When would you buy a property with a negative cashflow?
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Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2yI’ve made to use a scientific/financial term, I’ve made a “boatload” of money on a property with negative $80-/mo cash flow. And not even the easy way where you buy for way under market. (Who wouldn’t buy a negative cash flow property for $100m off?)
I go by actual profit. The principle portion was $1500+ the first month. So I was $700/mo to the good and only getting better. Add a couple hundred a month in rent increases every year and 10 years later I have a paid off $700k property. I put $100k down, an average of say $400/mo or $5k/yr. For 10 years. So another $50k. For $150k I have a paid off $700k property.
All of this was beyond tax free. I paid negative taxes after depreciation until the 7th or 8th year. Your wealth will not come from cash flow. Until a home is paid off all the real wealth will come from appreciation. (Especially when calculated not against it’s value but your cash in the deal.) I’ve said if before and I’ll say it again. If you NEED a property to cash flow $200 to afford it, you’re not ready for real estate. You just aren’t. One major repair, one long vacancy and all your “needed” cash flow is gone.
Treat these rental properties as investments like your retirement accounts. They don’t cash flow ever. But you’re still told by financial experts/advisors to stick hundreds of thousand in to them and pray for appreciation.
Cash flow is only one TINY way rentals make you money. I don’t know why there are only cash flow fanatics. No depreciation, loan pay down, tax advantage fanatics.
Good luck whatever you do but assume most people telling you not to do something haven’t done it themselves. It’s like when your friend says “Ferraris break down all the time…”. When you ask how many they’ve owned, how many their friends own, and how many they’ve repaired, or even seen broken down. You hear a sad little “zero”.
88 Replies
- 2yDave KushPro MemberFrankfort, IL · Member since 2022 · 204 posts · 132 votes
I would not by a property with negative cash flow. You don't know for sure if rents are going to go up. That is speculation. Speculation is different than investing.
One possible exception, I once bought a property that was already rented out at a below market rent, and it made me slightly cash flow negative until that lease expired. I factored that in as a cost and deducted it from the purchase price when I negotiated. The important part of that purchase was that I knew the rents were already high enough to make the deal cash flow once that tenant vacated.
- Member since 2024 · 400 posts · 240 votes2y
You didn't mention how much DP is involved. I don't know what market you are in but where I am at, a DP of 30-35% is not uncommon to cash flow. To answer your question any property can cash flow if you increase the DP. Question is when does it not make sense anymore. I would like to hear from other BP members.
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
In some areas, you will never cash flow (well if you pay cash or do a massive down payment).
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
I’ve made to use a scientific/financial term, I’ve made a “boatload” of money on a property with negative $80-/mo cash flow. And not even the easy way where you buy for way under market. (Who wouldn’t buy a negative cash flow property for $100m off?)
I go by actual profit. The principle portion was $1500+ the first month. So I was $700/mo to the good and only getting better. Add a couple hundred a month in rent increases every year and 10 years later I have a paid off $700k property. I put $100k down, an average of say $400/mo or $5k/yr. For 10 years. So another $50k. For $150k I have a paid off $700k property.
All of this was beyond tax free. I paid negative taxes after depreciation until the 7th or 8th year. Your wealth will not come from cash flow. Until a home is paid off all the real wealth will come from appreciation. (Especially when calculated not against it’s value but your cash in the deal.) I’ve said if before and I’ll say it again. If you NEED a property to cash flow $200 to afford it, you’re not ready for real estate. You just aren’t. One major repair, one long vacancy and all your “needed” cash flow is gone.
Treat these rental properties as investments like your retirement accounts. They don’t cash flow ever. But you’re still told by financial experts/advisors to stick hundreds of thousand in to them and pray for appreciation.
Cash flow is only one TINY way rentals make you money. I don’t know why there are only cash flow fanatics. No depreciation, loan pay down, tax advantage fanatics.
Good luck whatever you do but assume most people telling you not to do something haven’t done it themselves. It’s like when your friend says “Ferraris break down all the time…”. When you ask how many they’ve owned, how many their friends own, and how many they’ve repaired, or even seen broken down. You hear a sad little “zero”.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes2y
Ps. A quick little calculation. $20,000 at 5% is $105/mo. So really you’re asking would I rather have $20k in cash (or $40k for $200/mo) in my hands, or $100/mo in cash flow. If you want the cash flow, borrow that much less. I’d rather have the cash for security or the next deal.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Never,...ever.
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes2y
Quote from @Mary Jay:
Are there any situations under which you would buy a property with a negative cashflow?
May be if you know the rents will go up in the future... Then how long would you be willing to wait till the rents catches up with the mortgage? One year? 2 years?
(If lets say you would buy a property with the negative cash flow but you dont worry about the cash flow, because you will be flipping the property, what margin would you need in order to buy it if you know you cant rent it out as a back out strategy)...
Thank you!
NEVER,
- Member since 2024 · 400 posts · 240 votes2y
I think you hit it about 90% in the head(regards to cash flow)! IMO. Other way I read your response is: The REAL cash flow comes delayed when the property is 'near' or fully paid off. But then most of us usually do 1031 exchange long before that.
- 2yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
All of these posters are wrong. I'm not saying cash flow isn't important and much of that depends on where you are in life, but there are situations where it's much less important. Heck, if all that matters is cash flow, then no one would flip houses- no cash flow in that, it's only betting that you can create future equity and that the market is stable enough to provide that.
If you make a boatload of money and need a cost seg- cash flow doesn't matter one bit. It's a nice bonus, but it's not the focus. If you make $1MM in a year and are writing a $300k check to Uncle Sam and could wipe most of that out by buying a property that breaks even or loses a few hundred bucks per month, that's a pretty good trade.
If you are trying to quit your day job- that's a different story. But when people get in to huge money, it's a different ballgame. Everyone here talks about tax advantages, but when you are truly wealthy, it's ALL about the tax advantages. It's ridiculous to think that all of us amatuers on BP are better investors than someone paying $20MM cash for an apartment building in SF that isn't cash flow positive.
It's not for everyone, but there is a time and a place where cash flow is a bonus, but not the goal.
- Member since 2021 · 9 posts · 1 vote2y
I wouldn't. That's speculation. Get creative and fing cashflow.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes2y
Never.
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes2y
A couple of thoughts:
Are you house hacking? I would be okay with that because it beats renting myself.
Can you add value to increase cash flow/make it profitable?
Is there a "sell down the road" play that makes sense? For example, you see it appreciating well and you sell it for a profit to make up for the losses?
Otherwise, it isn't too exciting to buy a negative cash flowing property because it prevents you from scaling today.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Bill B.:
I’ve made to use a scientific/financial term, I’ve made a “boatload” of money on a property with negative $80-/mo cash flow. And not even the easy way where you buy for way under market. (Who wouldn’t buy a negative cash flow property for $100m off?)
I go by actual profit. The principle portion was $1500+ the first month. So I was $700/mo to the good and only getting better. Add a couple hundred a month in rent increases every year and 10 years later I have a paid off $700k property. I put $100k down, an average of say $400/mo or $5k/yr. For 10 years. So another $50k. For $150k I have a paid off $700k property.
All of this was beyond tax free. I paid negative taxes after depreciation until the 7th or 8th year. Your wealth will not come from cash flow. Until a home is paid off all the real wealth will come from appreciation. (Especially when calculated not against it’s value but your cash in the deal.) I’ve said if before and I’ll say it again. If you NEED a property to cash flow $200 to afford it, you’re not ready for real estate. You just aren’t. One major repair, one long vacancy and all your “needed” cash flow is gone.
Treat these rental properties as investments like your retirement accounts. They don’t cash flow ever. But you’re still told by financial experts/advisors to stick hundreds of thousand in to them and pray for appreciation.
Cash flow is only one TINY way rentals make you money. I don’t know why there are only cash flow fanatics. No depreciation, loan pay down, tax advantage fanatics.
Good luck whatever you do but assume most people telling you not to do something haven’t done it themselves. It’s like when your friend says “Ferraris break down all the time…”. When you ask how many they’ve owned, how many their friends own, and how many they’ve repaired, or even seen broken down. You hear a sad little “zero”.
YUP EXACTLY its calmed down a bunch but you know a few years ago on BP all you heard was cash flow cash flow cash flow appreciation is gambling. I dont care if I get appreciation I just want cash flow . for the reasons you suggest this is not a great way to think or look at things for long term wealth.. Part of the issue is down the line unless your super realistic about saving for Cap ex you cash flow home that never really went up is going to be negative by the time you have to remodel it.. - Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
When it is in a market that appreciates strongly and has strong rent growth.
District Invest Group546 Reviews - Rental Property Investor · Waterville, ME · Member since 2018 · 36 posts · 19 votes2y
@Mary Jay
The only way I think I would consider it is if I was buying it way below value and could flip it
- 2yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Dave Kush:
I would not by a property with negative cash flow. You don't know for sure if rents are going to go up. That is speculation. Speculation is different than investing.
One possible exception, I once bought a property that was already rented out at a below market rent, and it made me slightly cash flow negative until that lease expired. I factored that in as a cost and deducted it from the purchase price when I negotiated. The important part of that purchase was that I knew the rents were already high enough to make the deal cash flow once that tenant vacated.
You deducted $2500 out of the purchase price to keep against the $200 net negative or of the sort? Way to miss the forest for the trees. And investing in really any form is a degree of speculation, let's not act like some real estate investments are a given.
If you don't think rent is going up, or you think it will stand still that's an equal level of speculation. It has a 33.3% chance of doing any of the three; go down, stay flat, go up. It's not linear growth, that's why you invest on a long-term horizon. It likely will go up over the long time, or net deflation happened in a macro sense or you bought a **** location. The former coming with a huge array of other issues and the latter being exactly why you don't focus on a spreadsheet for this.
What happens when rent goes down and your PITI was measured against it? Or your rent stayed the same and your I&T went up? The latter is a reality of today. Investing to mitigate cash flow concerns is a priority today, but the catch is buying great & high quality locations for the long-term horizon on fixed rate debt. Let's not chase pennies and cost ourselves dollars.
To answer the underlying question, you don't want to buy something that's severely OTM. You want to, at worst, buy something that's on a 3-5 year horizon of being ITM assuming a smaller-ish growth scale yet a robust growth area, and that's a sliding scale with the quality of the house & location. If it's a stellar location with an excellent build, but it'll take 3-5 years to catch up on rents to break even. For some, and depending on your means, that's a great investment. For most that's not a legitimate investment, and they define it as speculation. Right now that's the difference in criteria for REI; it's no longer 2012-2022 where a monkey could buy a house and it's intrinsic. You take that risk. Physical assets being intrinsic was a small period of time, that's a rarity in the real sense when you look everywhere else. - Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes2y
I would buy with negative cash flow , I have done it . A couple times . The last one was a crappy house on 4 acres . I put lipstick on a pig , Made it clean , neat and livable . It was running about $250 a month negative . It took me about 3 years to subdivide into 4 lots ( including where the house was ) . I built on 1 lot , and now have the new house cash flowing very well . The crappy house still has the same guy in it , When he moves or the other 2 houses are built , I will tear it down and build a new one .
If I didnt rent the house and have negative $250 , I would have had negative $2000 . But now the whole deal is in the positive .
- 2yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 236 votesOP
Quote from @V.G Jason:
Quote from @Dave Kush:
I would not by a property with negative cash flow. You don't know for sure if rents are going to go up. That is speculation. Speculation is different than investing.
One possible exception, I once bought a property that was already rented out at a below market rent, and it made me slightly cash flow negative until that lease expired. I factored that in as a cost and deducted it from the purchase price when I negotiated. The important part of that purchase was that I knew the rents were already high enough to make the deal cash flow once that tenant vacated.
You deducted $2500 out of the purchase price to keep against the $200 net negative or of the sort? Way to miss the forest for the trees. And investing in really any form is a degree of speculation, let's not act like some real estate investments are a given.
If you don't think rent is going up, or you think it will stand still that's an equal level of speculation. It has a 33.3% chance of doing any of the three; go down, stay flat, go up. It's not linear growth, that's why you invest on a long-term horizon. It likely will go up over the long time, or net deflation happened in a macro sense or you bought a **** location. The former coming with a huge array of other issues and the latter being exactly why you don't focus on a spreadsheet for this.
What happens when rent goes down and your PITI was measured against it? Or your rent stayed the same and your I&T went up? The latter is a reality of today. Investing to mitigate cash flow concerns is a priority today, but the catch is buying great & high quality locations for the long-term horizon on fixed rate debt. Let's not chase pennies and cost ourselves dollars.
To answer the underlying question, you don't want to buy something that's severely OTM. You want to, at worst, buy something that's on a 3-5 year horizon of being ITM assuming a smaller-ish growth scale yet a robust growth area, and that's a sliding scale with the quality of the house & location. If it's a stellar location with an excellent build, but it'll take 3-5 years to catch up on rents to break even. For some, and depending on your means, that's a great investment. For most that's not a legitimate investment, and they define it as speculation. Right now that's the difference in criteria for REI; it's no longer 2012-2022 where a monkey could buy a house and it's intrinsic. You take that risk. Physical assets being intrinsic was a small period of time, that's a rarity in the real sense when you look everywhere else.Thank you!
What is ITM and OTM?
- 2yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 236 votesOP
Quote from @Bill B.:
I’ve made to use a scientific/financial term, I’ve made a “boatload” of money on a property with negative $80-/mo cash flow. And not even the easy way where you buy for way under market. (Who wouldn’t buy a negative cash flow property for $100m off?)
I go by actual profit. The principle portion was $1500+ the first month. So I was $700/mo to the good and only getting better. Add a couple hundred a month in rent increases every year and 10 years later I have a paid off $700k property. I put $100k down, an average of say $400/mo or $5k/yr. For 10 years. So another $50k. For $150k I have a paid off $700k property.
All of this was beyond tax free. I paid negative taxes after depreciation until the 7th or 8th year. Your wealth will not come from cash flow. Until a home is paid off all the real wealth will come from appreciation. (Especially when calculated not against it’s value but your cash in the deal.) I’ve said if before and I’ll say it again. If you NEED a property to cash flow $200 to afford it, you’re not ready for real estate. You just aren’t. One major repair, one long vacancy and all your “needed” cash flow is gone.
Treat these rental properties as investments like your retirement accounts. They don’t cash flow ever. But you’re still told by financial experts/advisors to stick hundreds of thousand in to them and pray for appreciation.
Cash flow is only one TINY way rentals make you money. I don’t know why there are only cash flow fanatics. No depreciation, loan pay down, tax advantage fanatics.
Good luck whatever you do but assume most people telling you not to do something haven’t done it themselves. It’s like when your friend says “Ferraris break down all the time…”. When you ask how many they’ve owned, how many their friends own, and how many they’ve repaired, or even seen broken down. You hear a sad little “zero”.
Thank you!
Ive done it too! Ive bought a property that was 1K negative ten years ago and its doubled now. But things are different now, the interest rates are high. Who knows what will happen with the RE market.....Now, I feel scared to buy with a 1K negative cashflow with these interest rates and prices....
- 2yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 236 votesOP
Quote from @Kevin S.:
You didn't mention how much DP is involved. I don't know what market you are in but where I am at, a DP of 30-35% is not uncommon to cash flow. To answer your question any property can cash flow if you increase the DP. Question is when does it not make sense anymore. I would like to hear from other BP members.
20%
- 2yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 236 votesOP
Quote from @Joe Villeneuve:
Never,...ever.
I see people who invest in linear markets say "Never"... At the same time, the rents in the linear markets dont grow very well, plus the price of the RE is linear... I am not sure how people make money with all breaks/fixing/non paying tenants... Untill the property is paid off... Of course if a person can fix everything himself, then it probably is easier
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThen don't invest in linear markets.
Quote from @Mary Jay:
Quote from @Joe Villeneuve:
Never,...ever.
I see people who invest in linear markets say "Never"... At the same time, the rents in the linear markets dont grow very well, plus the price of the RE is linear... I am not sure how people make money with all breaks/fixing/non paying tenants... Untill the property is paid off... Of course if a person can fix everything himself, then it probably is easier
- 2yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Only if you could see a guaranteed huge appreciation coming in the next 2-5 years....
Like 200 - 300 %......
- 2yMary JayGlendale, AZ · Member since 2017 · 1k+ posts · 236 votesOP
Quote from @Joe Villeneuve:
Then don't invest in linear markets.Quote from @Mary Jay:
Quote from @Joe Villeneuve:
Never,...ever.
I see people who invest in linear markets say "Never"... At the same time, the rents in the linear markets dont grow very well, plus the price of the RE is linear... I am not sure how people make money with all breaks/fixing/non paying tenants... Untill the property is paid off... Of course if a person can fix everything himself, then it probably is easier
You always talk about strategies, and they are all smart... but Ive never heard you give an example of your deal. May be I just overlooked...Can you please give an example of your buy and hold (like how much did you buy for, what is your cash flow on it when you bought it, when did you buy it, at what interest, what are the rents on it back then and now, what is your cashflow now on it)...
Sort of like what Bill did earlier, he gave us an example of his scenario...
I own in linear, hybrid and cyclical markets... I can tell they all are very different. I personally prefer cyclical or hybrids because with linear there is not much of cashflow and not much of appreciation...But would be interesting to hear your deal
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