negative cash flow, but not really an investment

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negative cash flow, but not really an investment

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

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?

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Royce Talbo
Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
11y

@Edward Debbs

 Ok I disagree with most here because they missed the key fact that you said that you are planning on using this place for your future use.  If it is a property that you love because of the location and got a deal on it and dont think you can get another deal in that location and you have the money to pay the $400/month then negative cashflow doesnt matter.  It is for your future use, it is not an investment.  Look at it as a house that you are away from on a long vacation and someone is looking after it for you.  The $400 is not lost, it is going into a savings called your personal future residence.  I guarantee none of these guys are  cash flowing on their personal residence,  if they are, they are living in a multi.  If you are not planning on living in it in the future, dump it and follow what everyone else is thinking as this is a bad investment unless you have crazy appreciation.  I had a condo in hawaii where I was negative cash flow, but in 5-6 years I made $150k when I sold. so negative cashflow is not always bad just depends on your market and if the other legs of the chair can keep your numbers up.

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  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Joe-

    I realize your advice is the most rational.  I get the impression that you make money because you live by your system and your system works.  I don't want to get a bad reputation here for ignoring good advice.  I absolutely see that you're hitting the nail in the head.

    And you're right I am rationalizing and I know that.  The area has an attached country club that I still want access to and a lake area that I intend to start using on weekends.  I also think, looking at my numbers, that I can move this property into profit in the next few years.  If profit on the property was my absolute goal I'd be hand waving, but as I mentioned it kinda-sorta isn't (completely).  

    In the next coming years I'll be buying subsequent properties for an absolute for-profit motive.  I'll have a different mindset about those.  This property is a bit of an in-between situation for me, so that's why my decisions may not appear completely logical.  They're not.

    As far as a $400 increase I see that that's not going to work.  $50 was a lot, a 2.7% increase.  If this renter moves I'm going to be out 3-5 grand: that's going to be a big gap to eat up.  

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  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y
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  • Edward Debbs
    OP
    Philadelphia, PA · Member since 2015 · 45 posts · 15 votes
    11y

    Posted a scatter chart of price/br and price/sq ft in my area.  Houses are all bungalow style so it's a little difficult to make sense of some of the data.  Sqft obviously has no reasonable correlation to price, although bedroom does.  I'm the 3 br dot just below the trendline.  Average for asking rents is 2107 for a 3br.  I'll continue to collect data over the next several months and have some discussions with real estate experts.  

    These are asking prices, I'd like to see what people are getting.

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    11y

    If you are eventually interested in buying more properties and rentals, you should absolutely get rid of this house. Lenders don't like lending money to people who are already bleeding money on current homes. This home will work against your DTI ratio when you apply for a new loan.

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