Would you buy a rental property with negative cash flow?
Investor · East Earl, PA · Member since 2016 · 12 posts · 6 votes
Would you buy a rental property with negative cash flow?
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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8yYou can get a 30 year mortgage and make extra principal payments rather than getting a 15 year mortgage and having negative cash flow...provides more flexibility.
I can argue against accelerating the debt pay down but that's a topic for a different post.
45 Replies
- Gardiner, ME · Member since 2015 · 190 posts · 177 votes8yNo. There would have to be a really compelling reason to buy a rental property and knowingly lose money monthly. Because why would you buy a house that loses money when you could buy one that makes money? It won’t just be the monthly loss by the way. You are going to have cap ex and other expenses. And it’s going to feel like an albatross around your neck when you are paying 10k for a roof. There are a plenty of reasonable plans including areas that are pure appreciation plays. I haven’t heard any of that from you. This feels more like you have an emotional connection to the house. That is not a good way to choose an investment. This is just a bad deal for no reason. Please spend a lot more time learning real estate before you jump into something. Start with The Bigger Pockets beginner guide, Rich Dad Poor Dad and Millionaire Real Estate Investor.
- Rental Property Investor · Northern NJ · Member since 2016 · 341 posts · 144 votes8yPatricia Luna the answer might be yes if it’s in high appreciating market. But I don’t think that Harrisburg falls into that category.
- Gardiner, ME · Member since 2015 · 190 posts · 177 votes8yBy the way that was as kind as I could be. I did not intend in any way to put you down. You need to hear it straight. Spend a lot of time analyzing deals. Bad deals jump out at you. Get so you can tell the difference between a good deal and a great deal
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes8y
Originally posted by @Andrew Ware:
No.
There would have to be a really compelling reason to buy a rental property and knowingly lose money monthly. Because why would you buy a house that loses money when you could buy one that makes money?
It won’t just be the monthly loss by the way. You are going to have cap ex and other expenses. And it’s going to feel like an albatross around your neck when you are paying 10k for a roof.
There are a plenty of reasonable plans including areas that are pure appreciation plays. I haven’t heard any of that from you.
This feels more like you have an emotional connection to the house. That is not a good way to choose an investment. This is just a bad deal for no reason.
Please spend a lot more time learning real estate before you jump into something. Start with The Bigger Pockets beginner guide, Rich Dad Poor Dad and Millionaire Real Estate Investor.
It's not as simple as an automatic no. I own Real Estate that doesn't always cash flow. I think the notion that every property you purchase must cash flow on day one is incredibly short sighted. The house is new, she feels it will appreciate, it's a desirable asset & they don't need any cash flow as it sounds like they have solid income.
There is a lot more to Real Estate than making an extra $1,000 or so per year off of a property. Let's face it $1,000 per year is an irrelevant sum of money to most successful folks. I imagine the OP is in that boat. What is nice is a headache free investment that is being paid for by the tenants, not the OP. On top of that we have tax benefits and of course the aforementioned appreciation.
- Investor · East Earl, PA · Member since 2016 · 12 posts · 6 votes8y
I see the need to clarify on the following:
I have experience buying rentals (I Have 3 rentals in Harrisburg with more than great cash flow), and I am an avid reader of this page and others related to real estate investment, including one of the books Andrew ware mentioned, so I believe I know more than the basics, that is why I am asking the question in the subject, because I know negative cash flow is in general, a "no no" when you are calculating your profit in a property. So, I wanted to ask the experts here in case somebody have a different perspective on the matter.
The property is located in Leola, PA. ( We live in New east Earl) there is not a lot of inventory in this area and surroundings, and since we are going to manage the property ourselves, we will prefer to do not have to drive more than 30 minutes. ( I am hiring a manager for the ones in Harrisburg next year because driving 1:15 minutes every way have been a pain since I moved here).
Our budget is $200,000 We had been looking for a while now, at that price there are townhouses or single family homes from the 1920's-1950's, the latest have oil for heating and do not have central AC. I had been looking at their price history and they have not appreciated much in the last 10 years.
I will continue buying properties on my own in Harrisburg, but for this investment I am partnering with my husband and he prefers to avoid Harrisburg.
During all this year, I had seen only one "deal" in this area, it was for a single family home that was sold for $140,000, it need it a lot of work, the comps in the area were around $190,000. We could have competed with other people that presented offers on the house but that house needed more than just paint and cleaning, so properties that need significantly amount of work are not an option for us, we will have to hire somebody to do the work.
- If you can’t find a rental that will bring in income I think it would be useful to research other areas where you can buy and have an income. Or meet with a financial advisor and invest in the market because at least you would be making money off of your money. Going into a deal knowing that you will lose money even if you do not incur additional expenses is not worthwhile. If you end up having to evict a tenant or have an expensive capital expense then the property will become an even bigger drain on your finances. The only exception may be if the property is expected to appreciate soon.
- Earth · Member since 2017 · 297 posts · 187 votes8yUse 30 years instead of 15 years Mortgage, the negative cash flow may become break even cash flow, and fine with it
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Not intentionally...ever. There are no good reasons for paying someone else to live in your house.
Any reason you might think of, are told, that says it is OK is a rationalization. Rationalization is the most expensive word in your dictionary as a REI. Don't ever use it.
You may be looking at the trade off being appreciation and in a good area. Those are future events you have no control over. That's speculation. That's also a single event of gain that is offset by the losses.
You are looking at your loss only being the cash flow, that you think you can cover by other means. The reality is this. There are many more loses your are taking, that are behind the scenes and exponential. You must add together that money, and the money you now have to use from other means to cover the original loses. That means this is a double loss...and that's just to break even.
Now, consider the compounding effect on potential future gains you would have had from that double loss, and no matter how great the potential appreciated equity you might "think" you are going to get, it won't even break even with the losses I mentioned.
The answer is no.....never.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Appreciation has very little value in a negative cash flow property. Why? That appreciated value is virtual money, that can only be accessed by selling the property (in which case you need to recover the losses from the negative cash flow in the profits), or by refinancing...which would just bring you a worse negative cash flow.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
non appreciating areas probably not.. reasonable expectation , 15 Year mortgage, class A tenants.. could be worse things
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
You can get a 30 year mortgage and make extra principal payments rather than getting a 15 year mortgage and having negative cash flow...provides more flexibility.
I can argue against accelerating the debt pay down but that's a topic for a different post.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes8y
I might be doing this wrong in the eyes of others, but yes I have TWO that cost me money every month. The NOI looks great, but when I add in debt service it costs me money. My rationalization is that I am very aggressive with paying off debt (I am 62 years old) and these two mortgages had terms of 5 years and 3 years. All my other rentals pay for themselves and cash flow, so I am paying off the negatives with the positives. In less than three years the debt will be extinguished. So personally, for me, I can live with that. Appreciation has been great, I got bargains when I purchased, and soon they will be nice income streams as the others are. If I didn't have lots of positive cash flow to soften the burden of paying to own these, no I would not have made this move.
- Never throw good money after bad money. If this deal doesn't give you a good ROI, find one that will. Or better yet, create one that will. Avoiding a bad deal is way better than hoping a deal will work out in the future. Don't gamble. Invest. When in doubt, trust the numbers. The numbers never lie.
- 8yShiloh LundahlPro MemberRental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
@Patricia Luna In my opinion the answer depends. What is your goal for this property? Do you just want a property in this particular area? Would this property be less of a hassle than one that may cash flow? Is your goal to aquire specific properties or make higher monthly cash flow or sell when they appreciate? I think the answer is it depends. For most people college doesn’t cash flow but people expect a big return at the end.
So what is your goals with investing and with investing in this particular property?
Also,if you get a chance to listen to the podcast “Get Rich Education” with Keith Weinhold, episode 163. It was awesome. He explained the risks of paying down mortgages on rental properties from a perspective I had never thought of before. It is worth listening to judging on the content of this tread.
My guess is you have not actually sat down and done the real math required or anticipated the headaches of being a landlord/investor.
Assuming you are a hobby investor, you have surplus income to supplement your investment income monthly and you do not mind contributing cash monthly resulting in lowering your actual end profit who cares.
It is a combination of investing and forced savings. Returns will be lower than a investor that operates a business but, as a hobby investor, it's probably OK assuming they also have the funds for major cap expenses, regular repairs, evictions, vacancies and some degree of renovation prior to selling.
Assuming expenses run in the 50% range there will be a small undetermined profit.
My guess is after DP, closing costs, interest on mortgage, expenses and the $250 monthly out of pocket there may be a slim profit assuming some degree of appreciation. Not really worth the time and effort on my part but again as a hobby investor who knows.
As a investor I can not afford 10, 20 or 100 properties each having a negative cash flow of $250/month in order to possibly see a small profit in 15 years.
- Investor · Gansevoort, NY · Member since 2015 · 18 posts · 16 votes8y
Wow, most people do not appear to be reading @Patricia Luna's actual post. She has money to invest and is tired of searching (search costs are *actual costs* in time, energy and $ sitting around not earning returns). She has a property that is (1) nearby (so she can easily manage it herself), (2) can be rented immediately and (3) is looking to pay it off fast (15 yr mortgage). If you include mortgage pay down, the returns will still be decent. If you take this a bit further, if Patricia has a good relationship with her bank and can free up the equity in this building in a few years for a down payment on another property (when a better deal does pop up), the returns will be compounded. So, @Patricia Luna, I would answer yes to your question. In this case, buying a property with negative cash flow can make sense. The BP podcast emphasizes almost every week that every real estate deal is different -- so why give textbook answers as if they were all the same?
It is my belief that rental properties are good for at least 4 reasons:mortgage pay down, cashflow, tax benefits and appreciation.Which of this is most important to you?Personally I would rather a property that allows for all 4. As a buy and hold investor, appreciation is the last on my list, it will come over time, am not too worried about that.A positive cashflow is a must for me as otherwise it defeats what I am trying to do, which is to essentially use real estate to find financial freedom.
- Boston, MA · Member since 2017 · 55 posts · 10 votes8y
i know people have given great advice. However, i just want to add one thing. It seems like they thinking about it as a saving with the given down payment and feel optimistic about the appreciation.
In my opinion, this is not a lucrative deal. You sound like you are emotionally coonectes to thia area, house or deal in general just because of other reason than ROI which in this case is negative. I would not do it if i was you.
- Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes8y
Hi,
Am i mistaken or the only reason to chose a shorter loan term when longer term can be paid off early anyway is if the rate you can get is significantly lower on short term.
Unless you talk about 2% addon for 15y additional term, the shorter loan deprives you of a cheap option to finance at historically low rates.
You take loan either to afford more property ot to enhance returns.
If investment has higher irr than the mortgage rate, take the longer loan. It will enhance your return. So if you have infinite money, you take the longer loan ifthe terms are fair.
The 10y or 15y option makes sense when rates are high, like 7% and 30y interest is really high.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes8y
Sounds like a recipe for trouble. $250 loss each month is a large loss and couple that with the thought that we are likely toward the top of the current market cycle.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes8y
I am truly shocked at how many folks on here are ready to immediately write off a $200,000 A-Class asset because of a $3,000/year variance.
If $3,000/year makes or breaks an investment that large for you, you are taking your eye off the ball & getting lost in the spreadsheets. When you get lost in the spreadsheets you miss the bigger picture. $3,000/year is pennies!
Despite the popular belief of many people on this site successful Real Estate Investors don't make their fortunes in Real Estate with the goal of quitting their 9-5. Those who grow a huge net worth in this business are those that understand they need another source of income on an annual basis and they should use Real Estate as a vehicle to invest said money for long term gains. Not the other way around.
I hear a lot of folks touting the goal of owning 100 doors. Guys I passed that 100 door goal many hundreds of doors ago. Guess what, I do not live off of my rental cash flow. Not even close. I live off & reinvest the income that my portfolio of active businesses kick off. Sales, PM, Insurance, Title, Storage, Utility aggrigation, Construction, Laundromats etc... The most successful people in the world who grow the biggest Real Estate portfolios are the same way.
- Gardiner, ME · Member since 2015 · 190 posts · 177 votes8yIt’s so hard answering questions without knowing someone’s background and experience. It’s encouraging that you have other properties. I personally believe you should look at the portfolio as a whole and individually. There is a place for appreciation and cash flow. I wouldn’t be too worried if you were losing a little bit of money, for a short period of time in a highly appreciating market in favorable market conditions. But in this case you are subsidizing 20% while managing yourself (which pulls away more wiggle room.) If you are planning on a long term hold you *will* have cap ex. Taxes will go up. It’s going to take a while to get to zero. I don’t know the Harrisburg market so it may or may not be appreciating. If the house is in the path of progress or you were planning on changing the use to realize more gain then that would change things. And we are in year ten of a seven year cycle. I don’t know the future but that’s not a position I’d bet on. And betting is exactly what you are proposing. It’s one thing to bet on something with good fundamentals. And it’s also a different situation if you have a knowledge advantage. But you appear to be planning to bet on the market to continue to rise significantly in the long term. That is a risky bet without the promise of 5x or 10x returns to offset the risk.
- Contractor · Truro, Nova Scotia · Member since 2017 · 32 posts · 13 votes8y
I would consider it. It sounds like you are looking to build your net worth and are able to sacrifice cash flow for it.
What is the cap rate on the property? If it is better than anything else in your market, and you're not willing to invest out of your market then it sounds like it may be a good idea to go ahead with it.
On the other hand, if you were able to find a property that did cash flow, it may make more financial sense to invest the profits from that property into something else for a better overall net worth gain? I guess it would depend if you have experience investing in other asset classes, what kind of rates you could get out of them, or if it would make enough profit to buy another income property down the road.
- Rental Property Investor · Denver, PA · Member since 2017 · 6 posts · 2 votes8y
@Patricia Luna I wish I had known more about real estate strategies before buying my townhouse in Leola, PA. At my stage in life I believe it would be better for me to have extra cash than to have tenants just paying down my mortgage.
However, my property manager is a big fan of newer townhouses due the low maintenance and good renters you can get. If you can afford the negative cash flow, I would say go for it.
- Real Estate Agent · Tulsa, OK · Member since 2016 · 408 posts · 242 votes8y
The only time I would purchase a non-cash flowing property is only if the equity in the house or if I have no money in the deal.
I agree with @James Wise 100-200 dollars is not that much in the grand scheme of things, especially if one has a decent income. But honestly, I would probably pass on the deal.
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