I am looking to invest in a SFH that cost about $400,000. With 20% down the property will negative cash flow $500/mo. It breaks even @40% down. One lender advised me it's better to negative cash flow if I can afford it and still do 20% instead of 40%.
Reason : the additional 20% or $80,000 is better spent towards down for another property (provided of course I can afford twice the negative cash flow) because the annual appreciation @ 5% (which is likely in Florida) will be greater than the negative cash flow per year. That is $6000 negative cash flow for $20,000 appreciation in return. That is still a 17.5% return(capex not included). I don't discount the possibility that the lender gets to finance 2 properties instead of just one but the proposition does make sense on paper and in theory. Does anyone refute this or agree with it? Am I missing anything? Thanks in advance.
Investor · Winnetka, IL · Member since 2020 · 15 posts · 18 votes
2y
Let's say you get your 5% appreciation and sell after 1 year. You will be hit a 6% agent fee. $420,000 sale price is a $24,000. So $396,000 is left. Pay off mortgage of $320,000 and you are left with $76,000. But you put $80,000 down. So it's a $4,000 loss at sale. Plus the $6,000 in negative cash flow, so a $10,000 loss.
Sale after two years at 5% appreciation per year is a $441,000 sale price. 6% agent fee is $26,460. So $414,540 is left. Pay off mortgage of $320,000 and you are left with $94,540. You invested $80,000, so $14,540 profit at sale. Plus the $12,000 in negative cash flow, so $2,500 profit. Which is a 1.5% ARR.
And that is best case scenario. Doesn't account for vacancy, unexpected maintenance, incorrect underwriting, etc.
I am looking to invest in a SFH that cost about $400,000. With 20% down the property will negative cash flow $500/mo. It breaks even @40% down. One lender advised me it's better to negative cash flow if I can afford it and still do 20% instead of 40%.
Reason : the additional 20% or $80,000 is better spent towards down for another property (provided of course I can afford twice the negative cash flow) because the annual appreciation @ 5% (which is likely in Florida) will be greater than the negative cash flow per year. That is $6000 negative cash flow for $20,000 appreciation in return. That is still a 17.5% return(capex not included). I don't discount the possibility that the lender gets to finance 2 properties instead of just one but the proposition does make sense on paper and in theory. Does anyone refute this or agree with it? Am I missing anything? Thanks in advance.
What happens to your plan if the home price trend turns negative? With 40% down how can you walk away? Relying on perpetual home appreciation seems like a risky plan
As real estate investors, we constantly weigh the pros and cons of different investment strategies, including the decision between a larger or smaller down payment on rental properties (I prefer smaller anytime I can). Let's consider what the lender suggests where puting 20% down on a $400,000 SFH results in a $500 monthly negative cash flow, while a 40% down payment would break even (even that is subjective to how you calculate breaking even but the is another post in and of itself).
Positives from an investor's perspective:
- Leverage and Appreciation: By opting for a 20% down payment, I'm leveraging my capital. If the property appreciates at the expected 5% annually (a reasonable assumption in many parts of Florida), that's a $20,000 increase in value on a $400,000 property. My effective return on the additional $80,000 (if not used for a larger down payment) could be substantial if invested in another property.
- Expansion: Using the saved capital to invest in another property can potentially double my investment opportunities, diversifying my portfolio and increasing my chances for additional income and appreciation.
Negatives from an investor's perspective:
- Cash Flow Concerns: The $500 monthly negative cash flow translates to $6,000 annually, a significant amount that needs to be managed carefully. This strategy requires a solid financial buffer to handle the negative cash flow and any unexpected expenses. Are you financially savvy or responsible enough to handle this?
- Market Volatility: Real estate markets are subject to fluctuations. Relying solely on property appreciation is risky. A downturn in the market could negate expected gains, impacting the overall investment strategy.
Additional Suggestion:
- Cash Reserves: Maintain strong cash reserves to cover the negative cash flow and any unforeseen expenses. This will ensure the investment remains viable during tough times.
As an investor, the decision to go for a smaller down payment and manage a negative cash flow hinges on my (your) ability to handle the financial strain and my (your) confidence in the property's appreciation and cash flow potential. It's a calculated risk that could lead to substantial gains but requires careful planning and risk management. All of this possible, what do you feel you are up for?
Thanks for your valuable input. Here's my feelings but mind you I admit I am not a seasoned investor(which is why I posed this question in the first place);
Since it is Florida where a net positive migration will be in the works for a long time to come I believe the appreciation is more likely to happen than not. May not be 5%. A 4% will be more conservative. Realtors can chip in here for past history and future trend as I am no expert.
Second, $6000 annual cost (towards negative cash flow) is but a small fraction of $80,000 additional monies that otherwise would go towards DP just to break even. If I can afford the $80K I probably have the reserve to cover negative cash flow. If that makes sense.
Before I take the step I wanted input from experienced investors like you and other BP members. Thanks again, Jonathan. Awaiting more comments!
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
2y
Don't buy your own cashflow! 40% down just to get cash flow is not sensible math. Instead have the money available for more investment opportunities, unforeseen needs and emergencies, personal and otherwise.
Don't buy your own cashflow! 40% down just to get cash flow is not sensible math. Instead have the money available for more investment opportunities, unforeseen needs and emergencies, personal and otherwise.
Thank you. I concur. Stick with 20% DP with negative cash flow for the appreciation and mortgage paydown by tenant OR wait for lower interest rate? Or go for duplex with 20% DP, $100-200/month cash flow with deferred maintenance? All duplexes I see are not in good condition.
Don't buy your own cashflow! 40% down just to get cash flow is not sensible math. Instead have the money available for more investment opportunities, unforeseen needs and emergencies, personal and otherwise.
Thank you. I concur. Stick with 20% DP with negative cash flow for the appreciation and mortgage paydown by tenant OR wait for lower interest rate? Or go for duplex with 20% DP, $100-200/month cash flow with deferred maintenance? All duplexes I see are not in good condition.
Don't overlook those ugly duplexes. You make money by buying properties others do not want. Run the numbers to buy, fix and rent out. If you can't make the numbers work then forget it. If the numbers sorta work you may be able to offer less, or fix the ugly parts- renters may not care, look with their eyes not your own.
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
2y
Never buy anything that negative cashflows make sure it at a minimum pays for itself. I would always put as low as possible down to where its not negative cashflow. Maybe look at 2-4 units atleast here even in the trendy nice parts of chicago 2-4 units still cashflow positive.
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
2y
"This strategy requires a solid financial buffer to handle the negative cash flow and any unexpected expenses" - If you don't have war chest on top of purchasing the properties I'd never consider buying them. You have more to lose and less to gain in my opinion. The entire return is based on an unknown.
No matter how much you try nobody can control the entire Florida market. Just because a few people say appreciation will be 5% doesn't mean it will. I'd look for properties with break even (minimum) or positive numbers.
Yes appreciation is not guaranteed and it clear your realtor has less than 10 years experience
What if you have 0 appreciation and your taxes and insurance double over next 3 years? What do your numbers look like then
Have you analyzed worse case scenarios ?
Thanks Chris. Yes, my realtor is less than 10 yrs. Believe it or not, I also get automatic emails from another realtor who's been at it for closer to 25 yrs, featured on one of BP podcasts who run a real estate and property management company in Florida. All properties I receive from her cash flow (barely) at or about 35% DP! Trying to figure out if it's Florida, the realtor(s) or me!!
"This strategy requires a solid financial buffer to handle the negative cash flow and any unexpected expenses" - If you don't have war chest on top of purchasing the properties I'd never consider buying them. You have more to lose and less to gain in my opinion. The entire return is based on an unknown.
No matter how much you try nobody can control the entire Florida market. Just because a few people say appreciation will be 5% doesn't mean it will. I'd look for properties with break even (minimum) or positive numbers.
Thanks Jaron. I can't seem to find any property with better numbers in the market where the growth is i.e all the major cities and surrounding suburbs in Florida. There are ones with better numbers but they are in smaller towns where tenants may be harder to replace and appreciation lagging. Trying to stay local but may have to consider out-of-state which I want to avoid if possible when starting out.
Never buy anything that negative cashflows make sure it at a minimum pays for itself. I would always put as low as possible down to where its not negative cashflow. Maybe look at 2-4 units atleast here even in the trendy nice parts of chicago 2-4 units still cashflow positive.
Thank you, Henry. Can you name the places you are referring to, the trendy nice part of Chicago? Can the property be managed from afar?
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
2y
Yes I have many clients who self manage from out of state as these areas have pretty much 0 late payments or tenant issues (my 4 unit going on no late payments for 5 years now). Some class A neighborhoods…. Rogers Park, Albany Park, Avondale, Irving Park, West Town, Portage Park, Pilsen, Mckinley Park/bridgeport.
We find cashflow by bringing rents to market (typically a 25%+ bump vs what they are being sold rented at) so you need know what looking for when scanning the deals and 4 units are what tends to work best. Feel free to shoot me a PM.
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
2y
@Kevin S. We're experiencing the same thing and we live in a cash-flow market (historically speaking). I guess the tides have turned. Properties that make sense financially (as a rental) are challenging to find right now. We're unwilling to except what the market is providing. I'm unwilling to spend thousands per month on advertising, letters, and lead generation. I'm unwilling to except a negative cash-flowing rental. Unless a property with opportunity crosses my path from the MLS, off-market, or a wholesaler we're not buying it.
I am looking to invest in a SFH that cost about $400,000. With 20% down the property will negative cash flow $500/mo. It breaks even @40% down. One lender advised me it's better to negative cash flow if I can afford it and still do 20% instead of 40%.
Reason : the additional 20% or $80,000 is better spent towards down for another property (provided of course I can afford twice the negative cash flow) because the annual appreciation @ 5% (which is likely in Florida) will be greater than the negative cash flow per year. That is $6000 negative cash flow for $20,000 appreciation in return. That is still a 17.5% return(capex not included). I don't discount the possibility that the lender gets to finance 2 properties instead of just one but the proposition does make sense on paper and in theory. Does anyone refute this or agree with it? Am I missing anything? Thanks in advance.
- 20 vs 40 it all depends on your experience - in-state vs out-of-state ? - the appreciation changes every year, are you in market where it's above nationwide appreciation or below, that's one of the key factor ?
For me, 40% with DSCR 1.0 only worthed if I can use it as STR. Such as in Tahoe or Hawaii. But for LTR, I would just invest at debt funds.
If rate of return of appreciation from equity is half than debt fund return, then I prefer debt investment. Personal choice though.
Investor · Winnetka, IL · Member since 2020 · 15 posts · 18 votes
2y
Let's say you get your 5% appreciation and sell after 1 year. You will be hit a 6% agent fee. $420,000 sale price is a $24,000. So $396,000 is left. Pay off mortgage of $320,000 and you are left with $76,000. But you put $80,000 down. So it's a $4,000 loss at sale. Plus the $6,000 in negative cash flow, so a $10,000 loss.
Sale after two years at 5% appreciation per year is a $441,000 sale price. 6% agent fee is $26,460. So $414,540 is left. Pay off mortgage of $320,000 and you are left with $94,540. You invested $80,000, so $14,540 profit at sale. Plus the $12,000 in negative cash flow, so $2,500 profit. Which is a 1.5% ARR.
And that is best case scenario. Doesn't account for vacancy, unexpected maintenance, incorrect underwriting, etc.
Let's say you get your 5% appreciation and sell after 1 year. You will be hit a 6% agent fee. $420,000 sale price is a $24,000. So $396,000 is left. Pay off mortgage of $320,000 and you are left with $76,000. But you put $80,000 down. So it's a $4,000 loss at sale. Plus the $6,000 in negative cash flow, so a $10,000 loss.
Sale after two years at 5% appreciation per year is a $441,000 sale price. 6% agent fee is $26,460. So $414,540 is left. Pay off mortgage of $320,000 and you are left with $94,540. You invested $80,000, so $14,540 profit at sale. Plus the $12,000 in negative cash flow, so $2,500 profit. Which is a 1.5% ARR.
And that is best case scenario. Doesn't account for vacancy, unexpected maintenance, incorrect underwriting, etc.
it never make sense to sell after one year, but possible at year 3 and preferably or more conducive at year 5 and so on in general.
the problem with these investments are that we have so many options these day so one has to figure out the math correctly.
I am looking to invest in a SFH that cost about $400,000. With 20% down the property will negative cash flow $500/mo. It breaks even @40% down. One lender advised me it's better to negative cash flow if I can afford it and still do 20% instead of 40%.
Reason : the additional 20% or $80,000 is better spent towards down for another property (provided of course I can afford twice the negative cash flow) because the annual appreciation @ 5% (which is likely in Florida) will be greater than the negative cash flow per year. That is $6000 negative cash flow for $20,000 appreciation in return. That is still a 17.5% return(capex not included). I don't discount the possibility that the lender gets to finance 2 properties instead of just one but the proposition does make sense on paper and in theory. Does anyone refute this or agree with it? Am I missing anything? Thanks in advance.
- 20 vs 40 it all depends on your experience - in-state vs out-of-state ? - the appreciation changes every year, are you in market where it's above nationwide appreciation or below, that's one of the key factor ?
For me, 40% with DSCR 1.0 only worthed if I can use it as STR. Such as in Tahoe or Hawaii. But for LTR, I would just invest at debt funds.
If rate of return of appreciation from equity is half than debt fund return, then I prefer debt investment. Personal choice though.
Thanks Carlos. I have no experience with debt funds 'returns' and will look into it now that you mentioned it. Having properties with tenants will always get you rent when the market goes south until it recovers. How do debt funds perform when stock market go down? Do they move parallel?
@Kevin S. We're experiencing the same thing and we live in a cash-flow market (historically speaking). I guess the tides have turned. Properties that make sense financially (as a rental) are challenging to find right now. We're unwilling to except what the market is providing. I'm unwilling to spend thousands per month on advertising, letters, and lead generation. I'm unwilling to except a negative cash-flowing rental. Unless a property with opportunity crosses my path from the MLS, off-market, or a wholesaler we're not buying it.
@Jaron Walling My guess is you are probably spoiled having gotten into the RE market before this high tide? What is a novice to do in the current market? Just trying to find a way and not wait for the next tide (God knows when) :)
I am looking to invest in a SFH that cost about $400,000. With 20% down the property will negative cash flow $500/mo. It breaks even @40% down. One lender advised me it's better to negative cash flow if I can afford it and still do 20% instead of 40%.
Reason : the additional 20% or $80,000 is better spent towards down for another property (provided of course I can afford twice the negative cash flow) because the annual appreciation @ 5% (which is likely in Florida) will be greater than the negative cash flow per year. That is $6000 negative cash flow for $20,000 appreciation in return. That is still a 17.5% return(capex not included). I don't discount the possibility that the lender gets to finance 2 properties instead of just one but the proposition does make sense on paper and in theory. Does anyone refute this or agree with it? Am I missing anything? Thanks in advance.
- 20 vs 40 it all depends on your experience - in-state vs out-of-state ? - the appreciation changes every year, are you in market where it's above nationwide appreciation or below, that's one of the key factor ?
For me, 40% with DSCR 1.0 only worthed if I can use it as STR. Such as in Tahoe or Hawaii. But for LTR, I would just invest at debt funds.
If rate of return of appreciation from equity is half than debt fund return, then I prefer debt investment. Personal choice though.
Thanks Carlos. I have no experience with debt funds 'returns' and will look into it now that you mentioned it. Having properties with tenants will always get you rent when the market goes south until it recovers. How do debt funds perform when stock market go down? Do they move parallel?
They don’t move in parallel… they are more “realiable” these days.
I could guess in your situation is you fall into investment trap where your limited choice of investment may make you decide for sub optimal investment.
but one tip if you decide to go into 40% down dscr 1 ; make sure your neighborhood appreciates higher than national average that way if market drops you know there is organic demand in your place. Also it would be good also if you can self manage the property. For me if it is vacation home I don’t care much about the dscr but I care lot when it is LTR.
i haven't looked at your other posts but yes, this market will take some combination of money, creativity, and patience. can you house hack? if you can house hack, hack.
if you can't house hack... it's just going to be tougher.
you can look off market, but off market usually means distress, and with distress comes risk. you can try for seller finance (not sub to, free and clear seller finance), but those deals are tough. BRRRR is tough. it's all tough.
despite the toughness though, i would not recommend buying something that cash flows negatively when you could put 80K in a savings account and earn 5%+.
@Jaron Walling is saying he's not going to buy just to buy. so you shouldn't either.
