Buy really expensive property and rent out for a loss?

Question

Ran an analysis on this one. They are losing $2500/mo assuming 80% LTV and CoC is -11.27%. Assuming 10% appreciation the 5-year annualized return is 31%, but they are speculating that the market will perform like that for next 5 years. Anyone know why people do this? This seems quite common in my area. I feel like I am missing something because I am only looking OOS due to terrible CoC and negative cash flow in Seattle.

https://www.biggerpockets.com/...

https://www.zillow.com/homedet...

https://www.biggerpockets.com/...

https://www.zillow.com/homedet...

Joe Villeneuve · Answer

The only reason why someone would do that, is they failed math in school, and don't have a logical bone in their body.  Then they rationalize their way into a terrible deal.

Russell Brazil · Answer

I cant get those links to work, but the fault in your logic is apparent. "Assuming." You are making assumptions that are unlikely to be true. I dont know anyone that buys on a negative 11% cash on cash. Probability is someone is paying cash, has better borrowing capability, or has the ability to improve the NOI, etc.

Brandon Sturgill · Answer

@Errol M Tazbaz not that I would recommend it, but if the stars align and you are a high-net-worth individual with W2 income, this loss may bump you into a lower tax bracket...

Carlos Ptriawan · Answer

if you came from Singapore, Hongkong, Tokyo, KL even London, this is the only option that's available. We get so much fun with 0-1% cap rate.

Carlos Ptriawan · Answer

Btw, Lennar is starting a new trend. Their new construction houses are sold with a cap rate of .... 1%in Dallas. PSF $370 sqft. Not even in California having a cap rate this low.

Errol M Tazbaz · Answer

@Zachary Beach This is a perfect answer. I completely forgot about depreciation and tax brackets. That might make all the difference.

I'm still in the cashflow phase of my investing journey so that doesn't work for me yet. Hopefully one day.

Zachary Beach · Answer

@Errol M Tazbaz There is speculation going on but if you can afford to speculate you often make and save way more than with some high cashflow properties that is losing value to inflation. Keep in mind that most people are not good at looking at risk to reward ratios 2 that some people don’t want cashflow they want net worth. For a high income person looking for high net worth this is not a bad move. This house is a big tax write off. If your right about 80% and they put 250k down that’s a 1 million loans at 3% interest it’s 30K a year plus probably 40K depreciation. Many people have top end taxes as high as 50% so to the right person (assuming they can right it off against other income often not the case) that’s 35K tax savings per year over 10% of what they invested in the property. plus the property will most likely go up in value faster on average than the 3% loan plus you have rent growth. When you look at the whole picture they will be the one laughing in 30 years. Everyone’s situation is different the best investment for one person isn’t always for someone else.

My personal strategy is to get all my money invested out within one year and to find places that will get the high appreciation but also cashflow like crazy now after I have already BRRRR’ed into them and got my money out within the year. But for most the people I help out with my STR management company they buy or already have a place with low interest loans or free and clear in an appreciating market and we also get them great cashflow. Often with second home loans 10% down it’s possible to get all money invested back from cashflow in 2-3 years for the properties that we manage. So you can choose both cashflow and appreciation.

Russell Brazil · Answer

Sounds like you wouldnt touch any of the investments I own either which are similar. Im DC area based with has similar prices to Seattle.  I average around a 25% IRR on my DC area based properties in the suburbs, and about 32% IRR on my properties in the city. Both substantially higher than my out of the area cash flow properties where I end up with IRR closer to 15% with much higher CoC.

Errol M Tazbaz · Answer

Like I said before, this is not a one-off. I have seen this often. Only reason I can think of is they are parking money and don't care about returns. This used to be more common with foreign investment but I think that has dried up in recent years.

Errol M Tazbaz · Answer

Even if they bought all cash the CoC is only 1.69% and 5 year annualized is 11.2% assuming 10% appreciation. Seems like there would be better investments than dealing with being a landlord for those kinds of returns.

Buy really expensive property and rent out for a loss?

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