you think the market can only go up ...you're WRONG!
So, if you are buying a property at a monthly loss "hoping" it goes up at some point in the future, you may want to contemplate how other potential outcomes fit into your current, medium, and long term goals and plans.
Oh, and I have also owned rentals where the rents actually went down! So, I don't believe anyone that tells me that can't happen either. It's not normal, but is possible. But, guess what I have rarely seen gone down .....my home insurance, property taxes, maintenance, capex, etc.
By the way, all properties cash flow....if you put enough money down. It's the returns that are affected.
With all that said, I have had negative cash flow properties, but there were good fundamentals toward upward momentum in prices. In general, I would try and stay away from negative cash flow, in aggregate (the whole rental portfolio), unless there were some very strong indications of possibilities.
And in general, CA is at a historically low affordability rate. The challenge is predicting which factors which make up affordability are going to move where and when. Those factors are: prices, supply, demand, interest rates, incomes, and all the things that make up those (and some are specific to location). In the past when affordability went low, some upward movement in supply would lead to some softening in prices, assuming stable or lowering incomes. Now, we have many homeowners with the lowest interest rates in history, who are more reluctant to sell or move, as they would otherwise be, this in turn helps keep inventory low, possibly keeping a lower floor on prices or at least, making it more difficult to guestimate market reaction.
If national and regional index price moving up but your home is losing value after 18 years it just mean you purchase at the wrong market,
I know place like flint Michigan is losing money but nationwide speaking,real estate value follows the money supply distribution model which is always expanding
***********************************************
Well, yes, I agree I bought those in the wrong market, but I sold them years ago and I'm not sure what the national or regional price index was doing at the time I sold them. My main point is it can be detrimental to just purchase for the sake of owning any RE, as some people seem to promote. There are specific factors which should be considered, and a main one is the time portion of an individual's goals. A 60yr old should have a different time horizon then a 40yr old, and someone wanting to leave their W2 job in 5 yrs should have different time considerations, etc. If the person wanting to leave their job in 5 yrs, would've purchased a home in 2006-07, they would've been severely disappointed in their readjusting time horizon.
"Right" markets don't fix "wrong" timing decisions quickly. Meaning, your underwriting and purchase strategy and decisions would be best altered to try and fit the current market environment. Sure, there is some educated guessing involved, but like you do Carlos, people would benefit from following the data.
I think it largely depends on where you invest. Where we live, if the proparty is purchased with a mortgage, a positive cashflow is almost unheard of due to extremely high real estate prices. We bought a condo in a very desirable area for 750K two years ago. Rented immediately. It had $600 negative cashflow the first year (against mortgage and HOA costs). Felt insane. This year it runs $400 negative cashflow. We had a modest rent increase because the tenants are incredible. If they stay, we will be cash flow positive in 3 years. If we get new tenants, we will become cashflow positive next year, as rents in this area grew ~ 700$/month over the last 2 years. >50% of the units in the building are investments, so I do not think there will be any changes in the condo rules. Condo appreciated 100 K over 2 years. While the negative cash flow was scary in the beginning, now it starts making sense.
Just curious, what that your original game plan? If so, what was the rational behind it? By the time you cash flow, excluding maintenance, turnover costs, repairs, and your time still you could be 50k in the hole. There are some C class communities you could buy a 50k property free and clear. Just by tracking the S&P you could turn that 50k into 75k in a reasonable amount of time as opposed to being in the hole. Was the original thought process to just have a very nice cool place in a cool area or was it a wealth move meant to play out over a few decades?
Interesting. If the strategy spans multiple decades it can work out I assume. It seems that you enjoy owning that kind of asset and the tenant base. If a major crash ever occurs it could suck. Since there are multiple units you are doing this with, have you made a calculation on the ROI on your entire portfolio? I know you will get cash flow eventually but being massively under water in multiple instances for multiple years could take an extensive about of time to even achieve a 1 percentile return. I don´t understand the comment about the stock market being too volatile. Lets assume over ten years with negative cash flow and everything else involved, you have a 150k deficit. There is no mutual fund, CD, high yield dividend accounts or ETF that tracks the S&P that will put you 150k under water. Meaning, if you set up allotments going to a stable fund with the same funds you put the negative cash flow, in ten years it´s nearly guaranteed you would have well above a 150k balance. Iḿ not sure what your break even point is when considering everything including time, upkeep and repairs but it could be into the hundreds of thousands. Hopefully that appreciation is astronomical. In 30 years when you own it all, it will be incredible.
Either way thanks for breaking it down. Its a long game like we all know!
Too stressful for me but I hope that all pays off over the long haul.
I wish you the best.
Team cash flow is giving dangerours advice!
The one thing that is more important than cash flow is low risk. Quality properties in quality locations come with low risk. Weired, old houses in the hood come with a number of associated risks. Making cash flow your chief guiding principle is pushing new investors into high risk purchases!
The biggest indicator of a success of any species is the ability to adapt.
Holding on to old docrines in an environment where this just does not make sense anymore is foolish. Investors have to adapt to remain relevant. And I am guilty of this too: early on I decided to only buy ranch homes, so the gutters are easy to reach for cleaning, just in case I had to do it personally (yeah, I was green). Two story colonials have much higher rents and a roof half the size (half the cost) - took me way too long to break with this old doctrine..
If you have been investing for 20 years it's easy to insist on cash flow. You can just sit on your portfolio and not buy anything for the next 10 years. But this is not relevant advice in todays market.
Even in Milwaukee, which has been know as a cash flow market, 8 years of appreciation and high interest rates make cash flow a rare comodity. We try to buy quality and the fall market has already given us some opportunities. But I have to put 25% to 30% down to achive a 1.2 debt service coverage ratio, which is something most DSCR lenders require, but it also has the nice side benefit that it allows to be break even or a little better..
Team cash flow is giving dangerours advice!
The one thing that is more important than cash flow is low risk. Quality properties in quality locations come with low risk. Weired, old houses in the hood come with a number of associated risks. Making cash flow your chief guiding principle is pushing new investors into high risk purchases!
The biggest indicator of a success of any species is the ability to adapt.
Holding on to old docrines in an environment where this just does not make sense anymore is foolish. Investors have to adapt to remain relevant. And I am guilty of this too: early on I decided to only buy ranch homes, so the gutters are easy to reach for cleaning, just in case I had to do it personally (yeah, I was green). Two story colonials have much higher rents and a roof half the size (half the cost) - took me way too long to break with this old doctrine..
If you have been investing for 20 years it's easy to insist on cash flow. You can just sit on your portfolio and not buy anything for the next 10 years. But this is not relevant advice in todays market.
Even in Milwaukee, which has been know as a cash flow market, 8 years of appreciation and high interest rates make cash flow a rare comodity. We try to buy quality and the fall market has already given us some opportunities. But I have to put 25% to 30% down to achive a 1.2 debt service coverage ratio, which is something most DSCR lenders require, but it also has the nice side benefit that it allows to be break even or a little better..
Not understanding the dangerous advice comment. Like I said earlier people are giving their own opinion on what they prefer. Dangerous advice would be coming from inexperienced people who dont know what they are talking about. And again, the people who are advising others to take negative cash flow, I have no idea why the tone seems to strike out against people who dont. Got to do what works for you. Because someone is not willing to lose tens of thousands of dollars in is not holding on to old doctrines nor are they foolish. Most of the senior, professional investors I know with killer multi million dollar portfolios know what they are doing. Assuming they dont know what quality is or cant assess risks is insulting. Iḿ not making this about me but in general, the dangerous advice would be making broad, sweeping assessments of what others are doing and advising one way is it.
Team cash flow is giving dangerours advice!
The one thing that is more important than cash flow is low risk. Quality properties in quality locations come with low risk. Weired, old houses in the hood come with a number of associated risks. Making cash flow your chief guiding principle is pushing new investors into high risk purchases!
The biggest indicator of a success of any species is the ability to adapt.
Holding on to old docrines in an environment where this just does not make sense anymore is foolish. Investors have to adapt to remain relevant. And I am guilty of this too: early on I decided to only buy ranch homes, so the gutters are easy to reach for cleaning, just in case I had to do it personally (yeah, I was green). Two story colonials have much higher rents and a roof half the size (half the cost) - took me way too long to break with this old doctrine..
If you have been investing for 20 years it's easy to insist on cash flow. You can just sit on your portfolio and not buy anything for the next 10 years. But this is not relevant advice in todays market.
Even in Milwaukee, which has been know as a cash flow market, 8 years of appreciation and high interest rates make cash flow a rare comodity. We try to buy quality and the fall market has already given us some opportunities. But I have to put 25% to 30% down to achive a 1.2 debt service coverage ratio, which is something most DSCR lenders require, but it also has the nice side benefit that it allows to be break even or a little better..
Team cash flow is giving dangerours advice!
The one thing that is more important than cash flow is low risk. Quality properties in quality locations come with low risk. Weired, old houses in the hood come with a number of associated risks. Making cash flow your chief guiding principle is pushing new investors into high risk purchases!
The biggest indicator of a success of any species is the ability to adapt.
Holding on to old docrines in an environment where this just does not make sense anymore is foolish. Investors have to adapt to remain relevant. And I am guilty of this too: early on I decided to only buy ranch homes, so the gutters are easy to reach for cleaning, just in case I had to do it personally (yeah, I was green). Two story colonials have much higher rents and a roof half the size (half the cost) - took me way too long to break with this old doctrine..
If you have been investing for 20 years it's easy to insist on cash flow. You can just sit on your portfolio and not buy anything for the next 10 years. But this is not relevant advice in todays market.
Even in Milwaukee, which has been know as a cash flow market, 8 years of appreciation and high interest rates make cash flow a rare comodity. We try to buy quality and the fall market has already given us some opportunities. But I have to put 25% to 30% down to achive a 1.2 debt service coverage ratio, which is something most DSCR lenders require, but it also has the nice side benefit that it allows to be break even or a little better..
Marcus's Market in Milwaukee indeed is really interesting, it is one of the top 5 cash flow market in entire US from 2015-2020 ; but after covid, it is the number 1 appreciation market in the whole USA, as of sudden. I still can't find reason why this particular city is suddenly skyrocketing in appreciation. Other than Milwaukee, some cities in FL like Tampa is also skyrocket post covid era.
Another city that experiences huge boom (top 3 in US between 2016 to 2018) is Kihei neighborhood in Maui, there's outburst of investor activity that increased demand started in 2017/2018 and finished in 2019.
After GFC 2009 to 2016, the top 3-4 most appreciating city is San Francisco and its vicinity. However post 2018, east bay cities overlapped SF while SF started the decline when the leftish gov. took over the city LOL
How these cities are pivoting from cash flow to appreciation market in specific time AKA the increase of absorption rate is indeed very fascinating. But it can be monitored by data analysis. If we invest at the right place at the right time with the right strategy, it is a money printing system.
In the end it all comes down to one thing: we want to make the most profit possible with the least amount of risk, right?
This can be done in a number of ways depending on the specific property, location, cash v loan, individual risk tolerance, etc, etc....
So on some properties, and for some investor's situations, negative cash flow can be a good thing. For others it would be a bad thing. Arguing in general about cash flow is kinda useless in my view....
But RE the OPs question, my opinion is still a big NO. But even with that, I don't know enough about the specifics to even be sure about that answer....RE is a funny game with very few solid Yes or No answers....
Team cash flow is giving dangerours advice!
The one thing that is more important than cash flow is low risk. Quality properties in quality locations come with low risk. Weired, old houses in the hood come with a number of associated risks. Making cash flow your chief guiding principle is pushing new investors into high risk purchases!
The biggest indicator of a success of any species is the ability to adapt.
Holding on to old docrines in an environment where this just does not make sense anymore is foolish. Investors have to adapt to remain relevant. And I am guilty of this too: early on I decided to only buy ranch homes, so the gutters are easy to reach for cleaning, just in case I had to do it personally (yeah, I was green). Two story colonials have much higher rents and a roof half the size (half the cost) - took me way too long to break with this old doctrine..
If you have been investing for 20 years it's easy to insist on cash flow. You can just sit on your portfolio and not buy anything for the next 10 years. But this is not relevant advice in todays market.
Even in Milwaukee, which has been know as a cash flow market, 8 years of appreciation and high interest rates make cash flow a rare comodity. We try to buy quality and the fall market has already given us some opportunities. But I have to put 25% to 30% down to achive a 1.2 debt service coverage ratio, which is something most DSCR lenders require, but it also has the nice side benefit that it allows to be break even or a little better..
Marcus's Market in Milwaukee indeed is really interesting, it is one of the top 5 cash flow market in entire US from 2015-2020 ; but after covid, it is the number 1 appreciation market in the whole USA, as of sudden. I still can't find reason why this particular city is suddenly skyrocketing in appreciation. Other than Milwaukee, some cities in FL like Tampa is also skyrocket post covid era.
Another city that experiences huge boom (top 3 in US between 2016 to 2018) is Kihei neighborhood in Maui, there's outburst of investor activity that increased demand started in 2017/2018 and finished in 2019.
After GFC 2009 to 2016, the top 3-4 most appreciating city is San Francisco and its vicinity. However post 2018, east bay cities overlapped SF while SF started the decline when the leftish gov. took over the city LOL
How these cities are pivoting from cash flow to appreciation market in specific time AKA the increase of absorption rate is indeed very fascinating. But it can be monitored by data analysis. If we invest at the right place at the right time with the right strategy, it is a money printing system.
Kihei became huge for celebrities, I thought. Like a few went, so a ton went. Then some got in front of others only to sell it to them lol.
Milwaukee is very interesting. I think Madison might be the most interesting example of this and god forbid I toss an Ohio city in there-- Columbus. I think Columbus, Madison and even Kansas City may be a different investor grade area than it was pre-covid. I am trying to research where to attack for Q4 '23- Q1 '24, then take my break in summer of 24. And some of the midwest areas are trending a bit more up.