Good Afternoon Everyone, My name is Jordan and I am from Houston, TX. Currently in process of getting my real estate license and have a long-term goal of buying rental properties to eventually cover my monthly expenses and to give back to the people in my life who got to where I am at today. I tend to get discouraged when I analyze properties (in Houston) where the cash flow is slim to none. Maybe I am being too conservative on expenses and rate increases? I have been mainly looking on Zillow and have been using the BP calculator for my analysis. Because of this, I have even tried analyzing properties out-of-state such as in Tulsa, OK looking at properties that seem lower risk ($40K + price range) and better cash flow. It also seems so far away because I am just now starting to save for a property, as most of it has gone to build of my 6 month emergency fund (Sometimes I think about using my emergency fund to buy my first property). With investing right now seeming like a stretch, I kept thinking and thinking only to have the light bulb go off. What if I could get away with buying a property that may have $-100 cash flow and just eat the $100 loss? I have a full-time salary job and because I am super on top of my personal budget each month, I know that I will have about $1,000 leftover each month after all my personal expenses. So If I bought a rental property that cash flowed -$100 or - $200, I would basically just be paying $100 - 200 a month from my $1,000 that I have left over from my work income. The rest would go towards saving for more properties. With all that being said, is there anyone on here who has done this, fell into it by mistake, or would consider doing this? Or is this just a bad idea altogether? I am open to all opinions. Feel free to even tell me its dumb idea. I am just looking for some guidance on how to get started. Thank you, Jordan Petty

I love properties with negative cash flow. I love to pay my tenants to live in my properties. I love to pay off the debt on my properties, instead of having the tenants do it for me. I love knowing that I would be much further ahead financially if I didn't own any real estate. Did I mention that I loved negative cash flow properties?

It depends on your investment thesis for the property. If you don't have better investment options, and have a clear exit plan in mind for the cash losing property, it could be fine. You need to make sure it is a good investment, though, and not just because you're itching to do something. or because you think that the market will magically always go higher. I've had negative cash flowing properties because I was aggressively paying down short term debt on them, or because I was renovating vacant units. My investment plan required that they have a path to becoming significant cash flowing properties at some point, which they did.

I would add that your -$100 cash flow is likely optimistic. What happens when the renter moves out and it takes you a month to get another renter in? What happens when the water heater bursts and floods the house? There are always expenses above and beyond mortgage. My first house was negative cash flow (not by choice). I didn't mind it so much when all I had to do was write a check for -$100 each month. My appreciation was way more than that. But when the property was transitioning renters, or I had to pay for repairs, I HATED that property.

If you are seriously planning on investing in rental properties how many negative cash flow properties do you think you can afford compared to investing in positive cash flow properties. The intent of investing is to have the expectation of making a profit. Unless you are speculating on appreciation or intending to add value buying a negative cash flow property is not investing.

Don’t start your real estate investment venture with a loser. All three of my properties are out of state. Three different states as a matter of fact. I live in Orange County California where the property values are so high and the laws favor the renter. So far , three years in, mine are doing great. Texas was a big target a while back but I think the values rose too much. Good luck

Hey Jordan Your frustration with your local property market is shared by a lot of people. One solution has been to invest in an area you dont live in. Sorry I dont remember all of the podcasts but there are at least 5 of people who earn money in one state then invest it somewhere with better deals. Check out this book for an overview: https://www.amazon.com/Long-Distance-Real-Estate-I...

I would absolutely buy a projected negative cash flow property if one or more of the following 1) it had a great value add that would provide equity significantly above costs 2) it was priced significantly below retail so that I had instant equity above cost 3) I was very confident of significant market appreciation (which I am not at this point) 4) I was very confident of significant rent appreciation. In 2014 I purchased a property that in the purchase state was projected cash neutral. It met conditions 1, 3, and 4 and was slightly below market. I basically pulled out virtually all of my capital after the value add and it cash flows very well today and my equity is ~10x what I have into the property. I have yet to purchase a projected cash negative but in the cash neutral at purchase property, I currently have ~$210k equity with ~$20k invested. I could afford many years of a negative $100/month and it would still be a good investment (but not as good as it has been). I look at total return. If it is cash flow negative but provides significant return then I would purchase it. Good luck.

Of course I'd buy a house with negative cash flow as long as there was a ton of equity in it. Then I'd turn around and sell that house and buy one with great cash flow.

Would You Buy a Rental Property with Negative Cashflow?

Jordan Petty

OP

Realtor · Sugar Land, TX · Member since 2017 · 22 posts · 24 votes

8y

Originally posted by @Patrick Soukup:

You buy an investment based on return. If you had someone come into your office and ask you to invest $50,000 and I can promise you a -2.5% return, you'd kick them out of your office and ask them never to come back. You make the money on the purchase, not the sale so if you're future oriented but presently blind, all you can hope for is that you don't step off a cliff and get to the other side alive. Sounds like a poor plan to me.

Be patient. It sounds like you're learning the market right now. It sounds like you are analyzing a lot of deals which will allow you to KNOW when a GOOD deal comes across your table. You could purchase this property and come across a positive cash flowing deal tomorrow and feel like the world's depression came crashing down on your shoulders. Be patient, but ready for when a good deal comes across your table.

Great work asking questions and doing your research, just don't get antsy.

@Patrick Soukup Thank you for the insight. That definitely makes a ton of sense when you explain it in that light.

It's definitely tempting to want to just "jump in" without the cash needed when you are reading or hearing everyone saying that. Sayings such as "If you don't invest now, you are missing out!"

I definitely don't want to be the guy that says he is going to invest, but never actually do it. I have already overcome my fear of talking to homeowners when I first tried to start wholesaling. It was nerve-racking, but I did it (talk to potential sellers and walk their property) and can say I actually enjoyed it. Never got a deal, but it was a good lesson for me. I decided to get my license instead because I felt there where many conflicts in my values with wholesaling. Definitely learning a lot now about the industry, the laws, and how the market works which I feel is invaluable to learn.

Right now I am reading "Loopholes of Real Estate" by Garret Sutton, which has really opened my eyes to tax advantages of real estate investing. So, definitely a lot more things to learn and a lot of patience to be had.

Would You Buy a Rental Property with Negative Cashflow?

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