Negative monthly cash flow
Investor · Fayetteville, NC · Member since 2015 · 55 posts · 13 votes
I had the same insurance for years, and after looking at the slow increase in premiums over time they had doubled my premiums. Call around and see what other offers are out there.
Insurance $53
Tax $37
Principle $542
Interest $344 (3.375%)
Total Payment $975
Maturity Date 10/2029
Balance (I was a little off) $121,690
Comps in the area are for sale for about the same price and are rent at or below my current tenants, who are possibly PCSing (moving) in July. The home is only 6 years old, very little maintenance is required, tenants pay utilities and maintain yard. The PM cost 10% which is lower then most for the area, and the rent is $850/mo.
Tick-tock, tick-tock, tick-tock,...
Every month you keep this, you are losing $125/month....this, is if you have no vacancies, no added surprise "fixes", etc...to make it a bigger loss.
SEll it, or refi it. You equity is useless if you keep the house...and don't refinance. If you refinanced, at 30 years, at the same rate, your payment would go down around $350...and you'd be cash flowing again.
So, I have looked into refinancing the property. An option is to do a 3/1 at 2.25%, I have requested information on a 5/1 and the rate. I would feel much more comfortable with a 5/1 a 3/1, however the whole concept is new to me. If I were to do the 3/1 I would be up $200 rather then down $200 a month. So, that is actually an extra $400 in my pocket a month. I am still trying to get my head around this because yes, over the next 24 months at $400/mo that is $9600. But with my current loan in 24 months $10000 more in equity then with the refinanced 3/1 loan. I guess I am only just now realizing I must calculate in the $200/mo it cost me to keep the current loan, total $4800. If we subtract that from the $10000, ouch when comparing it to the 3/1.
So it is clear, positive cash flow is KING. So, now what? Is it okay to refinance with only six months since my last refinance? Should I plan now to sell near the end of the 3 or 5 year fixed rate or maybe look into another refinance option at that time and compare apples? I am beginning to realize as I type this I am walking myself through it. But, how safe are 3/1 and 5/1 ARMs?
Is there anything I am overlooking, overthinking?
P/S I hope others are getting something out of this post than just me, thanks again BP community.
@Dustin Little I'm petrified of ARMs. I can remember a time when they destroyed people.
I'm thinking you should do a FSBO. Offer to sell it to your current tenants first. Ask for a higher than market rate interest rate, with an early payoff penalty. If they default, it's yours again, and you can do it again at a higher price (assuming the market goes up).
I knew a man in a small town in WA, who sold his property twice in the time I'd lived there. I rented a small apartment on that property. I made a comment that it's too bad the latest owners foreclosed. He laughed and said every time one of them gets foreclosed on, he makes money. He gets to keep the downpayment, makes an above-average interest rate, then sells it again for a higher price! Brilliant.
it depends on your personal preferences and how much research you've done on ARM's if used correctly with proper exit strategies they can be highly lucrative.
Its only risky when people go into them for just the initial fixed rate of 3/5/7/10 years with out looking at the exit strategy, the caps, the annual/semi/limits, start rate, margin, and etc
I am a lender and I invest as well so I see things from a couple different angles. For most people who ask about ARM's I dont necessarily say they are bad or good it just depends on the sophistication of the borrower/investor and their emotional maturity in handling the risk.
Whether you should sell or hold or rent depends on what your objectives are so no one here can know enough to advise you on that from the scope of this article. You'd have to have a good understanding of your level of competence in the subject, your emotional maturity when it comes to taking financial risks, and your investment objectives to properly advise.
@Joe Villeneuve There are certain valid cases to buy properties with negative cashflow. For starters, many A-class cities have apartments that have negative cashflows but can be classified as good/stable investments (for folks who simply need to park cash).
Like others said, whether it is a good idea is dependent yourself as a whole. If you have a cash-generating business on the side, to be tax efficient, you need somewhere else to spend the cash. Buying in cashflow-healthy but management-intensive areas may not be their best choice. (Personally, I know quite a few people that do that)
That said, fully agree with you Joe. The key of real estate, just like poker, is to stay in the game. How you get your poker chips (ie. cash) differs from one person to the other.
@Joe Villeneuve There are certain valid cases to buy properties with negative cashflow. For starters, many A-class cities have apartments that have negative cashflows but can be classified as good/stable investments (for folks who simply need to park cash).
Like others said, whether it is a good idea is dependent yourself as a whole. If you have a cash-generating business on the side, to be tax efficient, you need somewhere else to spend the cash. Buying in cashflow-healthy but management-intensive areas may not be their best choice. (Personally, I know quite a few people that do that)
That said, fully agree with you Joe. The key of real estate, just like poker, is to stay in the game. How you get your poker chips (ie. cash) differs from one person to the other.
Sorry, let me rephrase what I said.
There is NO reasonable, or logical, or rational reason to lose money in a REI. All the reasons given are bad reasons. Every reason given, like needing a place to park money to show a loss, makes no sense...worse it makes no dollars. Why bother investing if you are going to give away your profits?
@Joe Villeneuve There are certain valid cases to buy properties with negative cashflow. For starters, many A-class cities have apartments that have negative cashflows but can be classified as good/stable investments (for folks who simply need to park cash).
Like others said, whether it is a good idea is dependent yourself as a whole. If you have a cash-generating business on the side, to be tax efficient, you need somewhere else to spend the cash. Buying in cashflow-healthy but management-intensive areas may not be their best choice. (Personally, I know quite a few people that do that)
That said, fully agree with you Joe. The key of real estate, just like poker, is to stay in the game. How you get your poker chips (ie. cash) differs from one person to the other.
Sorry, let me rephrase what I said.
There is NO reasonable, or logical, or rational reason to lose money in a REI. All the reasons given are bad reasons. Every reason given, like needing a place to park money to show a loss, makes no sense...worse it makes no dollars. Why bother investing if you are going to give away your profits?
Certainly no one will go into REI with sole purpose of losing money (or for whatever in general).
"Parking money" is more figuratively speaking. The main point is there are various scenarios where an investment makes sense even if it has monthly negative cashflow (which is the main topic of this thread). Here are at least three:
1) Future capital appreciation (especially in A-class cities). While one can argue it is speculative and may not be advisable, it is nonetheless a valid strategy.
2) For foreign investors, it's an indirect play on strength on US dollars.
3) Sometimes real estate preserves values better than other more liquid assets (e.g. cash). One can lose it all in an instant, let's just say that.
In America, we are blessed with the freedom of capital movement and the property rights are recognized. Keep in mind we can't really say it's the same for all parts of the world.
#3 sounds somewhat dramatic. But believe me, I know of people (first-degree and second-degree) who buy negative cashflows properties for at least 1 of the reasons above.
Again, is it a shrewd investment by itself? Probably not, if you have better alternatives. As much as both @Joe Villeneuve and I believe in cashflow properties, it is simply better to keep in mind there are a lot of other people with different purposes when they invest in real estate.