Buying a Rental Property that has negative cash flow in Austin

68 Replies

Hi,

I have been presented with a very unique and rare opportunity to purchase the home right next door to me in a very hot neighborhood in Austin, TX. Because of this opportunity to potentially sell both lots to a developer, I am very keen on trying to make this work for the first few years because of the potential long term upside. The one downside that I see to this strategy is that after accounting for all expenses, mortgage, insurance, taxes, etc, there would probably be a negative cash flow of around $400/month. Normally, I would absolutely run away from this deal because of the negative cash flow, but I foresee the Austin market continuing to boom and I could potentially raise the rental rates over time and generate positive cash flow. Does anyone have any advice for me regarding this type of deal and thoughts on it?

Thanks,

Daniel

You're rationalizing a bad deal into a good one.  You're relying on future events you have no control over, and no time table.  You're speculating...not investing.

What's worse, is the negative cash flow ($5k/year), is losing potential profits by not being in play.  You're not only losing money from cash flow(-), but you're losing potential profits from an investment that wasn't taking away your profits...and your seed money at the same time.

Those profitable returns you're losing, is (should be) exponential. 

@Joe Villeneuve thanks for all of the insight and information into that! 

With the area appreciating around 5-8% per year, I feel that I could sell it if it became that large of a financial burden. Not sure if this helps out at all, but there are 3 co-investors on the property, so the financial hit would be minimal. Do you ever see a reason when going for an appreciation play makes sense over strictly cash flow?

@Steve B. that might be true of some areas, but definitely not true of Austin overall. We just hit 400K for median home price and my neighborhood especially are seeing homes sell for more than 500K now because of the proximity to downtown.

OK as usual I am going to be the contrarian to all those who posted before me.  

A little history.. I bought my first home ( not my absolute first home ) but the first home I bought in Palo Alto in

1984 for 185k... huge money in those days.. rest of bay area and even SF was maybe 100k  but palo Alto right next to Stanford has always been expensive..  So when I decided to move to the Napa valley  I could sell my home now for 400k ish but rents had not come up  so it was going to be 300 a month negative to keep it by the time I paid everything remember this was days of 10 11 % interest..  I thought no way can it go higher than 400k and 300 a month would cost me 3600 a year and in 10 years that 36,000 etc etc.. Well that house 15 years later got to about 1 million so it would have cost me about 50k but not really because rents started to sky rocket as tech came in and a few years later I would have been positive cash flow.. and well you know Palo Alto house is worth north of 3 million today.. 

to be fair I made a big chunk on my Napa Valley home as well but no where near Palo Alto.. 

so PRIME AUSTIN is not like buying a negative cash flow hood house..  so look at potential it could be a fantastic play and if you can easily afford it so what..   

that's the flip side..  and on top of all of that I had prop 13 tax's on the Palo Alto home OUCH if I kept it they would still be under 3k a year for a 3 mil home..  Oh well.. cant let it get you down.. just keep moving.

When a big ticket appliance or mechanical system of the house breaks and you have no reserves because you have no profit you’ll be sick to your stomache . 

@Daniel Tisdale where in Austin are you located? Location is where you want to be in Austin; otherwise walk away.  When you say there will be more than one investor I’m assuming your splitting the cost and profits (if any when you decide to sell)? 

@Daniel Tisdale

There are places just outside of Austin that you can purchase that will give you cash flow and the appreciation you are looking.  Why limit yourself to just buying the house next door because it just that, next door.  Chances are, out of all the 1000's of home for sale this year in Austin, the one next probably isn't the best deal.  I say keep looking and and don't stop until you find one that cash flows.

Always buy with positive cashflow, never buy expecting appreciation.

The deal must stand on it's on now.

You will be paying 400 every month for the privelage to see if the property appreciates. You may as well just buy lottery tickets.

You have to take the emotion out of the equation.

I lived in Silicon Vally for 30 years and did well-lots of good fortune helped. I also know many who bought at the wrong time-were forced to sell and lost their shorts-in Silicon Valley-who’d have thought? Anything I buy today or any other day has to CF really well and cover itself tomorrow too. If I want to speculate it might as well be at the casino-the entry price is way lower and I can walk away any time I want.

@Daniel Tisdale

"Normally, I would absolutely run away"  What you are suggesting is that you are ready to supress your investing instincts and gamble.  

"With the area appreciating around 5-8% per year".......still rationalising, you really did not come on here for advice you were seeking confirmation.

Go all in man, go all in. Good luck.

Originally posted by @Daniel Tisdale :

@Joe Villeneuve thanks for all of the insight and information into that! 

With the area appreciating around 5-8% per year, I feel that I could sell it if it became that large of a financial burden. Not sure if this helps out at all, but there are 3 co-investors on the property, so the financial hit would be minimal. Do you ever see a reason when going for an appreciation play makes sense over strictly cash flow?

 1 - What makes you think you could sell it, and not take an additional loss, if it wasn't already sold?

2 - 5-8% is history.  You are banking on it continuing.  Never a guarantee, and see how #1 applies here too.

3 - 3 co-investors, all making negative cash flow, all banking on a future event they all have no control over.  Yep...that's the perfect scenario.  I wish all of my partnerships were like that.  LOL?

4 - Yes...to the question about an appreciation play.  Never though, losing money while I wait.

Bottom line here is this.  You have no timeline, because you have no control over any timeline.  That means the only thing you know for sure, is you are losing money all through that uncertain timeline...exponentially.

No matter what happens to the value it's going to cost you a lot to hold plus any repairs.

If the price goes up 200k who cares about the holding cost.

If the price goes down 200k because we are at the top of another bubble you will either have to keep paying for a long time or take a huge loss.

I hope and feel like the current price increases we are seeing are natural growth. A lot of people say we are heading for a correction. Either way I'd prefer to be in something that cash flows.

@Daniel Tisdale How many bedrooms? Perhaps you can put a mini fridge and microwave in each one, rent each bedroom out long-term as corporate rentals to all the tech heads coming to town to work. Being long term rentals, they won’t violate any of Austin’s strict STR laws. Rent each room out 1200+/month all bills paid. Find a way to create another bedroom that pumps out income. Boom. Major profit! Listen to me and @Myka Artis podcast LIVE LET THRIVE to learn how to kick some serious butt at STR and LTR’s! ;)

> Not sure if this helps out at all, but there are 3 co-investors on the property, so the financial hit would be minimal.

As would the windfall if the market just so happens to bail you out of your negative ROI asset.

Ultimately with the appreciation v. cash flow debate, what you truly want is IRR aka both.

This deal swings way to the side of an appreciation play, which is enormously risky AND at a time when the market is pushing new heights.

I grew up in California and witnessed the power of appreciation. I can't fully leave markets that are likely to appreciate. The good jobs, the good schools... ultimately it's where the money is.

Why not go with the middle way, where you hunt a little harder to find a "break-even" property in Austin? It's a place where people want to live. If the market does go down, you won't be screwed, but you won't make a killing either.

@Daniel Tisdale Sounds like the combined lots could be worth moving or tearing down the existing structures and building denser and new. Sometimes after you depreciate and write off loses at tax time the hit is not too bad. So $400 month alligator even after 20% down or are you owner financing?

If it fits your plan do it...

Look for alternative or creative ways to increase your cash flow or minimize your expenses. It's possible and done all the time. Pet rent, rent by the room= more cash (more work tho), air bnb, corp housing.... 

Assume worst case scenario on paper. If it still fits your plan then do it. Assuming you have cash reserves...

If you don't know if it fits your plan then that is the bigger issue. (no written plan)

To me it depends a little on how much the payment is. 400 over 2000? Or losing 400 over 4000? Also, obv you don't have to say, but what is your financial situation? If you're high in cash reserve I like the gamble. Or would you be paying the 400 out of your w2? 

Good luck