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!
Any. The idea that rental property isn't supposed to generate immediate income is outrageous, wasn't acceptable the way it is now in the past, and only exists because people keep trying to hump the over inflated property value bubble.
Then what you are saying is there are no deals worth pursuing in that market. Which is true if they all come with negative cashflow.
I have a similar situation that a wholesaler brought me a deal:
sale price: $369,000
ARV: $450.000
Renovation cost: $1500
Market rent: $2500/month
The property is a newer property and essentially turnkey. It would break even from a cash flow perspective but I’d be getting almost 80k in instant equity.
Would you do this deal?
Then what you are saying is there are no deals worth pursuing in that market. Which is true if they all come with negative cashflow.
This is all circumstantial, it depends on what your strategy is. Why would you be willing to take negative cashflow for any reason other than massive potential appreciation? If you have the chance to grab something that will appreciate a ton, I'd say $200 negative cashflow a month would be my number. Again this is all relative to you
I have a similar situation that a wholesaler brought me a deal:
sale price: $369,000
ARV: $450.000
Renovation cost: $1500
Market rent: $2500/month
The property is a newer property and essentially turnkey. It would break even from a cash flow perspective but I’d be getting almost 80k in instant equity.
Would you do this deal?
Just my opinion based on my experience.
I have a similar situation that a wholesaler brought me a deal:
sale price: $369,000
ARV: $450.000
Renovation cost: $1500
Market rent: $2500/month
The property is a newer property and essentially turnkey. It would break even from a cash flow perspective but I’d be getting almost 80k in instant equity.
Would you do this deal?
Just my opinion based on my experience.
Thanks for your insight. My thought was to pay for the property in cash or use a HELOC from my primary residence, and then refinance it in a couple of years when the interest rates stabilize. It's similar to a BRRRR in that sense, but I didn't have to force the equity, but am simply getting equity from the lower cost of the deal. I would say getting 20% equity built-in without doing a reno is a good deal from an equity standpoint. Doesn't quite meet the 70% BRRRR rule, but again it's virtually turnkey. To your question about deep pockets, my wife and I both work W2 jobs and we positively cashflow more than 10K a month from a combination of active and passive income so I could survive if the property sits vacant or if there are unforseen repairs / maintenance.
I have a similar situation that a wholesaler brought me a deal:
sale price: $369,000
ARV: $450.000
Renovation cost: $1500
Market rent: $2500/month
The property is a newer property and essentially turnkey. It would break even from a cash flow perspective but I’d be getting almost 80k in instant equity.
Would you do this deal?
Just my opinion based on my experience.
Thanks for your insight. My thought was to pay for the property in cash or use a HELOC from my primary residence, and then refinance it in a couple of years when the interest rates stabilize. It's similar to a BRRRR in that sense, but I didn't have to force the equity, but am simply getting equity from the lower cost of the deal. I would say getting 20% equity built-in without doing a reno is a good deal from an equity standpoint. Doesn't quite meet the 70% BRRRR rule, but again it's virtually turnkey. To your question about deep pockets, my wife and I both work W2 jobs and we positively cashflow more than 10K a month from a combination of active and passive income so I could survive if the property sits vacant or if there are unforseen repairs / maintenance.
Based on your W2 and passive combined income, I know you can make it work. But the key is why do you need to make it work when you can take some time to find one that works out the gate.
Before going too far, I am going to assume that you have calculated using the HELOC would have the current rents to pay the HELOC without dipping into you other incomes to sustain the property. I am also assuming that you have calculated capex reserves into the fold. This is because it is very common to run into capex when buying, turn key/or not, from whole salers. Remember the point of the whole sale, it's not to get YOU the best property. Rather, its top get them the quickest buck.
I will not sit here and say it is a bad deal. I just want to caution you of the potential and to remind you and others not to give up on finding a cash flowing deal from the start. They are everywhere. You just need to keep digging around.
Based on the numbers you have put out so far, you can easily find multifamily that would probably get you a few thousand a month in cash flow from the start. At the very least, $1000/m with the potential to hit $4k/month after a few years of stabilizing.
In the end, only you and you spouse will know what is right because it depends on your risk tolerance.
If you do proceed, I wish you the best of success and hope it keeps you climbing to the next level.
Its hard to say how much is too much because the reality is you are coming out of pocket each month. I would make sure you are comfortable with the full payment amount. Once there is turnover you will need to cover everything and any additional maintenance costs. It sounds like you want the deal because you can assume the lower rate and you are expecting the property to keep appreciating. If there is no way to increase the rent to offset the loss I am not sure this makes sense, unless your W2 is insane and you have money to burn.
It sounds like you want the deal because you can assume the lower rate
This sounds like the main reason the OP wants to do the deal....and it's not a good one at all. Interest rates are still historically low, and to take on what is on paper a bad deal just to get something that doesn't really matter (long term) is just silly.
What I mean by 'doesn't really matter' is this: a) rates aren't really that high, b) the OP is willing to take an $1000 hit on costs, but not willing to take the same hit when it comes to the difference in mortgage payments, and c) the rate can be re-financed in a couple years anyway...
And this is HOA and MR? Lol....
It sounds like you want the deal because you can assume the lower rate
This sounds like the main reason the OP wants to do the deal....and it's not a good one at all. Interest rates are still historically low, and to take on what is on paper a bad deal just to get something that doesn't really matter (long term) is just silly.
What I mean by 'doesn't really matter' is this: a) rates aren't really that high, b) the OP is willing to take an $1000 hit on costs, but not willing to take the same hit when it comes to the difference in mortgage payments, and c) the rate can be re-financed in a couple years anyway...
And this is HOA and MR? Lol....
That's a really good point that I hadn't thought of until after posting this. You're right, I was blinded by the low rate but now realize that's kind of backwards because it leaves no room to lower my costs. If I take the $1000 hit at a higher rate I have the ability to refi if the rates drop back to 5-6%. The negative cahsflow would've been closer to $300 on this home but I walked away. I genuinely appreciate the comments and feedback, even the ones that call me stupid lol. I'm new to this but it's something I've always wanted to get into to help build a better life fo my family. I'm finally at a point where I can begin so I'm looking. I come from a poor family with no financial literacy and everyone lives to check to check. I'm trying to break that mold for my kids which leads me to asking dumb questions online lol. I definitely heed all advice and research things exhaustively, so while a deal might intrigue me I'll come to my senses lol. Thanks man!
It sounds like you want the deal because you can assume the lower rate
This sounds like the main reason the OP wants to do the deal....and it's not a good one at all. Interest rates are still historically low, and to take on what is on paper a bad deal just to get something that doesn't really matter (long term) is just silly.
What I mean by 'doesn't really matter' is this: a) rates aren't really that high, b) the OP is willing to take an $1000 hit on costs, but not willing to take the same hit when it comes to the difference in mortgage payments, and c) the rate can be re-financed in a couple years anyway...
And this is HOA and MR? Lol....
That's a really good point that I hadn't thought of until after posting this. You're right, I was blinded by the low rate but now realize that's kind of backwards because it leaves no room to lower my costs. If I take the $1000 hit at a higher rate I have the ability to refi if the rates drop back to 5-6%. The negative cahsflow would've been closer to $300 on this home but I walked away. I genuinely appreciate the comments and feedback, even the ones that call me stupid lol. I'm new to this but it's something I've always wanted to get into to help build a better life fo my family. I'm finally at a point where I can begin so I'm looking. I come from a poor family with no financial literacy and everyone lives to check to check. I'm trying to break that mold for my kids which leads me to asking dumb questions online lol. I definitely heed all advice and research things exhaustively, so while a deal might intrigue me I'll come to my senses lol. Thanks man!
No, no, no.... I never intended to question your smarts, my friend! Hey, you are in the game now (while most aren't), and need to learn the tricks.....not the rules, those are easy, but the 'hacks' and 'workarounds' that exist in any business - or sport for that matter.
You need older, more experienced folks who have been in the exact same spot to point out things like I just did. Whether you take the initial 'hit' in terms of mortgage payments or negative cash flow, it's all the same as far as money going in or out of your pocket, right? (Forget taxes, et al, for now, lets keep this simple)
But as you so astutely realized, you can ReFi that rate because it will drop, that is guaranteed, when or how much is not, but people like those on this Forum can guess pretty accurately. That negative CF may get better, it may get worse. no one knows, way too many moving parts on that one...
So keep moving ahead and keep asking questions! There are no 'dumb ones'. I seriously wish that a Forum like this had been there for me when I was your age. I really believe that it would have made a huge difference in mindset and eventual income and asset levels.....
Again, just my .02, I don't know half as much as a lot of those on here...
This might be controversial-- Its NOT all about the cashflow, despite the hype. ESP in a Socal Market. Assuming a loan at 2.5% is a no brainer. Market appreciation and rental increases happen at a very very high rate. Lets work the math backwards...
what would you be paying if the property was a 7.5% interest rate? I bet its close to that $800-1000 month right?
So, I would say do it- but plan out the math a bit more.
What is the average market appreciation rate in your area?
Inflation is over 7%- and you are locked in at 2.5% (win)
And rental increases are?? National average is 3%- assuming yours is higher?
tax benefits (loss on paper for taxes) WIN
And run the math and see what it looks like in 3, 5, 10 years. I am betting you will be ahead with all the things I mentioned.
This might be controversial-- Its NOT all about the cashflow, despite the hype. ESP in a Socal Market. Assuming a loan at 2.5% is a no brainer. Market appreciation and rental increases happen at a very very high rate. Lets work the math backwards...
what would you be paying if the property was a 7.5% interest rate? I bet its close to that $800-1000 month right?
So, I would say do it- but plan out the math a bit more.
What is the average market appreciation rate in your area?
Inflation is over 7%- and you are locked in at 2.5% (win)
And rental increases are?? National average is 3%- assuming yours is higher?
tax benefits (loss on paper for taxes) WIN
And run the math and see what it looks like in 3, 5, 10 years. I am betting you will be ahead with all the things I mentioned.
Thanks Melissa, that was my thought process originally. The negative cash flow would've ended up neing closer to $300-$500, it's still listed but I think I'm walking away for other reasons. It's in Santa Clarita in a master build community thats 2 years old so I was pretty certain it would appreciate as well as rents increasing.
I also forgot to mention that if you bought it as a rental, you would have to put 20% down min. So Since you are not doing that--- the $800-1000 is kinda like a loan you are paying to pay back that 20%.
@Bradley Shuhart depends on your portfolio. If this is your only property. Probably wouldn’t have anything negative until you have the portfolio size to offset negative cash flow to gain appreciation. Also consider in how much of your portfolio is leveraged. Total percentage.
@Bradley Shuhart I did not read through all the comments, you got tons of feedback. Negative cash flow with the thought of appreciation later can be a deadly game. On top of the monthly negative, there are many other expenses, what if a tenant does not pay, what if you cannot rent out for a few months, what if something breaks. If you are buying this purely to make an equity play, this should be a flip. If you cannot buy, renovate and make money then you are banking on the market to go up. What if we have a really bad recession, rents go lower and the value is no there? What if you lose your job? These are all the things to think about, I have been in the game 20 years and witness all the horror stories that know one said would ever happen. If you buy a property with negative cash flow and there is nothing you can to make that positive then I would pass on that deal.
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!
How much, 1 dollar, terrible idea
Hmmm all my personals are 20% or better. I just got back from Mississippi last night after a two day trip. We start buying next week ALL with 10% or better NET caps, of course cash purchases