Hi I have a unique situation on my hands. I have the opportunity to buy another home in the same communiting area with a VA Loan with 0% down. The current home I live in carries a 15 year mortgage that runs $1550 per month. I think I could rent the property for $1400 per month. The 15-year note is nice because every month about $1000 goes directly to principal with the downside being the high cost. I have about $20k in equity in the house now. I could sell it and take the equity or rent it for the loan pay down and just deal with the negative cash flow. Has anyone ever had this problem?
Would you sell it or rent it even though it will cash flow negatively?
Hello Michael! I have not been in that position but with all I've seen tells me that you should try to sell it and cut your losses and go on down the road and look for another opportunity. Do not count on anything good to happen that will help you. Sometimes, you just need to cut your losses if you can try to get rid of what you have and hope that you have some better luck on your next one. Do not take this negativity make you quit. Just keep on going and hope you will balance that bad experience on the next job or maybe go positive and learn any errors will hopefully not hurt you again. This might be when you get the highest price for your deal that will pull money out of your pocket otherwise. If you don't get rid of it that project you might continue to hurt you every month. Get rid of that deal and make it stop hurting you. Best wishes!
@Michael Lee thanks for the reply. I haven't pulled the trigger on the second property yet. I still live in the $1550 per month house. It's a great house, fairly new (built in 2015) and the neighborhood isn't bad. My only thought about keeping it was to rent it and have someone else pay 90% of the mortgage. Tenant pays $1400 I pay $300. Essentially I'd be paying about $150 per month out of pocket every month plus accounting for maintenance and HOA ($150) to keep the property while the tenant pays $1000 towards principal so I would net +$700 I just wouldn't see it in terms of cash flow because it would be tied up in equity. I'd be paying $300 every month out of my monthly cash flow to get $700 in equity and loan pay down every month. Does that make sense at all?
It doesn't appear that you're considering other expenses that will drive your negative cash flow further into the red such as capex, repairs, vacancies, management, etc. Only comparing the potential rent to offset the mortgage will not result in a good outcome for you. The numbers won't even make sense to re-finance into a 30 yr note. If you must move, sell the current residence, get your equity out and bank it until you find a rental property that makes sense. Meanwhile, use the VA loan to get into a new home for 0% down. Good luck.
@Michael Lee it is a loss in cash flow yes (-$300) but a return of +$1000 every month in equity. You still see it as a bad deal?
Do the math.
The negative cash flow will cost you $150 a month or $1,800 a year. It would take 11 years of losses to equal the $20,000 in equity so that doesn't sound to bad. But it's not the whole picture.
Even in a healthy market, homes tend to have a vacancy rate of 5% which means half a month's rent lost every year. What happens if the market turns and the home sits vacant for two months? Can you even afford $3,500 (mortgage, utilities, lawn care, etc.) during that time?
What if you have a bad tenant that causes $3,000 in damages, plus he skips on the last month's rent, plus it takes you another month to turn it around and get another renter. In one fell swoop you have to pay around $6,000.
Keeping a home with negative cash flow is a fool's errand unless you have a financial reserve of 3-6 months saved up. Even then, it's risky. You should cash out and move on.
If you don’t want to sell it, then run the numbers on refinancing to a 30yr. You can always apply any surplus income, after you account for the other expenses, to the principal. It won’t pay off in 15, but it has the best opportunity for you to continue to profit from the appreciation and positive cash flow.
@Nathan G. that scenario sounds frightening. At the moment yes, I’m not worried about paying the mortgage for 2 months but to be hammered with $3k in damages plus two months would no doubt hurt and leave me with a sour taste in my mouth.
Part of me says heck yeah have someone pay the note and cash out in a year or so but the risk is high.
@Cory Smith I'll run the numbers doing this. Unfortunately I don't think I can charge enough rent for it to cash flow. It's a $200k home and can only pull about $1500 max. I'm looking at a PITI of about $1050 per month. I'll run the numbers on the calculator but I think I'll have to end up selling it. It seems like all opinions are adamant that keeping the property is not the way to go.
Thanks everyone for the replies. I love the feedback of those that have more experience than myself. I want to get into the game soon but property values are sky high. I’ll probably just hang back save and wait for the market to go down unless I come across a crazy good deal. It seems like most good deals now you have to have a lot of cash to play with.
@Michael Pitsos I have a rental with similar numbers. Mortgage, insurance and taxes amount to 2000 dollars and we rent it for 1850 minus the 150 a month for property management. So, we're 'losing' 4-5 k each year when you consider the 3600 shortfall plus repairs, etc. To us, we're happy with this because it's in a place where we think the house will increase in value and it's a place we plan to live in down the road. Therefore, we're not concerned about that loss. But of course, that depends on your situation. If we got hit with a 6000 bill for a new hvac system, I'd groan and moan but I'd pay it and move on without much thought. If that would be a debilitating thing for you, then think twice about holding onto the house.
Recently, I sold a rental that was cash flowing in order to do another project and in the process, my realtor said that his motto was 'never sell anything'. I'm starting to think he's right. Good luck!
@Aaron Hollingshead yeah you have a very similar scenario. So you pay $150 for a property management company? The other potential downside I've had someone bring up is that when I go to get a loan to do another rental property it will look bad on me as a property manager and investor because I have a property with negative cash flow leading the bank to believe I am incapable of managing properties and likely to default on my loan. I don't know how much truth there is to that as a simple 3 minute conversation should clear up that confusion. I would simply remind them there are 4 ways to make money in real estate - appreciation, cash flow, taxes, and mortgage principal pay down. By holding this property I am still getting three of the four... If I have the funds to cover the mortgage (3-4 months) and can stand a $5k capex bill every 5 years then I think I should be fine...??? The other thing I see as a plus is the house is almost new (built in 2015) and I have been the only one to live in it and maintain it so I know it has been taken care of. I see these potential CapEx expenses to be a ways out if any in the next 5 years.
Can anyone convince me I am entirely wrong?
I haven't found that to be true about the lending concern. They might, however, require some time to pass with a stable renter (perhaps a few months) before counting that as income for you. Something to be aware of but not something I think would prevent you from getting another place.
Hello again! I would probably get out of a deal I was having negative cash flow that comes out of my pocket. The future is almost impossible to predict and your equity growth could stop anytime. The only way I would stay in is if I new that negative cash flow would end in the near future. You are never to invest because of appreciation. If you get any it should be thought of as luck or unpredicted profit.
“You can’t eat your house”
If you believe as many people do the market is at a high, that $20k in equity disappears fast, and could lead to a situation where you’re underwater and negatively cash flowing. Something to consider with your own goals and risk/reward tolerance. Let us know what you decide to do, I’m curious!
If its negative cash flowing NOW and you don't have a ton of reserves to cover yourself long term for the HOPE/GAMBLE of the appreciation play, then its time to sell, cut your losses and move on
I had a similar situation , had a house it was negative cash flow with a 15 year note . I started renting it with 4 years left on the note . After those 4 years it cash flows rather well
Rich dad poor dad book has a very similar situation with a condo.
You’re losing $$
. Numbers don’t lie.
I like the “you can’t eat your house!” Haha good point.
@Bethany Rankin where in rich dad poor dad book is the situation? I’m currently reading it and haven’t came across it yet.
After evaluating the options it looks like I won’t be renting it. Overwhelming support for me not to do it. I’ll aim for cash flow somewhere else.
@Michael Pitsos can you refinance the first house to a 30 Year note? I don’t know the numbers but it’s likely you will then have a little bit of positive cash flow.
@Michael Pitsos Do you expect your house to appreciate quickly/ substantially? That can be a game changer. Anyone who says you should "never rent a house that doesn't cash flow positively" is short sighted. I currently own a home in san diego I am breaking even on each month and has increased in value $50,000/year for the past four years. As with anything, if the numbers work, rent it.
I agree, none of the big players that I have ever met (or any of our clients) created wealth through cash flow, that’s antiquated. It’s a gamble, and 90% of the time if you’re smart it pays off. It’s all about either flipping or buy and hold, even in the tough times.
I think it depends on your goals. If your goal is to invest in other properties, it might not be a bad idea if you can get the money out to fund a positive cash flow property. Keep in mind 20k in equity doesn’t equate to 20k in your pocket if you go through a realtor, however.
I’m currently losing a small amount of money every month ($200 a month to start, about $100 now) counting expenses on my first home. It was originally my primary residence I bought at the top of the market and was around 60k underwater; I didn’t have much but to rent. I didn’t mind either… I saw it as me paying $100 bucks a month that put many times that more in equity month and would be paid off well before retirement. When I started investing in real estate with the goal of passive income my views changed.
That was about 6 years ago. I now have about 30k in equity. When my current lease is up I plan to rent-to-own it, that way I can structure the deal to minimize (or hopefully eliminate) any expenses during the lease term, get the loan paid down some more (extra 30k in equity, assuming 2 year lease) and avoid sales commissions. Then I can sell it and put the money towards a cash flowing property or two.
I think either decision will eventually pan out if you have a good property in a good neighborhood.
Originally posted by @Abdul Shishi :
Originally posted by @Michael Pitsos:
@Michael Lee it is a loss in cash flow yes (-$300) but a return of +$1000 every month in equity. You still see it as a bad deal?
What kind of logic is this? Principal paydown is counted as return?
If I had money to invest and I was told if you put 300 dollars a month into a fund for 5 years (18,000) and at the end it would net 60,000, I don't think that's such a bad return on investment. If you then told me if I did it for 10 (or however many years is left on the loan) and it would return $1000+ in today's dollars a month for life, I think that's a pretty good return too...
i dont know the exact place but robert had under contract a condo in waikiki and when he told his rich dad about it and they looked at the numbers he was losing money every month and he canceled the contract.
@Abdul Shishi that is exactly my point. Why would it not be counted as a return? Someone is paying down the note every month $1000 for me while I pay $300 (CapEx, Maintenance, Property Management) to maintain the property each month. Yes, it's illiquid in the sense I have to cash out the property (sell, cash-out refi) to see the actual money, but it is there (as long as the house doesn't depreciate).
@Brian C. the rent-to-own isn't a bad idea especially for your scenario. Sounds like you made the best of a less-than-ideal situation.
@Joshua Davies @David Campbell @Diane Campochiaro I can't do a thirty year note. I unfornately just refinanced from a 30 year to a 15 year note in Jan (ill timed I know and hindsight is always 20/20). I mean I guess I could I would just have to pay closing cost again and I don't want to spend $3k to do that. I ran the numbers and by estimates it would still cash flow negatively with a 30 year note. Also the house will not appreciate anymore I do not believe. It is the nicest house in the neighborhood unfortunately. That is one thing that does worry me. I can get $205 for it now and make about $20k if I sold it. I am worried that when the market goes down (within the next 2 years I believe) that the value will drop to $160k and I will lose my equity if I am forced to sell then. Of course I could hold but then I'm worried about my ability to rent it for $1400 which would cause me to come even more out-of-pocket even more every month.
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