If rental income doesn’t cover expenses

Member since 2018 · 5 posts · 0 votes

Is it considered bad if the rental income doesn’t cover the expenses? For example paying a certain amount of money per month out of pocket to cover expenses. Or does it not matter because of the appreciation of the house?

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Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

It's an unwise choice. Could it work out? Maybe. But the odds are against it.

Your friend is basically investing $300 a month ($3,600 a year) in the hopes the property value will increase over time and provide a good return. Meanwhile, he's carrying all the risk of losses due to bad tenants, necessary repairs, etc.

If he wants to dump money into something every month and hope the market provides a good return, he should invest in mutual funds.

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Account Closed
Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
8y
Originally posted by @Zachary T.:

Is it considered bad if the rental income doesn’t cover the expenses? For example paying a certain amount of money per month out of pocket to cover expenses. Or does it not matter because of the appreciation of the house?
Try to make every property have positive cash flow. Keep in mind that eventually you have to replace the roof, replace the furnace or AC, have a vacancy, etc. All of these cost a lot of money. Since we don't know how much you are losing each month and how much the property is going up each year it is a little hard to run the numbers to see where the investment is going.
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Zachary T.
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Member since 2018 · 5 posts · 0 votes
8y
Yeah that makes sense. It’s my friends rental investment, I asked him for advice and what he did. House was 430k 2 years ago done a bit of work to it and he said it he has to pay $300 a month to cover everything, I’ve recently read ‘Rich dad poor dad’ and he said liabilities take money out of your pocket so I was unsure if it was bad that it was taking that much out
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Max T.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
8y
Sounds like your friend has a liability, although we can't tell how much the property has appreciated in the time that he has owned it, so...
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Wesley W.
Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
8y
Appreciation is NEVER a guaranteed return. It's speculation, and in my opinion very risky. During the last downturn, a lot of people lost their rental properties whom bought them on an appreciation play. Remember on the the real estate investing tenets, "you make your money when you buy, you cash the check when you sell." I would never consider such a deal, as you've described. Caveat emptor.
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Zachary T.
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Member since 2018 · 5 posts · 0 votes
8y
Very new to all of this, but has helped, thanks for your replies!
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Rachel H.
San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes
8y
@Zachary T. Negative cash flow is not a good thing in my book. ;)
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Nathan GesnerBusiness Member
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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
8y
It's an unwise choice. Could it work out? Maybe. But the odds are against it.
Your friend is basically investing $300 a month ($3,600 a year) in the hopes the property value will increase over time and provide a good return. Meanwhile, he's carrying all the risk of losses due to bad tenants, necessary repairs, etc.
If he wants to dump money into something every month and hope the market provides a good return, he should invest in mutual funds.
The DIY Landlord Book4.7248 Reviews
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Nancy DeSocio
Rental Property Investor · Cranston, RI · Member since 2017 · 171 posts · 158 votes
8y
Hi Zachary,
I'm not sure you'll get any responses that are in favor of negative cash flow, but that said, your friend probably wants to make it work in his favor. If he's made improvements to it, maybe he can bump up rent a bit to offset the cost. Or if the improvements did increase the value significantly, there might be options to refinance or sell (not sure how your market is, but prices have jumped in the last 2 years in many markets). In general, I wouldn't suggest following this path for your own investments, but it doesn't sound like a disaster either.
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Zachary T.
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Member since 2018 · 5 posts · 0 votes
8y
So could work out, but probably not best to get into a negative cash flow deal, which makes sense, thank you!
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John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
8y
How long can you feed something until you go broke? Buy under market...make your money on the buy.
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Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
8y
There was an interesting broadcast yesterday on flipping and pointed to buy and holders who worked with a negative cash flow as being a larger part of the housing collapse then previously thought. Good segment anyway and an interesting listen-
https://www.npr.org/2018/04/17/601925433/a-decade-after-the-bubble-burst-house-flipping-is-on-the-rise
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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
8y
That completely depends on a) whether the house will actually appreciate or not and b) your situation. If you're just buying some random property that doesn't have a lot of appreciation lined up, then you're just tanking yourself and there'd be no point. But if it's a property in a growth area that maybe you'll live in yourself one day or that once you fix it up it will cash flow or...whatever other scenario...then it might make sense. All depends.
But for the most part...that starts becoming dangerous territory.
Why are you asking? Is there a property possibility that doesn't cash flow that you are interested in?
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Zachary T.
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Member since 2018 · 5 posts · 0 votes
8y
@Ali Boone was just to gain knowledge for deals in the future! But yeah I believe it’s in a growth area but I’m not entirely sure if he plans to live in it or in the future get positive cash flow
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Chris Szepessy
Catskill, NY · Member since 2018 · 636 posts · 668 votes
8y
I agree with most that cash flow is important. However, my two rentals just break even. They are owner financed on 10 and 12 year mortgages so my mortgage payment is much higher than if it were on a 30 year note. I'm willing to take the "risk" in order to have them paid off so quickly. Also, my loan was written so that it could be modified if necessary to prevent default. The guy who sold me the houses is basically a mentor to me and wanted to help me get started. In most cases it's not a good idea to break even or be negative cash flow, unless it's for a very short time until rents could be raised after renovations or something like that.
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