No cash flow but equity, Is this ok?

47 Replies

I am looking to invest into my first tri or quadplex to start off my REI.

Since I want to buy a property in CA with less than 20% down (VA loan, no house hacking), I was just looking to build equity on the property even if it doesn't give me any cash flow first few yrs.

Is this ok? Or should I look for a different route? 

Also, is it bad manners to talk to multiple real estate agents? I heard this from a friend. 

Any advise is appreciated :) 

If you don't have CF in the first few years, you won't have it after that.  Why would you think that would change?

Equity is your cash, paid for (DP) and gifted (appreciation) that is locked up in jail.  CF is free money.  Negative CF says you are willing to pay your tenants to live in your property so that sometime down the road, future events you have no control over, will give you free money (appreciation), of which you can't be sure how much it will be, but you do know you will need to subtract all the negative CF from that potential appreciation, before you can declare a profit.

Talk to as many agents as you want.  Find a new friend.

If the property is generating enough income to maintain itself (without any out of pocket cost/expense), since Im building equity as the yrs go buy, when I sell it with appreciation, I would profit, no? 

Rule number 1 "Make your money when you buy" ( If you are hoping to make money when you sell,  then you are not investing you are Gambling) 2 ways to make money when you buy  1: Buy the property well below market value so you have instant Equity.  2: Buy a property and ADD value (rehab,update,or add amenities) If you solely rely on appreciation you could find your self holding the bag if the market turns south.  

P.S. Your strategy sounds like a single exit plan always have more then one way to profit or exit any deal

If you are covering all expenses without any money out of your pocket you are cash flowing. You are living for free. if you ever move out your cash flow would come from your unit.

@Account Closed property tax would be covered from the rent income which would increase annually so I guess what I am saying is that I wont be making any money off the rent income.
Well you can hold off on paying taxes on the gain if investing again in the same kind if property, right? but like Jerry said, I guess it can be a gamble since I am assuming those policies will still be effective then.

Im new so don't know much. 

Originally posted by @Saemi Jung :

If the property is generating enough income to maintain itself (without any out of pocket cost/expense), since Im building equity as the yrs go buy, when I sell it with appreciation, I would profit, no? 

 There's no such thing as "breaking even" when it comes to CF.  You're either positive. or negative.

If your cash flow is neutral, or even negative but partially offsetting some of your living expenses, you're almost certainly doing much better off than renting. There will probably be some tax benefits, your tenants will be paying down your mortgage, and if you buy at a good price in a good location and hold long enough, you stand a great chance of having nice appreciation. 

As far as talking to multiple realtors, loyalty is a two way street (talk to as many as you want but they'll be more likely to send their best deals and give better service to someone they have an exclusive relationship with). 

@Saemi Jung my personal thoughts are it could be very risky to hope for appreciation alone, especially in this market. Even on the properties best days, you are already squeezing out every penny you can and still not making any cash flow leaving you absolutely no margin for error. Add any unforeseen circumstance, and this “break even” property could become your worst nightmare for a long time to come.

@Saemi Jung let's back up - have you picked any markets and started looking at any actual properties?  Are you talking to any banks about financing?  Are you actually working with / talking to one or more agents?  All of this is going to be very deal specific... but as you can see the community is skeptical about the combination of no cash flow + counting on appreciation / building equity.  Thoughts?  What are your immediate next steps?

@Saemi Jung just to clarify, are you planning to owner-occupy one unit? That was my assumption since you're using a VA loan (which with a few exceptions is meant to be used for owner-occupants). I think that changes the calculus significantly and the comments on here seem to be assuming this will be a pure rental. If you're currently renting, then putting less than 20% down on a property where your tenants are offsetting your living expenses, paying down your mortgage, creating tax benefits, and you have an asset in a high appreciation market (CA), is a no-brainer. You'll be much better off than renting even if you're coming out of pocket just a little less than you've been paying in rent.

I see a lot of responses, but few if any from coastal So Cal.  So Cal market is very different from a majority of markets in the US.

Here are some of my thoughts:

  • VA loan I believe implies house hack.
  • Appreciation has historically created wealth while cash flow is used to pay the bills.  If you do not need the cash flow to pay the bills, you should be more concerned about total return than concentrating on just the cash flow.  
  • In the short-term, the prices are unpredictable and have fallen even in coastal coastal So Cal.
  • In the long term, coastal So Cal has appreciated for over 60 years.  Most coastal So Cal markets do not have any 10 year window without appreciation.  My properties have various duration of holds.  Some were bought with great timing and some with less than ideal timing (implying they fell in value after purchase).  Every property has appreciated at least $1600/month over the hold period with the highest having appreciated over $4k/month over the hold period.  Do you think there are many properties from the zero appreciation markets that have cash flow over $4K month (not including commercial MF)?
  • Cash flow is not as sure as some of these posts imply.  Many areas had rent impacts during the great recession (GR).  Some other areas, like my market, had no appreciable rent decline from the GR.  LL who had been cash flowing great in Detroit, Las Vegas, and much of Arizona had their cash flow significantly impacted.
  • Cash flow is defined by the cash flow over the hold period.  RE Markets are efficient.  The price takes into various parameters including perceived risk and appreciation prospects.  Historically there is a minimal correlation between initial cash flow and the true long term cash flow achieved.  This is because most higher initial cash flowing markets are expected to have lower appreciation and most lower initial cash flow markets are expected to have higher appreciation.  It is simple math that the higher rent appreciation market will always out cash flow the lower rent appreciation market given enough time.  This basic math is ignored by many investors that are not familiar with the coastal So Cal market.
  • Prop 13 is an under appreciated benefit of California RE investors.  I have properties that I am paying ~25% of the property taxes that a new purchaser would be paying.  Our OOS properties had prop taxes going up faster than our rents.
  • Tax rules change.  They are not easy to predict.  Currently appreciated RE can be exchanged via 1031 to postpone paying cap gains.  In addition, when you die the current value is stepped up to current value for your heirs.
  • I have never purchased a property with projected negative cash flow, but I would not be adverse to doing so under the right circumstances.  I have other property's with positive cash flow that I can use to absorb any negative cash flow from a property.  I concentrate on total expected return and use cash flow as a single source of that total return.

The investors from other markets are providing honest feedback that can be very relevant in their market.  The coastal So Cal market is very different and therefore their feedback may not be valid in the coastal So Cal market.

Good luck

@Dan Heuschele wow! thank you for such detailed response. Yes I was hoping to hear from those familiar with So Cal market specifically LA county. I know I have to dig in but thought it’d be good to hear directly from experienced investors as well. I am hoping my realtor can help although I have not contacted anyone just yet. 

@Joe Villeneuve

What do you mean when you say there is no breaking even with Cashflow? It’s either positive or negative?

I understand what the words mean but I don’t see how you can’t “break even”... if your income was the exact same as your expenses on a property wouldn’t this be breaking even to some extent?

@Joe Villeneuve then is it better to not buy the property at all and rent? Since like I mentioned, I do not have the 20% down and want to take advantage of the low rates. Any thoughts on CA market specifically? I am looking into LA. I see some advise saying that buying the property which can pay itself off is better than renting and can look for total return at the end. Yes, I am currently renting. 

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