smart to keep a buy and hold if it doesn't cash-flow well?

Question

would it be smart to keep a condo that doesn't cash flow initially in the beginning but starts to cash-flow in the 5 and 6th year and beyond at 10%?

Brent Coombs · Answer

Zero returns for 5 years? So, you're considering just gambling on continuing (paper) appreciation?

It's down to personal preference, also accounting for other factors which you haven't mentioned.

And even what you did tell us, is largely guess work, right? Who's telling you the cash-flow story?...

Account Closed · Answer

The "positive cash flow" mantra picks up after economic downturns when folks who bought marginal properties find themselves feeding them each month and losing equity through falling values.  This crowd is prevalent on BP but can sometimes sound like your grandparents who, having lived through the Depression, never trusted banks again.Still, that doesn't mean they are aways wrong.  In truth, feeding a property is not the greatest situation in the world and if your appreciation projections are off (which is likely 5 years into the future) you might find yourself as a desperate seller in a few years.Feeding a property  (also referred to as "negative gearing") can make sense if:- You have sufficient cash flow from other sources like a job where a large repair bill won't sink you- You are converting a home into a rental in which you put little down for a FHA or VA loan (as examples)- You are undertaking an expedited paydown of the mortgage to enjoying a better cash flow downstream (perhaps aligned with a retirement age)David

Brent Coombs · Answer

You can't spend appreciation (until you sell), so, don't include theoretical appreciation as cash flow*! The only thing to include in net cash flow is: CASH! Cheers...

* ie. real/anticipated cash flow is a different metric than "profitibality".

Tajinder Kandola · Answer

it only Cashflows based on the increased rent 3-5% and appreciation annually with the added factor of all other expenses going up 5%. Currently looking in the areas of Kelwona, Cilliwack and abbotsford

Stanley Kong · Answer

@tj

Which area are you looking at now?

I'm interested in looking at your numbers, does it only cashflow after you re-fi it with appreciation put into account?

Roy N. · Answer

@Tajinder Kandola

If you are looking to invest in property in the lower mainland, better analyse your deals under flat conditions (no appreciation) or even duress (what happens to your condo if Vancouver suddenly concludes real estate is 40% over-valued?).

If you are looking to speculate, then find something on the edge of the redevelopment zone and see if you can afford to sit-on it for 12-24 months (even then it would be practical if it could carry itself at least 80% or more).

Michaela G. · Answer

What's going on around there? Some major development that will make the area pop in 4-5 years? Anything else you anticipate? It all depends on what your end game is. Are you buying to be a long-term landlord? Are you buying, so that you can sell in a few years, because you know something's happening in the area? Is it a tourist attraction area, where it would make sense to do airbnb and get great cashflow, even if a normal tenant cashflow wouldn't work?

Properties usually don't stand in a vacuum, but what's going on around them can make a big difference.

Corby Goade · Answer

It depends- what's appreciation look like, and is that your goal? Can you afford the negative cash flow? I'd say, in general, buy a house that cash flows from the start. There's an anecdote in one of the Rich Dad books, something along the lines of: How many houses can you buy with negative cash flow? Maybe a few? How many can you buy with positive cash flow? As many as you can find.

John Thedford · Answer

It would make no sense to purchase it unless you could buy well under market and flip it. Assuming you have good numbers, and you say it won't cash flow, it is quite possible you have to take cash out of pocket for unexpected repairs, CapEx, etc. Buy something that makes sense. DON'T try to make a marginal deal work.

smart to keep a buy and hold if it doesn't cash-flow well?

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