What would you do?

General Real Estate Investing
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What would you do?

Kevin S.
Member since 2024 · 400 posts · 240 votes

Hi BP members,

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.

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Theo Hicks
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.

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  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y

    @Jake Baker

    Thanks for the vote.  And how are you doing this in Jax while in San Diego?  Well, I am just talking to myself.  No need to answer it for obvious reason :)

    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @Crystal Smith:
    Quote from @Kevin S.:

    Hi BP members,

    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.


     The only time we take a bet on a property with negative cash flow is if we have a way to force up the rents or we can force appreciation through improving the property.  We would also have to get the property with little to no money out of pocket.  As a real estate investor and business person, I'm not going to rely on appreciation to make up for a negative cash flow unless it's nothing down deal. 


     Thank you and I see your point.  At this time I don't have access to that kinda properties yet!  

    0Reply
  • Scott JohnsonBusiness Member
    Specialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes
    2y
    Quote from @Kevin S.:

    @Scott Johnson. If you are not a fan of appreciation then where are you getting your wealth building from REI? Unless you are paying cash to buy properties aren't typical duplex/quadplexes with mortgage give out few hundred (not few thousands) bucks per door? Am I missing something?


     Depreciation, cash flow, and loan pay down. These are the things we can control and our fantastic sources of wealth, if used correctly.

    [email protected]
    0Reply
  • David RossBusiness Member
    Lender · Henderson, NV · Member since 2023 · 32 posts · 8 votes
    2y

    Others have touched on this but you have to really consider the value of that extra 20% to you and your future plans.   If it's not necessary to tie up that money, then hang on to it.  

    The only other thing I would want to look at in your shoes is what 25% down looks like.   There are scenarios where 25% down offers considerably better terms on an investment transaction.  In these scenarios, it often can make sense to put that extra 5% down.   

    Good luck!

    [email protected]702-483-8122
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  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    2y

    So your negative cash flow is based only on PITI?

    So what do you numbers look like when you have to replaced that 2k hot water heater....or that 6k HVAC...or have a tenant turnover? They are MUCH worse .......

    Buying solely based on appreciation is speculation.... not RE investing. It can be done....with bigger pockets in certain markets.... but with much bigger risks. Not a great idea for a newcomer with more limited resources. Appreciation is the icing on the cake.... not the cake itself.

    Dont sink more DP into a property to buy "cash flow".... the only time you want to go with a higher DP is if it is needed to get better terms on the loan like lower interest rate, no PMI etc....otherwise keep your $$ and use the banks money

    1Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    2y

    @Kevin S.   You are right you can be hit with issues even in the property is cash flowing but at $500 negative a month you are already footing an annual bill for the property.  Now whether you can carry that is a personal issue because you need to consider your other income sources. If you are making 70 k vs 300k, regardless that 6k and any capital expenditures comes right out of what you can do for your family. If you have a high salary and a secure profession maybe you take the risk on a break even property that is going to appreciate and rents go up (I would not put 40% down to do it) but if you are at the mid to lower range that negative cash flow can push you over the edge. Couple weeks out of work, a car accident, stuff happens. You can look at the cap rate in your area and decide if it is worth it.  

    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @David Ross:

    Others have touched on this but you have to really consider the value of that extra 20% to you and your future plans.   If it's not necessary to tie up that money, then hang on to it.  

    The only other thing I would want to look at in your shoes is what 25% down looks like.   There are scenarios where 25% down offers considerably better terms on an investment transaction.  In these scenarios, it often can make sense to put that extra 5% down.   

    Good luck!


     Thank you.  I wasn't aware of that.  Now I know and will inquire with the lender.  Appreciate it.

    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @Ned J.:

    So your negative cash flow is based only on PITI?

    So what do you numbers look like when you have to replaced that 2k hot water heater....or that 6k HVAC...or have a tenant turnover? They are MUCH worse .......

    Buying solely based on appreciation is speculation.... not RE investing. It can be done....with bigger pockets in certain markets.... but with much bigger risks. Not a great idea for a newcomer with more limited resources. Appreciation is the icing on the cake.... not the cake itself.

    Dont sink more DP into a property to buy "cash flow".... the only time you want to go with a higher DP is if it is needed to get better terms on the loan like lower interest rate, no PMI etc....otherwise keep your $$ and use the banks money


     Like many others here you are correct too!  Appreciate your input.  I guess the money to fix hot water heater or HVAC will come from the $80K that I won't be adding.  Thanks.

    0Reply
  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    2y

    What would I do? I would absolutely under no circumstance do anything you listed here. Itś all worked out on paper but you are depending on a lot to make it work and over simplifying other stuff. I know several people here adopt the negative cash flow mentality but Iḿ not one. When you allude to 6k under water, consider that the baseline. If you get a dumb azz tenant you have to evict, with your turn round costs and no rent coming until its ready, that 6k you banked on could be 15k or more. What if you have a few major repairs (i.e HVAC collapse, flooding) ? That can put you back tens of thousands. In your scenario of getting another property; suppose all this happens in both? That 6k you were hoping for now sinks you in the hole over 50k. If you are not capable of staying on top of it all, in a few years that can balloon to over 100k in losses. Now, this 20k your are so positive you will achieve in appreciation; what if there is a major crash or some terror attack that destroys appreciation for many moons? I just dont think you baked in contingencies to the master plan. Its too many moving parts in this game to narrow things down to the point that everything must play out perfect for it to work. I wish you the best and want you to win but I would never recommend this. 

    2Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y

    @Mark Cruse

    Thanks for your comment, Mark.  Cannot disagree that it's entirely possible. 

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    2y
    Quote from @Kevin S.:

    @Mark Cruse

    Thanks for your comment, Mark.  Cannot disagree that it's entirely possible. 


     Thng is this, that risk factor of 10k HVAC is always there whether you have positive or negative CF.
    In reality, think it like this , a DSCR 1.5 with 25% down when one purchase, is easily becomes DSCR 1.1 in real life after year two because of insurance increase/property tax increase and so on.

    Now all properties are coming with cap rate 3% by default, whatever you do, most likely you would make very little money anyway too. 

    This is why I stopped buying for cash-flow only, because cashflow is simply no longer available. But appreciation is possible. I could easily make more than 15% from non-real estate for cashflow.

    So use different tool for different strategy, don't just follow BP advice. Expand your scope.

    1Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y

    @Carlos Ptriawan

    So you agree with me the cash flowing property is hard to find post-Covid.  Almost feel the conventional math no longer applies to current properties and appreciation in mostly what one has to depend on. Or buy in areas further out with less demand. 

    What's the alternative?   

    0Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    2y
    Quote from @Kevin S.:

    Hi BP members,

    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.


     This is sometimes a matter of comfort for the buyer.  If putting 40% makes you feel secure and you can afford it, there is nothing wrong with that.  This is a common thing for investors who do not want to worry about the future.  

    If you are looking to build a portfolio of homes still, then it might make sense to buy 2 at 20%.  It comes down to your level of comfort and should never be push on you, just offered as advice. 

    1Reply
  • Jessie Dillon
    Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes
    2y

    appreciation is a hell of a lot more speculative than cashflow, keep that in mind. yes we can make educated guesses on what's going to happen, based on what HAS happened, but still. why buy a property that loses money when you could instead buy something that makes money? 

    1Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y

    @Jessie Dillon

    I don't disagree with you.  Where I am at I cannot find any property with the 1% rule.  Properties do not cash flow with 20% anymore here. Suggestions? 

    0Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    2y
    Quote from @Kevin S.:

    I don't disagree with you.  Where I am at I cannot find any property with the 1% rule.  Properties do not cash flow with 20% anymore here. Suggestions? 

    The 1% rule is not happening at the moment.  Brandon Turner has said it was just a quick way to evaluate and not real in this market.

    Try MTR (medium-term-rentals) or rent by the room (house hack with or without you in it).  They can make the cash flow even or positive.
    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:

    Hi BP members,

    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.


     This is sometimes a matter of comfort for the buyer.  If putting 40% makes you feel secure and you can afford it, there is nothing wrong with that.  This is a common thing for investors who do not want to worry about the future.  

    If you are looking to build a portfolio of homes still, then it might make sense to buy 2 at 20%.  It comes down to your level of comfort and should never be push on you, just offered as advice. 


     Thank you, Stephen.  Since you are a real estate agent (and if you work with investors) what are you seeing in your market?  Are investors putting more than 20% down in the current market?  If so, what percentage of them are doing it and what percentage are able to keep it @ 20%.  Would love to hear from all real estate agents on BP.  I might post this question by itself on another post, actually.  Thanks.

    0Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    2y
    Quote from @Kevin S.:
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:

    Hi BP members,

    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.


     This is sometimes a matter of comfort for the buyer.  If putting 40% makes you feel secure and you can afford it, there is nothing wrong with that.  This is a common thing for investors who do not want to worry about the future.  

    If you are looking to build a portfolio of homes still, then it might make sense to buy 2 at 20%.  It comes down to your level of comfort and should never be push on you, just offered as advice. 


     Thank you, Stephen.  Since you are a real estate agent (and if you work with investors) what are you seeing in your market?  Are investors putting more than 20% down in the current market?  If so, what percentage of them are doing it and what percentage are able to keep it @ 20%.  Would love to hear from all real estate agents on BP.  I might post this question by itself on another post, actually.  Thanks.


     I have a few that always do it.  Even 50% at times if they really want the A class neighborhood.  Most investors try to leverage into more properties or keep the extra cash for reserves, which is also a "feel good" safeguard.

    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:

    I don't disagree with you.  Where I am at I cannot find any property with the 1% rule.  Properties do not cash flow with 20% anymore here. Suggestions? 

    The 1% rule is not happening at the moment.  Brandon Turner has said it was just a quick way to evaluate and not real in this market.

    Try MTR (medium-term-rentals) or rent by the room (house hack with or without you in it).  They can make the cash flow even or positive.

    I attended a seminar on Padsplit and ever since I am getting emails from them about Padsplit properties on sale. Needless to say, the cap rate and COC are better bc of rental by the room. I am not sure if I want to buy them and end up paying more compared to me buying a regular property and converting to Padsplit myself.

    0Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:

    Hi BP members,

    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.


     This is sometimes a matter of comfort for the buyer.  If putting 40% makes you feel secure and you can afford it, there is nothing wrong with that.  This is a common thing for investors who do not want to worry about the future.  

    If you are looking to build a portfolio of homes still, then it might make sense to buy 2 at 20%.  It comes down to your level of comfort and should never be push on you, just offered as advice. 


     Thank you, Stephen.  Since you are a real estate agent (and if you work with investors) what are you seeing in your market?  Are investors putting more than 20% down in the current market?  If so, what percentage of them are doing it and what percentage are able to keep it @ 20%.  Would love to hear from all real estate agents on BP.  I might post this question by itself on another post, actually.  Thanks.


     I have a few that always do it.  Even 50% at times if they really want the A class neighborhood.  Most investors try to leverage into more properties or keep the extra cash for reserves, which is also a "feel good" safeguard.


     50%.  WOW!!

    0Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    2y
    Quote from @Kevin S.:
    Quote from @Stephen DeThample:
    Quote from @Kevin S.:

    I don't disagree with you.  Where I am at I cannot find any property with the 1% rule.  Properties do not cash flow with 20% anymore here. Suggestions? 

    The 1% rule is not happening at the moment.  Brandon Turner has said it was just a quick way to evaluate and not real in this market.

    Try MTR (medium-term-rentals) or rent by the room (house hack with or without you in it).  They can make the cash flow even or positive.

    I attended a seminar on Padsplit and ever since I am getting emails from them about Padsplit properties on sale. Needless to say, the cap rate and COC are better bc of rental by the room. I am not sure if I want to buy them and end up paying more compared to me buying a regular property and converting to Padsplit myself.


     Most times you are better off buying your own properties.  They are a business that is trying to make money and some of these give bad advice.

    0Reply
  • Jessie Dillon
    Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes
    2y
    Quote from @Kevin S.:

    @Jessie Dillon

    I don't disagree with you.  Where I am at I cannot find any property with the 1% rule.  Properties do not cash flow with 20% anymore here. Suggestions? 


     yes, invest somewhere else LOL

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    2y

    @Kevin S.

    Your lender's advice is an interesting perspective and emphasizes the potential long-term benefits of investing in real estate, particularly in areas with strong appreciation potential like Florida. Let's break down the key points:

    Positive Aspects:

    Leverage: By making a 20% down payment, you are controlling a $400,000 home with a 20% financial leverage. This enables you to possibly profit from the property's appreciation even in the event that your initial cash flow is negative.

    Opportunity Cost: Investing the money you would have saved by making a 20% down payment on a different property might diversify your holdings and raise your total return over time.

    Appreciation: The return on the lower original investment may surpass the negative cash flow if the property increases at a rate of 5%.

    Considerations:

    Market Stability: Although Florida has traditionally seen rapid growth, it's important to take the stability and possible swings of the market into account. Results in the future are not guaranteed by past performance.

    Cash Flow: If there are unforeseen bills, having a negative cash flow may be quite taxing on your budget. Make sure you have enough cash on hand to handle any unanticipated expenses.

    Interest Rates: Take into account how interest rates may affect your financing. Rate increases might have an impact on the viability of the negative cash flow approach.

    Personal Risk Tolerance: Understand your own risk tolerance and financial goals. Negative cash flow may be acceptable for some investors in the short term, while others may prefer positive cash flow properties.

    Exit Strategy: Have a clear exit strategy. If property values don't appreciate as expected or if circumstances change, you should be prepared to pivot your investment strategy.

    The strategy proposed by your lender has potential benefits, especially if you're confident in the appreciation potential of the market. However, it's essential to weigh the risks, consider your personal financial situation, and have a well-thought-out plan. Consulting with a financial advisor or real estate mentor who understands your specific goals and circumstances can provide valuable insights tailored to your situation. Remember, every investment decision involves a level of risk, and there's no one-size-fits-all approach.

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    1Reply
  • Kevin S.
    OP
    Member since 2024 · 400 posts · 240 votes
    2y

    @Wale Lawal

    You comment was comprehensive, well thought out and well balanced.  The lender did mention to me the alternative of putting the other 80K (put 20% DP instead of 40% DP in an attempt to offset negative cash flow) in a High yield saving account (currently @ 4.5%).  The HYSA will yield about $3600/yr offsetting 'most' of the negative cash flow.  This 80K also becomes a sort of reserve.  One BP member mentioned 15% return.  Hopefully that member read this post can shine a light to that source.  I got lot of different inputs and I am thankful to everyone.  And thank you. Wale. 

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    2y
    Quote from @Kevin S.:

    @Wale Lawal

    You comment was comprehensive, well thought out and well balanced.  The lender did mention to me the alternative of putting the other 80K (put 20% DP instead of 40% DP in an attempt to offset negative cash flow) in a High yield saving account (currently @ 4.5%).  The HYSA will yield about $3600/yr offsetting 'most' of the negative cash flow.  This 80K also becomes a sort of reserve.  One BP member mentioned 15% return.  Hopefully that member read this post can shine a light to that source.  I got lot of different inputs and I am thankful to everyone.  And thank you. Wale. 


    You're very welcome, and I'm glad you found the information helpful! The alternative of putting the additional $80K into a High Yield Savings Account (HYSA) is an interesting approach. It serves as a risk mitigation strategy, providing a financial buffer to offset negative cash flow and acting as a reserve for unexpected expenses.

    Remember, every investment decision involves trade-offs and considerations. The key is aligning your strategy with your financial goals, risk tolerance, and overall investment plan. As you continue to explore your options, considering various perspectives and scenarios, you're taking a thoughtful approach to real estate investing.

    Best of luck with your investment decisions, and always happy to help!
    [email protected]832-776-9582Podcast Guest on Show #469
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