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

Question

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.

Bill B. · Answer

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.

Jay Hinrichs · Answer

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

Simon Obas · Answer

@Margaret Johnson thank you.

Margaret Johnson · Answer

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.

Michael Kay · Answer

@Simon, You have a good strategy. I'm trying to do the same here in the bay area.

Amit M. · Answer

@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

Caleb Heimsoth · Answer

@Simon Obas. My banker said today they don’t even finance stuff that’s cash flow negative, so I don’t recommend you do it either.

George W. · Answer

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?

Simon Obas · Answer

@Bill Brandt appreciate your response! Seriously, thank you.

Simon Obas · Answer

@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.

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

Most Popular Reply