First time home owner running the numbers - negative cash flow with a 2.25% rate

General Real Estate Investing
2yFollow

First time home owner running the numbers - negative cash flow with a 2.25% rate

Austin Merritt
New to Real Estate · Denver, CO · Member since 2020 · 3 posts · 3 votes

I've been running the numbers on my first primary residence that I will be moving out of in June. BLUF - this would be my first rental property and I'm on the fence about what to do with the home. I currently have about $112,000 worth of equity and also have my VA loan tied up in the property. I locked in a great rate at 2.25% in 2021. My house is located in an appreciating area outside of the Denver Metro area. I will be moving out of state and I will be bringing on a PM company.

After running the numbers, I would be facing negative cash flow every month after accounting for all the expenses (Annually about $1,000 - and that's the rosy estimate)  Is it worth it?  If I sell the home, I don't plan on doing anything with the proceeds other than parking it in a HYSA.  I would love to keep the home for many reasons - potential appreciation, landlord experience, tax benefits.  But at the end of the day, it will not cash flow. 

1Reply
69 views

Most Popular Reply

V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
2y
Quote from @Austin Merritt:

I've been running the numbers on my first primary residence that I will be moving out of in June. BLUF - this would be my first rental property and I'm on the fence about what to do with the home. I currently have about $112,000 worth of equity and also have my VA loan tied up in the property. I locked in a great rate at 2.25% in 2021. My house is located in an appreciating area outside of the Denver Metro area. I will be moving out of state and I will be bringing on a PM company.

After running the numbers, I would be facing negative cash flow every month after accounting for all the expenses (Annually about $1,000 - and that's the rosy estimate)  Is it worth it?  If I sell the home, I don't plan on doing anything with the proceeds other than parking it in a HYSA.  I would love to keep the home for many reasons - potential appreciation, landlord experience, tax benefits.  But at the end of the day, it will not cash flow. 

So it's OTM by less than $100/mo. But if miraculously it was neutral or positive $100/mo, it's a no brainer you keep it?

You're being penny wise, pound foolish. It'll be intrinsic in a couple of years, the actual debt is an asset itself, so what you're out $1000/annually. Is that financial loss that detrimental to you, to you cannot weather it? If so, then yes sell. If not, you'll be fine. 

The pass or fail test of cash flow is taking more significance than all the other positives it brings. Look at it a whole. Anyone that makes $200/mo in cash flow is truly net negative. The real intrinsic properties are the one in which their debt is half or below their rent revenue, anything tighter than that --it's truly cash flow negative. I don't care what the cheap, low barrier of entry investors tell me. The only tangible issue I see with keeping it is the whole VA allocation you get if you were to buy a house. Now, that's a legitimate one but the $1000/annual loss is a joke


8Reply
See this reply in the discussion

14 Replies

Jump to latestLatest
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y
    Quote from @Austin Merritt:

    I've been running the numbers on my first primary residence that I will be moving out of in June. BLUF - this would be my first rental property and I'm on the fence about what to do with the home. I currently have about $112,000 worth of equity and also have my VA loan tied up in the property. I locked in a great rate at 2.25% in 2021. My house is located in an appreciating area outside of the Denver Metro area. I will be moving out of state and I will be bringing on a PM company.

    After running the numbers, I would be facing negative cash flow every month after accounting for all the expenses (Annually about $1,000 - and that's the rosy estimate)  Is it worth it?  If I sell the home, I don't plan on doing anything with the proceeds other than parking it in a HYSA.  I would love to keep the home for many reasons - potential appreciation, landlord experience, tax benefits.  But at the end of the day, it will not cash flow. 

    So it's OTM by less than $100/mo. But if miraculously it was neutral or positive $100/mo, it's a no brainer you keep it?

    You're being penny wise, pound foolish. It'll be intrinsic in a couple of years, the actual debt is an asset itself, so what you're out $1000/annually. Is that financial loss that detrimental to you, to you cannot weather it? If so, then yes sell. If not, you'll be fine. 

    The pass or fail test of cash flow is taking more significance than all the other positives it brings. Look at it a whole. Anyone that makes $200/mo in cash flow is truly net negative. The real intrinsic properties are the one in which their debt is half or below their rent revenue, anything tighter than that --it's truly cash flow negative. I don't care what the cheap, low barrier of entry investors tell me. The only tangible issue I see with keeping it is the whole VA allocation you get if you were to buy a house. Now, that's a legitimate one but the $1000/annual loss is a joke


    8Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    2y

    I am not saying 'Do it'. Frankly analyzing CF alone may not tell the whole story. You are ignoring appreciation which you may get or not depending on when you sell, plus depreciation write off, and mortgage pay down-your tenant takes care of this. More to consider, not saying you should, or not. Get some decent tenants, and a good PM, Denver should be a solid market. Up to you!  

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    2y

    Sell it.  That's a lot of equity that's wasting away, and being taken away with negative CF.  Sell the house.  The equity you receive in cash will equal the same thing in a different, CASH FLOWING, property with one huge difference.  It will buy you a larger property value, it's the property value that appreciates.  The bigger the PV, the bigger that actual dollars in appreciation.  Oh, and you'll have positive CF.

    3Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    Not all homes make good rentals.  Also think about capital gains if you sell it vs turn it into a rental and sell it down the road.

    3Reply
  • Philip Liu
    Investor · Fairfax, VA · Member since 2016 · 6 posts · 2 votes
    2y

    You may have 112K in equity, but you should also account for closing costs when you sell the property. Have a few agents give you a quote on how much it would cost to sell the home. It can be a hefty amount unless you sell FSBO. You could also consider selling on contract since you have such a low interest rate, but that would lock in your VA loan on the property.

    1Reply
  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    2y

    I always bias to selling in these situations. It’s not a hard and fast rule, but it’s a tendency. 

    The gains on this property are tax free. You can redeploy the cash into something that both appreciates and cash flows.

    Podcast Guest on Show #223
    BiggerPockets
    5Reply
  • Brian Bohrer
    Real Estate Agent · Colorado Springs, CO · Member since 2021 · 279 posts · 121 votes
    2y

    Great questions @Austin Merritt !

    I am partial to buy and hold so I would lean toward the "keep it" side of the fence...  As rents increase over the years, your cashflow will soon become positive while you ride the wave of inflation and appreciation! 

    Do you know what you would buy with the equity if you did sell?  Current interest rates are going to make it difficult to reinvest into real estate and not come out of pocket more than $1000 annually, per your current situation.

    I am also assuming you are paying a property manager with your current figures.  If so, you may consider a flexible property manager who will work with you on the fees and find a structure that works for you both!  Some savvy managers wont charge anything upfront and will collect when sold in the future instead!  Thus, allowing you to take home profits now and let your future appreciation pay the bill.

    If you are interested in learning more about this style of property management please reach out and I would be happy to discuss!  I wish you the best in your adventure!

    Take Care,

    Brian Bohrer

    1Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    2y

    @Austin Merritt I lean toward the hold side. As others have mentioned. Look at the whole picture. The principal paydown, the tax advantages and the depreciation. As others mentioned, there is the cost to sell which can really eat into your equity as all those costs come from your equity but are usually based on the whole value of the property.  There is also appreciation which although it can't be counted on also acts on the whole property value not just your equity. 

    That said, out of state landlording is not something I recommend. In reality, if you are hiring a pm you won't get a true landlord experience. In reality, 90% of the time you can probably do as good a job if you go the DIY route on the PM side as long as you invest time to learn how to do it right. If you don't want to invest the time to learn and are trying to offload it to a PM with the idea that you will learn from them, I'm not sure you will be too happy with the outcome unless you get lucky. 

    In summary IMO, financially you should keep it. Practically you should sell it. You will invest far more time and effort than you will be rewarded for from just this property. If you plan to use this as a stepping stone, then your time and effort is part of your education and is well worth it.

    The good news is if you do keep it you can do a test run for 3 years before you would lose your capital gains exemption. 

    1Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    2y

    The most money I ever made was on houses that cash flowed the least! And I am talking non trivial. Just sayin’!

    1Reply
  • Michael SmytheBusiness Member
    Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
    2y

    Did you try MTR or STR numbers?

    Logical Property Management4.9464 Reviews
    WebsiteView Page
    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    2y

    That interest rate is really hard to beat and something you'll never see again. I would lean toward keeping it but ask a few questions:

    1) Are you assuming a small negative cash flow WITH a vacancy factor included? Also are you factoring in some turnover costs and recurring capex (like a new roof every 25 years)?

    2) How much principal are you paying down? 

    If you're only losing $100/month (factoring in some for turnover/recurring capex and vacancy) and paying down a decent amount of principal each month, I would keep it. You just can't beat that debt, especially in an area that is appreciating and in high demand. 

    Podcast Guest on Show #121
    1Reply
  • Ryan KellyBusiness Member
    Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
    2y

    @Austin Merritt the benefit of the VA Lon is you likely put 0% down to buy it in 2021. Over the past 3 years, you are still only in the property for a few thousand dollars in the principal you have paid so far. You also have a loan % you will likely never see again. If you "invest" an additional $1,000 through negative cash flow a year, but it appreciates $10,000 a year, you are getting a 10x return on that money not counting any other benefits you could receive. Once your monthly rents increase $100/month, you should be breaking even.

    None of that matters if the property doesn’t align with your long term goals. Once you know exactly WHY you want to own real estate and the STRATEGY you will master to build your portfolio, the answer will present itself.

    [email protected]512-674-5478
    Ryan Kelly Group - Keller Williams5112 Reviews
    WebsiteView Page
    0Reply
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    I agree with the other comments on leaning towards keeping it. You can't beat that 2.25% rate and it's in an appreciating area. Denver is a solid market. If the annual cash flow really is -$1000, I think that is pretty small. The only issue would your VA loan being tied up. Were you considering buying a new primary residence at some point after your move?

    I would look at the big picture of appreciation, principal pay down, tax benefits including depreciation vs. parking the money in HYSA. If you're considering buying another property in couple of years, cash flow is going to be tough with higher interest rates and higher prices anywhere and in my opinion focusing on cash flow will lead to some bad deals (I can attest to this along with many other California investors who buy in inexpensive out of state markets). 

    0Reply
  • Zeke Liston
    Real Estate Agent · Columbus, OH · Member since 2018 · 1k+ posts · 1k+ votes
    2y
    Quote from @Austin Merritt:

    I've been running the numbers on my first primary residence that I will be moving out of in June. BLUF - this would be my first rental property and I'm on the fence about what to do with the home. I currently have about $112,000 worth of equity and also have my VA loan tied up in the property. I locked in a great rate at 2.25% in 2021. My house is located in an appreciating area outside of the Denver Metro area. I will be moving out of state and I will be bringing on a PM company.

    After running the numbers, I would be facing negative cash flow every month after accounting for all the expenses (Annually about $1,000 - and that's the rosy estimate)  Is it worth it?  If I sell the home, I don't plan on doing anything with the proceeds other than parking it in a HYSA.  I would love to keep the home for many reasons - potential appreciation, landlord experience, tax benefits.  But at the end of the day, it will not cash flow. 


     Cashflow isn't the only factor in this deal. It sounds like you'll appreciate quite well and have an incredible rate. You're making money just by that loan. I would personally keep the property unless it's going to be tough to cover the difference. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free