negative cash flow, but not really an investment

Edward Debbs

OP

Philadelphia, PA · Member since 2015 · 45 posts · 15 votes

11y

Joe, yep, 30 year.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Originally posted by @Joe Villeneuve:

Originally posted by @Edward Debbs:

Joe-

We bought in 2008 for about 300k. The house was already down from 340, but continued to slide. It's probably worth ~280 right now. I owe 260 on it. We're at 3.5% interest. I pay 2250 a month right now, its normally 2200 but we're catching up on escrow (insurance went up). We collect 1850 in rent.

30 year mortgage?

I just did the calculations. You have a 15 year mortgage. I also ran the calculations for a 30 mortgage with the same interest rate based on the 260k you still owe, and your payment would go down to under $1200. There's your answer. You'd potential go from $400 under, to $600 over.

Say the interest rate on the 30 year is a full point higher, it's still only a little over $1300...and you'd still be almost $500 over in positive cash flow...what a concept.

3 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Originally posted by @Edward Debbs:

Joe, yep, 30 year.

Your numbers work out to a 15 year mortgage though.

1 Reply

Account Closed

Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes

11y

Originally posted by @Edward Debbs:

Hi all-

I have a rental in New Jersey which I've rented out steady for 3 years now to the same family. We actually hadn't intended to rent it out, but we had to move quickly and it was faster than selling it.

We have a low interest rate on the mortgage, but we net $400 less than we pay on it every month.

We are interested in eventually buying more properties and renting them out, particularly since we have some experience on this one.

So I've gotten conflicting feedback from others about whether or not something like this is worth it. One of my friends tells me "that's like handing somebody off the street $400 bucks a month to go live on your dime." My sentiment is, yeah, kinda not really. That assumes the house I'm paying off is worth $0. I figure as long as my rent check covers all taxes and insurance and eats part of my principal every month, I'm still making money. Plus I depreciate on taxes and get money back that way.

Would I buy this house today as an investment property? No. But the issue here is that this is a house we would like to keep for our future use (due to its unique location).

Is there reason to what I'm saying or do I just pull the plug on this place, save my 400 bucks a month and put it toward a positive cash flow property, then buy a similar house later in life?

Save $400 a month, $4,800 a year...sell it and acquire something that makes money. Never underestimate the power of negative and positive cash flow. It compounds. $100 a month compounded every month is dramatically better than -$100 compounded. Trust me. Then...you'll thank me.

2 Reply

Account Closed

Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes

11y

restructure the debt as @Joe Villeuve and others suggest, then, if you have equity, cash out refi and take the proceeds and reinvest it in positive cash flowing properties.

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Account Closed

Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes

11y

Originally posted by @Edward Debbs:

Hi all-

I have a rental in New Jersey which I've rented out steady for 3 years now to the same family. We actually hadn't intended to rent it out, but we had to move quickly and it was faster than selling it.

We have a low interest rate on the mortgage, but we net $400 less than we pay on it every month.

We are interested in eventually buying more properties and renting them out, particularly since we have some experience on this one.

So I've gotten conflicting feedback from others about whether or not something like this is worth it. One of my friends tells me "that's like handing somebody off the street $400 bucks a month to go live on your dime." My sentiment is, yeah, kinda not really. That assumes the house I'm paying off is worth $0. I figure as long as my rent check covers all taxes and insurance and eats part of my principal every month, I'm still making money. Plus I depreciate on taxes and get money back that way.

Would I buy this house today as an investment property? No. But the issue here is that this is a house we would like to keep for our future use (due to its unique location).

Is there reason to what I'm saying or do I just pull the plug on this place, save my 400 bucks a month and put it toward a positive cash flow property, then buy a similar house later in life?

Save $400 a month, $4,800 a year...sell it and acquire something that makes money. Never underestimate the power of negative and positive cash flow. It compounds. $100 a month compounded every month is dramatically better than -$100 compounded. Trust me. Then...you'll thank me.

Or, as Joe and others suggest, restructure the debt and, assuming you have positive equity, cash out refi and invest the money in positive cash flowing properties.

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Thomas B.

Investor · Memphis, TN · Member since 2013 · 59 posts · 30 votes

11y

@Joe Villeneuve I think the $2250 month payment above includes PITI and PMI so it may be 30yr loan.

@Edward Did you $2250 a month include taxes, insurance, and PMI? or is it just principle and interest.

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Edward Debbs

OP

Philadelphia, PA · Member since 2015 · 45 posts · 15 votes

11y

Hey all-

Yes that includes everything, PMI principal, interest, taxes, insurance. Whole ball of wax. We actually did refi from a 5% a couple of years back, and now we have a 25 year mortgage. Ended up shaving off a few months from the original 30, nothing significant.

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Account Closed

Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes

11y

Originally posted by @Edward Debbs:

Hi all-

I have a rental in New Jersey which I've rented out steady for 3 years now to the same family. We actually hadn't intended to rent it out, but we had to move quickly and it was faster than selling it.

We have a low interest rate on the mortgage, but we net $400 less than we pay on it every month.

We are interested in eventually buying more properties and renting them out, particularly since we have some experience on this one.

So I've gotten conflicting feedback from others about whether or not something like this is worth it. One of my friends tells me "that's like handing somebody off the street $400 bucks a month to go live on your dime." My sentiment is, yeah, kinda not really. That assumes the house I'm paying off is worth $0. I figure as long as my rent check covers all taxes and insurance and eats part of my principal every month, I'm still making money. Plus I depreciate on taxes and get money back that way.

Would I buy this house today as an investment property? No. But the issue here is that this is a house we would like to keep for our future use (due to its unique location).

Is there reason to what I'm saying or do I just pull the plug on this place, save my 400 bucks a month and put it toward a positive cash flow property, then buy a similar house later in life?

It's better to cut your losses quickly then keep an investment that is losing money. Negative monthly cash flow of $400 over 5 years is a NPV of -$25,000. If you were to sell and save this $25,000, I could tell you where to invest it and you can generate $400 in positive monthly cash flow with .

A	B
Years	Cash flow
0	(4,800)
1	(4,800)
2	(4,800)
3	(4,800)
4	(4,800)
5	(4,800)
Discount rate	6%
NPV =	-$25,019

2 Reply

Steve L.

Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes

11y

@Edward you are actually probably losing $800-900/month. Your -$400 doesn't factor in vacancy, capex, repairs & maintenance.

1 Reply

Giovanni Isaksen

Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes

11y

+1 on @Account Closed's comments. Ask yourself this: if you had the cash in hand that you could sell it for today would you buy it again? The behavioral people call it 'Loss Aversion' and we often find ourselves paddling down that big river in Egypt because if we don't sell out of that bad investment we can delude ourselves (and hopefully our friends) into thinking we haven't lost money... but it's already gone and all that's left is the crying. The pros know to cut their losses and this is one of those situations where you can learn to be a pro.

Good hunting-

1 Reply

Charles Worth

Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes

11y

@Edward Debbs

Many other great points have been made here about speculation and the risk you are taking on and that is all definitely true. I definitely agree and think there are less risky ways to make a good return.

I have thought about this many times in looking at investing in NJ (though never at negative cash flow). In this case: I assume:

1) The house was worth $200K and you put in $20K

2) You are really losing $600 a month all in (capex reserves, major repairs the tenant can't do, little incidentals etc.)

3) You sell in 15 years at a price of 2x the $200K or $400K

4) You pay 6% in commission and 5% in closing costs.

In this case your rate of return would be only 11% which is lower than you can make in other investments like lending, etc. that are much lower risk.

If the house tripled over 10 years to $600K? well you would make 16% which is respectable but still achievable elsewhere.

Of course this is a gross generalization as rents will rise as well probably quicker than costs in NJ. Yet even if you started breaking even in 5 years your return would still be only 16% on a 2x rise and would be about 19% on a 3x rise.

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Cliff Odom

Real Estate Investor · Cypress, TX · Member since 2015 · 41 posts · 26 votes

11y

You are what I call an accidental land lord. This is a person that ends up renting a house by serendipity. Real estate is a business. You buy houses to rent out for a profit.

Real estate makes you money 5 ways:

1) equity capture -The difference between market sales price and the price you paid for it.

2) Principle paydown - The amount your mortgage is reduced each month you pay the mortgage

3)Appreciation - The amount that the value of the house goes up year over year.

4) Cash Flow - The difference between the rent you get and the monthly costs to hold the house.

5) Tax Advantage - Because of the tax structure built around real estate if done right the money made from real estate is never taxed.

If you go into business in real estate you should maximize each of these 5 ways you make money. Now if you accidentally find yourself in the land lording business you will almost certainly not have all these areas optimized. I suggest you work to optimize all the areas of sell the house and buy one that satisfies all the areas.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Originally posted by @Cliff Odom:

You are what I call an accidental land lord. This is a person that ends up renting a house by serendipity. Real estate is a business. You buy houses to rent out for a profit.

Real estate makes you money 5 ways:

1) equity capture -The difference between market sales price and the price you paid for it.

2) Principle paydown - The amount your mortgage is reduced each month you pay the mortgage

3)Appreciation - The amount that the value of the house goes up year over year.

4) Cash Flow - The difference between the rent you get and the monthly costs to hold the house.

5) Tax Advantage - Because of the tax structure built around real estate if done right the money made from real estate is never taxed.

If you go into business in real estate you should maximize each of these 5 ways you make money. Now if you accidentally find yourself in the land lording business you will almost certainly not have all these areas optimized. I suggest you work to optimize all the areas of sell the house and buy one that satisfies all the areas.

Answers:

1) equity capture -Useless, insecure, can disappear like the title of a "soap opera"... "as the market turns". .

2) Principle paydown - See #1

3)Appreciation - See #1...again

4) Cash Flow - Winner!!!! Only thing that is real and tangible.

5) Tax Advantage - Bonus

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Karyn T.

Investor · Bellingham, WA · Member since 2013 · 210 posts · 138 votes

11y

While I agree that no one should buy an investment that has negative cash flow, he has experienced becoming an "accidental landlord". He originally bought it for personal use and not for making him money....kinda like the fancy cars some on BP drive. For those running the numbers for him, how about running the numbers on how much it will cost to suddenly evict his "Golden Tenant", list the house, have it sit vacant (with no rent) during the sale, and then commissions to the agents, sellers fees, etc.

I bet it's more than the $4800/ yr he's currently losing and probably more than the $24000/5yrs....not to mention that just quick glance at his numbers looks like he doesn't have any true equity yet. He'd have to bring a fairly sizable check to closing, from what I can see.

Keep it. Refi if you can. Improve value. Keep your awesome tenant.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Golden tenant in the wrong house does you no good...and only wastes a Golden tenant.

Sell for a one time loss, and move forward. If you keep it losing money on a slow bleed it becomes a long term problem.

No matter what, you are going to lose money on this. You have to decide if losing it in a lump sum, that you can recover from is better or worse than losing it every month. The every month will add up to more than the one time loss too.

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Cliff Odom

Real Estate Investor · Cypress, TX · Member since 2015 · 41 posts · 26 votes

11y

Originally posted by @Joe Villeneuve:

Originally posted by @Cliff Odom:

Answers:

1) equity capture -Useless, insecure, can disappear like the title of a "soap opera"... "as the market turns". .

2) Principle paydown - See #1

3)Appreciation - See #1...again

4) Cash Flow - Winner!!!! Only thing that is real and tangible.

5) Tax Advantage - Bonus

@Joe Villeneuve What is insecure?

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

Originally posted by @Cliff Odom:

Originally posted by @Joe Villeneuve:

Originally posted by @Cliff Odom:

Answers:

1) equity capture -Useless, insecure, can disappear like the title of a "soap opera"... "as the market turns". .

2) Principle paydown - See #1

3)Appreciation - See #1...again

4) Cash Flow - Winner!!!! Only thing that is real and tangible.

5) Tax Advantage - Bonus

@Joe Villeneuve What is insecure?

A: Equity. Do you recall the year 2008 and surrounds? You can't count on equity. Any market can change over the years.

It only has use when you tap into it...by refinancing (raising your debt service thus reducing your cash flow) or selling...which means you have no more cash flow.

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Cliff Odom

Real Estate Investor · Cypress, TX · Member since 2015 · 41 posts · 26 votes

11y

Originally posted by @Joe Villeneuve:

Originally posted by @Cliff Odom:

Originally posted by @Joe Villeneuve:

Originally posted by @Cliff Odom:

Answers:

1) equity capture -Useless, insecure, can disappear like the title of a "soap opera"... "as the market turns". .

2) Principle paydown - See #1

3)Appreciation - See #1...again

4) Cash Flow - Winner!!!! Only thing that is real and tangible.

5) Tax Advantage - Bonus

@Joe Villeneuve What is insecure?

A: Equity. Do you recall the year 2008 and surrounds? You can't count on equity. Any market can change over the years.

It only has use when you tap into it...by refinancing (raising your debt service thus reducing your cash flow) or selling...which means you have no more cash flow.

@Joe Villeneuve is correct. You want to make sure you get cash-flow above all else. If you get into trouble in the others and you have cash flow you can last it out. But principle paydown is not market related. It happens also.

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Stephen S.

Wholesaler · Holiday, FL · Member since 2013 · 571 posts · 221 votes

11y

A question to ask yourself is: Do I want to own this house?

If yes, the next question is: Why do I want to own this house?

If you want to eventually live in it, or it was in your family since 1825, or your great-grandmother still haunts the place - then it's not business and you just Want it.
If that is the case, then ask: Am I willing to pay $400. a month to own it?

If it's a business venture then you have to make it show a profit, or you have to cut it loose. Can you re-rent / reconfigure it it in some way which makes a profit? Can you sell it at a profit? If so; that would be the way I would go.

What is your goal here?

stephen
------------

Originally posted by @Edward Debbs:

Hi all-

I have a rental in New Jersey which I've rented out steady for 3 years now to the same family. We actually hadn't intended to rent it out, but we had to move quickly and it was faster than selling it.

We have a low interest rate on the mortgage, but we net $400 less than we pay on it every month.

We are interested in eventually buying more properties and renting them out, particularly since we have some experience on this one.

So I've gotten conflicting feedback from others about whether or not something like this is worth it. One of my friends tells me "that's like handing somebody off the street $400 bucks a month to go live on your dime." My sentiment is, yeah, kinda not really. That assumes the house I'm paying off is worth $0. I figure as long as my rent check covers all taxes and insurance and eats part of my principal every month, I'm still making money. Plus I depreciate on taxes and get money back that way.

Would I buy this house today as an investment property? No. But the issue here is that this is a house we would like to keep for our future use (due to its unique location).

Is there reason to what I'm saying or do I just pull the plug on this place, save my 400 bucks a month and put it toward a positive cash flow property, then buy a similar house later in life?

0 Reply

Edward Debbs

OP

Philadelphia, PA · Member since 2015 · 45 posts · 15 votes

11y

Thanks for all the thoughtful replies. As to the previous post, my goal for this house at first was to just not have to write a check to get out of it. I didn't have time enough to list it and it was questionable that we were going to be able to get a price that would cover what we owed. It was on the cusp.

The reason I started this thread is I'm not sure what my goal is. I like the house, I like the area, and I like the idea of having a second home up in NJ at some point where I can spend weekends with the family.

I've got plenty invested in this house, but I would have too if I had just been paying rent. Of course, money I spent it he past may have nothing to do with money I make in the future, I'm clear on that.

Would I buy the house for an investment today? Absolutely not. But if you asked me would I buy a house in that area that cost 2400 dollars a month for 400 bucks a month, I'd probably say yes. Depends how you think about it.

I think within the next 12 months I could probably cut my losses in half. I'm still weighing my options and considering if I'm OK with that, and if that's realistic.

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

11y

Originally posted by @Edward Debbs:

... Long story short, I'd like to keep this renter.

Maybe my strategy should be rather than giving him a big hit on rent, move it up incrementally. Also, I see other places on Zillow and what they're asking for rent, and I do think I could charge more. That said, its difficult to find what people are actually getting. Any thoughts on that?

It's somewhat true that you can only see asking rents - unless your market has similar houses that were rented through the MLS, where the MLS can show the "settled" amount (that would be the agreed rent).

Now, your existing tenant is in the same boat - they are limited to seeing asking rent for most of the searches they would perform online. So you can certainly increase the rent to a number that is below asking rents elsewhere AND not lose the tenant, especially where your tenant has been there a number of years; you just explain that as your expenses have risen over time you absorbed those increases, but now realize that over time those increases will have to be passed along to the tenant.

Adding this paragraph using EDIT: The existing tenant will have the chance of evaluating a rent increase by looking at available housing inventory, and comparing your new asking rent against the asking rents in the market. If you have priced a bit below the market, the tenant should see a "no brainer" decision is to accept the increase and remain because you have offered them a more than fair rent and hence a good deal / value.

Negative cash flow is not a good idea, that ui subsidizing a tenant on your dime as you had been advised already, and subsidizing a tenant's lifestyle is not the business to be in - our gov't does that on our tax dollars as it is.

Lastly, have you gone onto a site like bankrate.com and used their mortgage calculator to produce an amortization schedule for your refi based on the amount and date of the refi? That should break down the principal pay down that happens monthly. Essentially, that is how much you pay down the borrowed amount each month, and it varies over time getting bigger as time passes. It's quite possible that the tenant's rent might be covering everything but the amount going to principal pay down; so if that's the case, the tenant is not buying the house for you, you are doing that yourself from the $400 a month.

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Edward Debbs

OP

Philadelphia, PA · Member since 2015 · 45 posts · 15 votes

11y

Thanks to all your replies. I think I'm going to hold on to the place for a little while longer. My personal cash flow will be increasing in the next couple of months, and I think I may be able to refinance to a slight positive cash flow.

Additionally, the tenant emailed me that he wanted to add a pet (went from one mature dog to two puppies). I told him $50/month increase for wear and tear compensation. He didn't seem thrilled but agreed it was reasonable as I haven't increased rent in 3 years.

As far as the market is concerned, I emailed my realtor to see what she thinks about the market as compared to 3 years ago. In addition to that, I've been checking zillow and will continue to do so weekly. I made a spreadsheet of the address, bedrooms, bathrooms, garage space and sqft as well as the asking rent. I'm still on the lower end of br/$ and sqft/$ in my area, which I think is fine for now. It would take me a couple years of slightly higher rent to recoup what I'd lose if this renter left. I have no property manager and live 2 hours away so for now I'm ok with the situation and will continue to optimize.

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Hal Thompson

Las Vegas, NV · Member since 2014 · 284 posts · 123 votes

11y

First off, why don't you float the $400 increase to your tenant and see what he says. Worst case scenario is he says no, and then you have a decision to make. Have you looked at comps in your area. What do other houses rent for?

I don't think negative cashflow is always a bad thing. If you think the asset is strategic for one reason or another, and you will eventually make your money back on sale, then there is theoretically a good reason to have negative cashflow. Ultimately, it is a function of your other sources of income. If you make more than enough money to cover the $400 a month hit, and it doesn't adversely effect your lifestyle, then I don't think I can be too critical. Perhaps you envision raising your family there in the future and know you won't find another house like it. There are other "returns" on investment besides money, happiness being one of them.

On the other hand, most of us are on here to make money. If that is your goal, then negative cashflow properties are clearly bad news. The more negative cashflow properties you obtain, the worst your situation will be (and vice-versa). So deal with this one as you will, but run the numbers in the future if you invest in other properties.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

11y

To me, this is very simple. The reason why I never have negative cash flow, and will never have negative cash flow, and will never "rationalize" that negative cash flow can be somehow a good thing, is because.....

it's not my job to pay my tenants to live in my house.

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negative cash flow, but not really an investment

negative cash flow, but not really an investment

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