Should I go in knowing it’s negative cash flow?

14 Replies

Planning on purchasing a triplex. There are two tenants already living in the house. Market rent should be $1000 per unit but one tenant pays $650 (and is month to month). The other pays $800 and signed a 2 year contract that expires January 2021. Mortgage will be $2300 (insurance price is included).

I plan on house hacking but I have to honor the tenant’s rental contract. I will raise the other tenant’s rent to $1000 ASAP. I am looking to get my first deal and stop paying rent ($1905 a month). Would this purchase be a bad deal knowing that I would have to come out of pocket $500 hundred dollars a month— and then raise the rent on the other tenant as soon as her contract expires? I plan on living there for a year and then will buy another home and house hack again. Please let me know your thoughts.

when you're done living in third unit and rent it out, the other units are getting market rent would it still have negative cashflow monthly? 

Originally posted by @Simon Obas :

Planning on purchasing a triplex. There are two tenants already living in the house. Market rent should be $1000 per unit but one tenant pays $650 (and is month to month). The other pays $800 and signed a 2 year contract that expires January 2021. Mortgage will be $2300 (insurance price is included).

I plan on house hacking but I have to honor the tenant’s rental contract. I will raise the other tenant’s rent to $1000 ASAP. I am looking to get my first deal and stop paying rent ($1905 a month). Would this purchase be a bad deal knowing that I would have to come out of pocket $500 hundred dollars a month— and then raise the rent on the other tenant as soon as her contract expires? I plan on living there for a year and then will buy another home and house hack again. Please let me know your thoughts.

 if your exchanging renting with owning and your exchanging 1900 dollar rent for 500.  can see how that is a bad deal. 

@Simon Obas are you prepared for several months of vacancy and rehab? Because when you almost double the rent, the tenant will leave. And, if the tenant was paying that far under market, you can bet the property will likely need significant upgrading to get market rent.

Just something to think about.

If you are living rent free I would take that into account as that is a cost savings.  If the only out of pocket you have for the building is $500 a month and you live rent free that's not bad.  But I would try to get the low paying tenant out and then do some updates/upgrades to justify a higher rent and get a new person in paying more than $1000 to make up for the money you are losing on the long lease. 

Turn over costs are one of your biggest profit killer. If it were me, I would not raise the rent immediately. If that happened to you, how'd you feel? Not great.

I do think that it sounds like your prospective property is a de-facto BRRRR situation -- definitely count on having to rehab units to get that $1000 a month rent. It can still be a great deal but this doesn't sound like a straight up purchase like you are expecting.

@Michael Kay thank you for responding, I appreciate it. Ideally, I’d like to cash flow form the beginning however, this house seems like the true rewards are in the long run.

It is cash flowing. It’s flowing $1400 month towards your rent. 

You were paying $1900 and now you’ll be paying $500, that’s $1400/mo tax free.

Who’s turning down $1400/mo tax free cash flow?

Ps. With capital pay down you might even be making tax free income.

Pps. If the unit you’re going to move in to is livable as is.  Maybe when you raise the rent on the lowest guy and he moves out. You fix it up and when you “give up looking for a tenant” after spending tax deductible money, you move in to it and rent out the unit you initially move in to. 

@Simon Obas also factor in potential appreciation if that area has gentrification potential. I have no idea where you’re buying, but if it’s a solid location, with a decent quality tenant base and appreciation potential, then your plan sounds solid...as long as you don’t have to dump a ton of $$$ into renovations. But if it’s a low income/non appreciation play, then I’d be leery.

my2c

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you