What do you do when you analyze a Negative cash flow?

26 Replies

I am new to investing and I am following Brandon's rental cash flow calculator tutorial from bigger pockets.

I've analyzed a property but found it to have a negative cash flow. I remember Brandon saying to play with the numbers and made the deal work before pitching a offer.

Well I tried that and forms my problem is I found my operating expenses are always greater than my rent and therefore it will never make money. Does this mean you should move into the next property or are there things people do to bring this back into a positive cash flow? How would other investors approach a negative cash flow situation? Will playing with the numbers only work if you first have a positive cash flow?

Walk away...period.  On to the next deal until you find one that DOES cash flow positive...without playing with the numbers.  Playing with the numbers is another way of saying, you are negotiating against yourself.

@Josh Thompson the numbers are what the numbers are. You shouldn't be "playing around" with these numbers. Calculate your estimated income and expenses and use those numbers to see what you could offer for the property base on your predetermine criteria (cash flow, cash on cash return, etc). If the cash flow is negative, move on to the next property. I'm guessing the "play with the numbers" was some type of reference on different ways to make an offer, seller financing, seller 2nd mortgage, etc. 

@Josh Thompson

I'm currently reading The ABCs of Real Estate Investing. In the book, the author states: "The seller's asking price is irrelevant." He goes on to say that the numbers need to work, and that is how you land on an offer number. The asking price has nothing to do with it. If the numbers don't work, you gotta walk, or make an offer where the numbers DO work and see what the seller does.

I'm also walking away from a negative cash flow deal right now.

I’ve made negative cashflow properties work spectacularly. Cashflow is what made many of the members here financial free. But appreciation, forced and natural are what made some of the members here very wealthy. 

That being said…

What Brandon meant was play with the purchase price. He said there was a price at which any property works. He didn’t mean play with expenses to make it work. 

Ok so I need some more advice. I've been looking at a number of homes and following everyone's great advice. However I have yet to find a home with positive cash flow. So now i'm wondering what I could do differently to turn it into positive. Should I try a new area? Should I speculate rents to go up in the long term?

Cashflow can be the most insignificant number when analyzing a property. What is the most important is the 1, 5, 10 and 20-year projections. If the property is going to appreciate significantly due to repairs, increasing the rents, or increases due to the market then the cashflow could be very insignificant.

The goal and business model for real estate investing should be to double your investment capital every 1 to 2 years, or to earn 50% to 100% on your investment capital every year and not put a heaviy emphasis on cashflow.

Example: I  have $50,000 to invest. I purchase a $300,000 property for a discount and it is worth $350,000. I just earned 100% on my money the day I closed escrow. Now, I make a few minor repairs to the property and at the end of 1 year the property is worth $400,000. Now, I made 200% on my money in 12 months. Try doing that in the stock market. Then you may made 250% or more at the end of 12 months because you have depreciation from your taxes, rental income and your tenant helped to pay down the mortgage and that is all profit in your pocket.

Originally posted by @Josh Thompson :

@Jack Orthman

Ok, so a properties cash flow is used for maintaining the property (ie capex, repairs, management) and the real money is made on the properties appreciation. Correct?

 The old school investors used to think that they would purchase as many rental homes as possible, have the tenants pay down the mortgage and then the investors would be rich and living on Easy Street. This is totally the wrong philosophy since major plumbing, roofing and other repairs set the investors way back, but the real serious problem is the increased costs and inflation make it so that landlords barely survive and never get rich.

The big money is earned through appreciation. The real big money is earned from multi-unit properties no less than a 4-plex where rent increases cause the property to increase in value almost exponentially when you consider the Gross Multiplier as in the image below.

Cashflow is great, but you definitely need to crunch the numbers for every scenario.

You also need to be careful in regards to what you believe and who you listen to. Never believe what a broker tells you and only make decisions when you know all the answers, yourself, without having to ask others for advice because everyone has their own personal agenda and their agenda may not align with your goal.

Hey Josh,

It basically sounds like you are just in a tough market. This thread reminds me of my anxiety and qualms with the 1 % rule and how no property in my area will ever meet its criteria. 

I live just outside of the very competitive market in Boulder, CO. The majority of investor I talk to in this market are primarily, if not exclusively, are appreciate investors. I often hear about how friends realize significant profits but eating $200/ mo in negative cash flow. However, the common thread is that these investors are usually rich and established.  

I think that the key questions here are: how long can you sit on an investment without pocketing gains and can you support the negative cash flow. I dislike sitting on equity when I could be doing more with it. If your market has big year to year appreciation growth and you are okay with a slow return, you may be able to make your market work. However, if you are starting out and cognizant of the velocity of your money....I would look elsewhere. 

@Jack Orthman @Bill Brandt   this is the classic thread from the Cash flow only folks If it does not cash flow with minimum down its bad.. to those who have truly made it in this business who chime in with cash flow is just one component and for sure not the overriding decision by a long stretch.

However I do get the mind set of those who will only buy if its positive with 20% down.. they tend to live and invest in very value static markets .. they are not investing in a market were we are . IE our properties can and do double in a decade .. or more than double.

So for those folks it makes no sense to to buy if you cant have positive cash flow since the cap ex will almost certainly be as much as the meager appreciation over a very long hold time.   The reason those markets are attractive to most/many is simply the low price of entry..

For us west coast minded or high dollar value markets where ever they are I know investors look at cash flow as a place setter as it were.. Money is made on mortgage pay down tax bene's and GULP that big gambling appreciation.. But so many get on BP and say they are not speculators or gamblers so they go for these its got to cash flow investments.

I personally have made a pretty nice balance sheet gain on bare land did not cash flow..  bought one in 97 for 30k and sold in 2020 for 2 mil..  that kind of thing.. never cash flowed a day.. Most people reading BP would never have considered buying that because YUP it has to cash flow or your making a mistake

Originally posted by @Jeffrey K. :

Hey Josh,

It basically sounds like you are just in a tough market. This thread reminds me of my anxiety and qualms with the 1 % rule and how no property in my area will ever meet its criteria. 

I live just outside of the very competitive market in Boulder, CO. The majority of investor I talk to in this market are primarily, if not exclusively, are appreciate investors. I often hear about how friends realize significant profits but eating $200/ mo in negative cash flow. However, the common thread is that these investors are usually rich and established.  

I think that the key questions here are: how long can you sit on an investment without pocketing gains and can you support the negative cash flow. I dislike sitting on equity when I could be doing more with it. If your market has big year to year appreciation growth and you are okay with a slow return, you may be able to make your market work. However, if you are starting out and cognizant of the velocity of your money....I would look elsewhere.

U dont have to be rich to feed a property 2500 a year that over a 10 year hold or 25k negative will go up 100 200 500k or more.. short term thinking 

Originally posted by @Jay Hinrichs :

@Jack Orthman@Bill Brandt   this is the classic thread from the Cash flow only folks If it does not cash flow with minimum down its bad.. to those who have truly made it in this business who chime in with cash flow is just one component and for sure not the overriding decision by a long stretch.

However I do get the mind set of those who will only buy if its positive with 20% down.. they tend to live and invest in very value static markets .. they are not investing in a market were we are . IE our properties can and do double in a decade .. or more than double.

So for those folks it makes no sense to to buy if you cant have positive cash flow since the cap ex will almost certainly be as much as the meager appreciation over a very long hold time.   The reason those markets are attractive to most/many is simply the low price of entry..

For us west coast minded or high dollar value markets where ever they are I know investors look at cash flow as a place setter as it were.. Money is made on mortgage pay down tax bene's and GULP that big gambling appreciation.. But so many get on BP and say they are not speculators or gamblers so they go for these its got to cash flow investments.

I personally have made a pretty nice balance sheet gain on bare land did not cash flow..  bought one in 97 for 30k and sold in 2020 for 2 mil..  that kind of thing.. never cash flowed a day.. Most people reading BP would never have considered buying that because YUP it has to cash flow or your making a mistake

I agree with what you write and when you say that some people don't have the same opportunities we have in California, but at the same time I still own properties in Idaho, Massachusetts, Colorado and California and had I had a good business model where cashflow was a good factor to follow my net worth today would be more than 20 times what it is if I did the math for cashflow and put an emphasis on appreciation. Especially, if I focused on multi-unit properties. While I have enough money to retire it would be serious fun to be able to turn the clocks back and invest with a better business model.

I am not a real estate broker and I don't sell any services, but I used to go to real estate clubs at least twice a month before COVID and contrary to how much I write on BP I am more of a listener at meetings than a talker. What I hear from members at meetings and BP is that almost every real estate investor and broker refuses to do very simple math and a serious high percent (if not most) of investors do little to zero math when it comes to projecting on paper which of the properties that look at will benefit them the most regardless of whether or not they have a business model.

I have investors come to my office because they claim they are 'like-minded' (whatever that means) and I sit with them for 2, 4- and 6 hours explaining different business models and how to do the math and I can see their brain is totally misfunctioning and then I hear words come from them that sicken me and make me angry. After taking off an entire day from work to help someone understand that they need to do the math to figure which potential property will be best for them I often hear the words, "I don't have the time to do the math and we (my wife and I) are busy all the time and we are not really interested in buying another property", or something really aggravating that makes me know their head is full of lead.

Cashflow can be very critical for investors, but if people refuse to do the math to look at all the avenues then they will never have the ability to jump on a serious money-making property.

 The images below are how I do calculations when looking for a property. This is a property where the owner claimed she wanted to sell her house and move from California to Texas within 30 days. I found this potential buy by delivering "I BUY HOUSES" flyers. At the time I was talking to the seller a freaky and weird real estate agent showed up when I was there and she didn't want to ignore making a sales commission. So, the seller got seriously freaky and rude with me and told me I wanted to steal her house that was seriously tiny and thrashed inside and out. It was the dumpiest house for several square miles.

Regardless, this is how I do the math for flips and buy and hold.

Originally posted by @Jay Hinrichs :

@Jack Orthman@Bill Brandt   this is the classic thread from the Cash flow only folks If it does not cash flow with minimum down its bad.. to those who have truly made it in this business who chime in with cash flow is just one component and for sure not the overriding decision by a long stretch.

However I do get the mind set of those who will only buy if its positive with 20% down.. they tend to live and invest in very value static markets .. they are not investing in a market were we are . IE our properties can and do double in a decade .. or more than double.

So for those folks it makes no sense to to buy if you cant have positive cash flow since the cap ex will almost certainly be as much as the meager appreciation over a very long hold time.   The reason those markets are attractive to most/many is simply the low price of entry..

For us west coast minded or high dollar value markets where ever they are I know investors look at cash flow as a place setter as it were.. Money is made on mortgage pay down tax bene's and GULP that big gambling appreciation.. But so many get on BP and say they are not speculators or gamblers so they go for these its got to cash flow investments.

I personally have made a pretty nice balance sheet gain on bare land did not cash flow..  bought one in 97 for 30k and sold in 2020 for 2 mil..  that kind of thing.. never cash flowed a day.. Most people reading BP would never have considered buying that because YUP it has to cash flow or your making a mistake

You definitely have more real estate experiences than I do and I appreciate your posts. 

I did purchase a 17-1/2 acre property in Palmdale California and it was under the jurisdiction of the Los Angeles County Building department. I purchased 7-1/2 acres for myself and the seller was supposed to split the property into 3 properties and sell two 5-acre pieces .The county would not let us share the water well. We ended up going to court because I paid $225,000 cash to the seller before it closed escrow because the seller purchased 100 acres in norther California, got into a cash jam and I paid him the entire purchase price. Then, the seller wanted to back out of the deal because his 100-acre farm went bankrupt and he tried to move back into the house I purchased. So, we went to court, the case took exactly 5 years to the last day before the case expired and the judge told the owner to sell me the other 2 parcels for $75,000 each and I ended up with the entire 17-1/2 acres . The parcel split was never completed.

The property was high on a mountain overlooking Palmdale California and what is strange is when you go to the very top of the mountain there is water bubbling out of the ground. When you go to Las Vegas, the very highest mountain just before you get to Las Vegas has a  large lake, about 500 x 500 feet where miners dug down about 300 feet into the ground for gold or silver and then underground water filled the hole to about 9 feet deep with fresh water that constantly flows through the lake. We ride quadrunners to the lake about once or twice every year, swim in the lake and have a picnic. 

@Josh Thompson

I have to lightly disagree with the consensus here. In your case- walk away.

However, if your buying a property with severely under market rents or buying for 60% ARV, that cashflow number can change significantly.

On the other hand. Assume market rents and market value. Negative cashflow can make sense in markets such as LA if you have a high net worth individual you needs loses on taxes as write offs, those write offs can significantly change negative cashflow in certain individuals. Also, those type of markets can have fast appreciation so you may buy at a loss and resell at a profit with nice write offs.

In your case, this isn’t a thing most likely but just for the future when you get rich, it might make sense!

Originally posted by @Josh Thompson :

I have yet to find a home with positive cash flow. So now i'm wondering what I could do differently to turn it into positive. Should I try a new area? Should I speculate rents to go up in the long term?

You need to source deals off market. MLS is sort for 'too late'. There are simply too many mouths that need fed in a status quo agent-fortified transaction

The cash-flow has sucked on some of my best purchases.  It's the equity capture at the buy that matters. It's the smart value-adds that matter.  The way is off-market.  Work it. 

Originally posted by @Michael Plante :
Originally posted by @Jack Orthman:

Here is a breakdown including my 25% tax bracket. I could have had this house ready for re-sale in 60 days.

 What is a 25% tax bracket 

 I put 25% for the income tax you will pay to the state and IRS for the profit you earn if you sell the property. I always like to know how much I have left after paying taxes. I don't know if you pay 20% or 25% and I know very little about how much people pay, but I think taxes for short-term real estate investments may be a little higher that taxes for wages you earn when working for yourself or for some company. Not sure!

Originally posted by @Steve Vaughan :
Originally posted by @Josh Thompson:

I have yet to find a home with positive cash flow. So now i'm wondering what I could do differently to turn it into positive. Should I try a new area? Should I speculate rents to go up in the long term?

You need to source deals off market. MLS is sort for 'too late'. There are simply too many mouths that need fed in a status quo agent-fortified transaction

The cash-flow has sucked on some of my best purchases.  It's the equity capture at the buy that matters. It's the smart value-adds that matter.  The way is off-market.  Work it. 

I agree with that. I never purchased a single-family property that was on MLS or any internet website because they are always prices to the highest price the un-savvy investors will pay.

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