Could negative cash flow actually be justifiable some times?

Question

I have an opportunity to grab another set of five rental properties.  They are off-market. Seller financing is an option, but they want a 7 year term.  They are offering that with a rate that is 1 point under the banks around our area. I really don't want to finance through a bank with these, if possible.  I also love the idea of paying them off in 7 years.

I really would love to seller finance this. If I do this 7 year term, I will, at current rental rates (which are actually a bit low, but I'm always basing my analysis on current rental rates with the current tenants) negative cash flow around $50/month for the total 5 property package (1 duplex, 4 small SFH).

I have another 5 rental properties (11 units), that cash flow FANTASTICALLY.  They kill the 1% rule and are over 2.5%. So they are doing great.  Can I justify this other deal with that small negative cash flow?  If I did a 30 year note on these same properties, I would cash flow about $1,100/month. The rent is, total between all properties, $2,150, and they are asking $150,000.  That's almost 1.5% of the asking price.

I feel like doing this actually can make sense, as when I pay these off in 7 years (or less), I will have about $1,700 cash flow from these... assuming rents stay exactly where they are (which is very unlikely).  Any help and advice is very much appreciated!  Hopefully this is all clear.

Thank you in advance!

Craig Jeppesen · Answer

It won’t help for taxes. The extra PMT is going to principle and the irs does not care that you are paying it off early. They give you 27.5 years of depreciation no matter how fast you accelerate payoff. Don’t listen to the couple of negative comments here. This is a decent deal. I would take it anyway in my market. The only thing I wonder about is it really only $430 rent per unit? Can you raise rent or are these all 1 beds?

Dennis M. · Answer

The part I don’t get is the rent total at 2150$ .. this is for 5 units ? That’s 150k for for only 2150$ ?  I would personally not pay 150k for such low rent income even if the seller carried the note .

Nathan Gesner · Answer

Keep us updated on how this goes, @Brian H.

Brian H. · Answer

@Nathan G.

I do have a comfortable reserve. I just have a personal desire to grow it a little more.  I am not doing this deal to save on taxes, that was just something that popped into my mind when I was responding to you as another possible positive side to the deal.

Thanks for responding! Really helpful to hear from more seasoned investors. Very much appreciated, sir.

@Craig Jeppesen @Casandra M. @Robert Biggerstaff @Chris Szepessy

I really appreciate the responses.  It has given me more comfort to move forward. I felt good about it, but it helps hearing from people that are more seasoned than myself.

Nathan Gesner · Answer

Don't you already have a reserve from your other properties? If not, I would recommend skipping this deal. I wouldn't recommend buying a property with a negative cash flow in the hopes nothing goes wrong while you build your reserve.

I can't answer the tax question without knowing all the details of your personal finances. Writing off losses or expenses may reduce your tax burden but you're talking about spending a dollar to save $0.33. It's the same fuzzy math my wife uses to justify a new pair of shoes.

Nathan Gesner · Answer

Can you show us all the numbers? I'm curious why you're in a negative cash flow with a 1.5% return.

Do you have a reserve built up? If so, you don't need to build it in perpetuity. If you have one house, you want a reserve to handle vacancy, maintenance, etc. But when you have 20 units you don't really need a full reserve for all 20 units because the odds of them all going vacant at the same time is ridiculously low.

I suspect this could work but I would be careful to check the numbers, the strength of your personal financial stability, and the strength of your reserve.

Chris Szepessy · Answer

I agree...I'd go for it. My two rentals are owner financed for 10 and 12 years. They basically break even and I've thought about refinancing in order to get some cash flow, but since I don't need the extra money now, I'm gonna wait to reap the bigger benefits when they're free and clear in a much shorter amount of time.

Robert Biggerstaff · Answer

I would definitely consider it if you have some decent reserves built up in your account. That would be a nice acquisition for it to be all paid for within seven years