The Negative Cash Flow Club!!

General Landlording & Rental Properties

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The Negative Cash Flow Club!!

Amy Raye Rogers

Real Estate Agent · Minot, ND · Member since 2021 · 131 posts · 223 votes

The numbers are in for 2021...

6 doors acquired in 2021... 8 total doors owned (all SFR)

54k in rents, 24k expenses, 30k cap ex, and 30,500k in PITI...

For a grand total of -31k net cash flow!!!

but...

400k equity growth! I'd call that a win.

Know what you're getting into folks!! It's a long term game for buy & holders.

Cheers!!

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

Nothing wrong with cash flow negative, as long as you understand what you're getting into and have the reserves to cover the loss.

That said, a lot of people go into negative cash flow without understanding the risks. I know a lot of investors who were using this method to scale back in 2004-2007, and they learned the hard way that markets don't always go up. Many of them were over-leveraged, under-capitalized, and weren't prepared for a spike in vacancies and bad debt.

It all boils down to your ability to absorb risk, and only you know what that looks like.

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Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Great post....a lot of newbies need to figure this out. My theory has always been that cash flow is only one of many factor involved in successful RE investing....
3 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
How is that a win? You don't own the equity, the property does. You're losing money from cash flow and from your equity and don't realize it because you're rationalizing it.
How long have you been negative CF? What's your cumulative CF over that time period?
14 Reply
Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
4y
There is some missing information here to be able to make a good assessment. I'm a believer in cash-flow - because rentals are my full time job (have 38 of them). But neglecting that for a moment - one has to ask what the $24,000 in expenses were that were outside PITI and cap-ex? You presume the Capex comes way down in year 2. Lets say it all goes away (theoretically). We need to understand the expenses to know if these are fixed, or start-up costs, etc?
The equity play is always good - so YES to that - but if the market cools, your equity will drop and you will be left with cash-flow and mortgage pay down gains. (and I'm not suggesting all the equity goes away...) but the current hot market can't continue to run like this much longer - especially with the FED forecasting 3 rate hikes, etc this year. Which brings you back around to understanding your real cash flow. If you subtract ALL your expenses and Capex, your numbers look healthy - 43% gross after PITI. That feels right. Then you factor in reserves - which are actually just payments towards the maintenance and Capex accounts. If you say 20% between those two - it takes your expenses plus reserves to $41,300. On $54,000 in rents that is 24% gross. So just estimating - I say you made good purchases, and hopefully the Capex comes way down now that the properties are established.
I still stick to the fact that there is no reason to NEED to be negative cash flow though. I don't really think you are (negative) going forward - it's just likely that your houses needed stuff to be rentable (I hope)!
All the best!
Randy
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Amy Raye Rogers
OP
Real Estate Agent · Minot, ND · Member since 2021 · 131 posts · 223 votes
4y
@Randall Alan

You summed it up well. Almost all those "costs" were to get the properties rent ready... Isn't that how the BRRRR method works? Next year's books will look dramatically different. I'm mostly just making a point for new investors. You don't make money day one if you are trying to scale.

@Joe Villeneuve
People under sell the value of equity... We cross collateralize into a line of credit. Therefore, the equity is gainfully employed. That's how we were able to buy several of these properties for $0 out of pocket. Sounds like a pretty good use of equity to me!
9 Reply
Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
4y
We are on the other end… cash out refinancing appreciated properties to pay off the mortgages on other properties at a lower APR. It reduced the number of mortgages we held by half - freeing up more Fannie Mae loans available to us in the future, and moving those savings on interest to the profit column.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
4y
Nothing wrong with cash flow negative, as long as you understand what you're getting into and have the reserves to cover the loss.
That said, a lot of people go into negative cash flow without understanding the risks. I know a lot of investors who were using this method to scale back in 2004-2007, and they learned the hard way that markets don't always go up. Many of them were over-leveraged, under-capitalized, and weren't prepared for a spike in vacancies and bad debt.
It all boils down to your ability to absorb risk, and only you know what that looks like.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
4y
Originally posted by @J Scott:
Nothing wrong with cash flow negative, as long as you understand what you're getting into and have the reserves to cover the loss.
That said, a lot of people go into negative cash flow without understanding the risks. I know a lot of investors who were using this method to scale back in 2004-2007, and they learned the hard way that markets don't always go up. Many of them were over-leveraged, under-capitalized, and weren't prepared for a spike in vacancies and bad debt.
It all boils down to your ability to absorb risk, and only you know what that looks like.

and for sure the assets.. and location.. for many bp investors who buy C and D class semi inner city slow to appreciate etc property negative cash flow is to be avoided. In markets were you can ride a nice wave of increasing values a tad of negative is just fine.

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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
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@Amy Raye Rogers I wouldn't include CAPEX in a cash flow calculation, because those are capital improvements. I am also kind of surprised your expenses are so high for single family homes. Your operating costs are almost half of gross rents.
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John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
4y
It's very common for a property to be unprofitable in the year of purchase but I wouldn't classify them as cash flow negative because they're "in the process" of being a stabilized asset. If they lost money the second year, I would be very concerned as negative cash flow properties don't fit my model. Appreciation is NEVER a sure thing even if there's a history of it.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Amy Raye Rogers:
@Randall Alan

You summed it up well. Almost all those "costs" were to get the properties rent ready... Isn't that how the BRRRR method works? Next year's books will look dramatically different. I'm mostly just making a point for new investors. You don't make money day one if you are trying to scale.

@Joe Villeneuve
People under sell the value of equity... We cross collateralize into a line of credit. Therefore, the equity is gainfully employed. That's how we were able to buy several of these properties for $0 out of pocket. Sounds like a pretty good use of equity to me!

So you're saying you're OK with paying for the use of your own money?
As equity grows, it loses value, because it grows on a 1 to 1 ratio of face value to property value. When you buy the property, it has a 1 to 5 value. So, if you buy a property worth $100k, you only paid $20k for it (20% DP). If that property gained $20k in value through appreciation, it would be worth $120k, but your equity would only be $40k...that's a 1 to 3 value. The value of your equity is going down.
Now you're telling me you want to reduce it even more by paying for it (interest).
0 Reply
John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
4y
Not sure I understand @Joe Villeneuve's math. 20% equity is less than 33% equity so how is that going down?
2 Reply
Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
4y
@Joe Villeneuve

joe, can you clarify your point? Are you suggesting that having equity in a property is bad, and that extracting the equity is better? Not following your train of thought.
1 Reply
Amy Raye Rogers
OP
Real Estate Agent · Minot, ND · Member since 2021 · 131 posts · 223 votes
4y
@Joe Villeneuve
When you buy a property using 0 of your own liquid cash what's the ratio then? A line of credit allows you to do that. I'll give you an example... we purchased a property for 130k that appraised at 215k immediately at close. The ONLY reason why our offer was accepted was because we were able to close quickly using the LOC. There is value in using equity this way. I'd consider that a reasonable strategy. Also, we are able to refinance before paying a cent of interest.
Don't get me wrong... I've read a lot of your posts. You are a FAR more sophisticated investor than I am. I'll concede to your judgment the vast majority of the time and we've learned a lot from you. Thanks for engaging my post!
5 Reply
Jeremy Komer
Rental Property Investor · Cincinnati, OH · Member since 2020 · 84 posts · 81 votes
4y
@Amy Raye Rogers
Until the market heads south and POOF!
All those unrealized gains are gone and your stuck underwater with negative cash flow investments. See all the investors who went bust in 2008.
Cash flow is what makes this sustainable, a company bleeding money has to find profitability eventually.
1 Reply
Amy Raye Rogers
OP
Real Estate Agent · Minot, ND · Member since 2021 · 131 posts · 223 votes
4y
Just to clarify...
All of our doors are POSITIVE cash flow---post renovation. The point is when you are rehabbing you're going to be spitting out a lot of cash early on. I would never advocate long term negative cash flow as a safe strategy.
Here is a quote from David Greene "I never expect to make positive cash flow (on a single family home) in year one"... I'm reaffirming that message.
9 Reply
Allen L.
Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
4y
You touched a lot of good points, one of them is that capex is a cash flow killer. You might have rehabbed it and renewed the age of the asset now, but if you hold the property for another 20+ years, you will have to put in those capex again, so you can back out a theoretical monthly capex to be "escrowed" from your CF if you will... for me that number comes out to ~220 a month for a 1000 sqft 1 bathroom ranch home, which covers roof, gutter, HVAC, hw, appliances, driveway, flooring, plumbing, windows, interior/exterior paint, cabinets/counters, siding, foundation, garage/fence, landscaping, electrical, and other components, basically a lite replacement cost calculation. So if you are a long term hold investors and is being completely honest with yourself, negative CF for 5-6 years including shadow capex is very likely. Of course you may not need to pay the bulk of it until year 20, so your negative CF for 5-6 years is actually only theoretical, but hopefully you get my point. I own almost 30 units and my CF including shadow capex is ~10K a year.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Equity clarification:
1 - Equity is good. Equity is cash that's locked up. Locked up cash has no use when it's locked up.
2 - The face value of equity isn't the true value of it. If it is, you're losing the value of leverage.
3 - If a property's equity doubles, that increase is based on a dollar to dollar relationship. For every dollar a property appreciates in value, the equity increases an equal face value.
4 - When a property is bought, the property has a true value of 5 times the face value because you are buying at 20% down. When that property value increases $20k, it increases the PV to $120k (from the original $100k). The equity is now 1/3 of the PV...instead of 1/5.
5 - If that same $40k (1/3 of the new PV of $120k) was used as a DP (20% of the PV), it could be worth $200k (20% of the new PV).
6 - If both properties had an appreciation of 5%, the $120k would increase $6k to $126k...the $200k property would increase $10k to $210k.
8 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 584 posts · 738 votes
4y
@Joe Villeneuve great explanation. Thanks for getting into the weeds of this post. I am learning and reaffirming a lot.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @John Teachout:
Not sure I understand @Joe Villeneuve's math. 20% equity is less than 33% equity so how is that going down?

Percentages lie. Percentages alone have no value...until they are converted to dollars, unless you can buy milk and bread with percentages. Percentages convert to those dollars based on what each percentage is applied to. The number behind the % sign doesn't set the value of that percentage. The number behind the $ sign does.
2 Reply
Yousef RedaPro Member
Investor · Winnipeg, Manitoba · Member since 2016 · 92 posts · 40 votes
4y
Being negative cash flow is not ideal but can be done.
Few issues with negative cash flow are
A) if the market corrects or drops you are at risk of being underwater
B) that no one here has mentioned is higher debt to credit ratio which will make it less likely to scale in the future the more you have these types of properties as banks will find you higher risk.
C) you won’t have the ability to save up for repairs/maintenance/cap ex in future unless you did a realistic assumption in your numbers
D) longer time to get to FU money status
I personally only buy for cash flow. Equity appreciation I aim for but is icing on the cake. Cash flow first and equity second. If you do equity only your basically gambling to some degree.

Buying negative cash flow assets is better then not buying anything at all however.
4 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Originally posted by @Joe Villeneuve:

Ok, well then, using your example $40,000 (the 1/3) has more value than $20,000 (the 1/5), correct?
1 Reply
Maurice D.
Coppell, TX · Member since 2015 · 485 posts · 310 votes
4y
How are you NOT hitting DTI issues on refi with all the mortgages and a large LOC pooling the equities?
2 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Bruce Woodruff:
Originally posted by @Joe Villeneuve:

Ok, well then, using your example $40,000 (the 1/3) has more value than $20,000 (the 1/5), correct?

Yes, however that's based on two different stops along the same timeline. Standing alone, with no context, you are correct. Within the context of this discussion, not so much. The $40k is only worth $120k in PV. The $20k at 1/5 is the $40k at 1/3 before the property increases to $40k in equity. It's not comparing apples to apples. The $20k (1/5) is the starting point for both options. The comparison isn't between $20k at 20% vs $40k at 33%. The comparison is $40k at 20% vs $40k at 33%.
You have to compare the $40k value in two scenarios:
1 - $40k within the same property (33%), is only worth $120k
2 - $40k in a different property (20%), is worth $200k...this also will have double the CF as Option #1.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
If you look at it that way, you are of course correct. However you're kinda comparing apples and oranges as well. No problem, I get your point and it should be considered by investors.....
0 Reply
Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
4y
@Amy Raye Rogers - congratulations! You actually doo have positive cash flow excluding capex, as you pointed out in a response.
Cash flow and equity are usually inversly related, as you push one up the other one goes down. When you design your financial model you can dial it in where you want it to be.
Personally I think most of BP is way too much focused on cash flow (out of thin air). Nobody ever got welathy of cash flow alone - it's the equity side that creates wealth, especially if you use the equity to create more cash flow.
It is realatvley easy for an average income person to acquire one million worth of real estate over a period of time - and you can create a million in equity from that over about 7-9 years, even with very conservative assumptions. Just play around with the BP calculators.
Now do the math an see how long it takes to create a just million from cash flow. We have a lot of people in Milwaukee buying cheap properties in thr rough part of town (like sub 200k duplexes) - yes they cash flow well, but thats all you have to pay for long term capex. And over 5, 10 or 15 years capex is going to exceed cash flow. Let that sink in.
Years like 2021 have been a windfall for every portfolio owner, and from everything we know at this point we will be going down this alley for years to come - the USis short 4-6 million houses, so optimistically 8-10 years until new construction supply has caught up with demand.
If you agree with this outlook then the question becomes what types of properties will benefit the most over the next years? And if you disagree then hedge your bets with cash flow. Or, dial it in somewhere in between.
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