Negative cashflow on Rental Property .

260 Replies

Hi BP, 

I've just bought a property in Rancho Cucamonga in California  and rent it out from last year. Since I live in Southern California, the price of real estate is kind of high. Therefore , although I've already put 25% for my down payment and the value of the house is about $500k , I've still got month negative cash flow. I rent it for $ 2,200 but my expense is around $2,500 ( included tax , property management fees, insurance and mortgage).  I would like to listen to your advise how to make cashflow break even or become positive. Thank you 

Originally posted by @Vinh Huynh :

@Joe Villeneuve thank you for your suggestion . The only thing I am thinking right now is I can gradually raise the rent to cover up the expense . 

1 - How long will it take before you are at break even in monthly cash flow?  

2 - How much negative cash flow would have been accumulated when this event finally takes place?

3 - How long will it take before you start getting positive CF?

Since you don't start making a profit until you first recover all the cash you personally put in...

4 - How long before the positive cash flow equals the accumulated "out of pocket" (see total accumulated negative CF + down payment), and thus start making money on this property?

Originally posted by @Vinh Huynh :

Hi BP, 

I've just bought a property in Rancho Cucamonga in California  and rent it out from last year. Since I live in Southern California, the price of real estate is kind of high. Therefore , although I've already put 25% for my down payment and the value of the house is about $500k , I've still got month negative cash flow. I rent it for $ 2,200 but my expense is around $2,500 ( included tax , property management fees, insurance and mortgage).  I would like to listen to your advise how to make cashflow break even or become positive. Thank you 

Don't listen to investors who have never seen rising prices and rents. In my area very little cashflows in the SFH or condo markets, but they sell like hotcakes to investors. IMO $300 is very little neg cashflow, and long term you are in a nice investment. At a 3% rent inflation you'll be at even cashflow at month 52.

I'm currently building a spreadsheet model of negative cashflow investing. But look at this simplistic example of neutral cashflow. A 25% down, 15 year mortgage will yield you 9.6% if nothing ever goes up. But you're in a high value area where rent and value do go up.

@Vinh Huynh you'd have to raise the rent by about $800 to truly break even on a monthly basis. Can you raise it $100/yr?

So that's 8 years to break even, but your now 8 years in the hole, so another 8 years of $100/yr increases to get back the money lost over the first 8 years.

Your break even from today is 16 years, is that worth the wait?

Or you could sell, invest in positive cash flow and be decades ahead of this property from day 1

Originally posted by @Vinh Huynh :

@Joe Villeneuve thank you for your suggestion . The only thing I am thinking right now is I can gradually raise the rent to cover up the expense . 

 The other issue you with have is that your costs will not stay fixed while you gradually raise rents. Your costs will increase as well, further delaying your break even point.

Originally posted by @Johann Jells :
Originally posted by @Vinh Huynh:

Hi BP, 

I've just bought a property in Rancho Cucamonga in California  and rent it out from last year. Since I live in Southern California, the price of real estate is kind of high. Therefore , although I've already put 25% for my down payment and the value of the house is about $500k , I've still got month negative cash flow. I rent it for $ 2,200 but my expense is around $2,500 ( included tax , property management fees, insurance and mortgage).  I would like to listen to your advise how to make cashflow break even or become positive. Thank you 

Don't listen to investors who have never seen rising prices and rents. In my area very little cashflows in the SFH or condo markets, but they sell like hotcakes to investors. IMO $300 is very little neg cashflow, and long term you are in a nice investment. At a 3% rent inflation you'll be at even cashflow at month 52.

I'm currently building a spreadsheet model of negative cashflow investing. But look at this simplistic example of neutral cashflow. A 25% down, 15 year mortgage will yield you 9.6% if nothing ever goes up. But you're in a high value area where rent and value do go up.

 We've all seen rents raise.  Negative cash flow investing isn't investing.

your quote:  "At a 3% rent inflation you'll be at even cashflow at month 52".

Why in the world would you want to wait over 4 years just to break even?

Don't listen to people who rationalize poor cash flow in their markets.

@Vinh Huynh i would recommend selling the property in Rancho Cucamonga. It would it to diversify and invest out of state. You would be able to get a few properties cash flowing.

Never a fan of carrying a property with negative cash flow

What states would you consider investing in?

@Joe Villeneuve I agree that I am losing money now but to be honest , with the house value keep going up in California , it's hard to find positive cashflow market in my area ,unless , you need to put more down payment . For those houses that can give me positive cashflow , it's not really attractive for renters or it is not in nice area. I think I should treat it like my retirement . 

Originally posted by @Joe Villeneuve :

Why in the world would you want to wait over 4 years just to break even?

How about if the property values are rising 20% a year in a gentrifying area? If you have leveraged at 75% LTV, that's an 80% annual return.

This is purely a speculation move. Nothing you can do will turn this into positive cash flow. The longer it takes to get closer to positive monthly the farther you fall behind overall. One step forward two steps back.

If you can not manage negative cash flow until you sell, relying on appreciation, you are best to sell now.

Let me get this right. 

Op should sell and pay $30,000 in commissions ( or counting discounted price because it has renters in it.) so he can start over in an area he knows nothing about, to avoid $3,000 a year in negative cashflow?

Does anyone suggesting this think in 10 years when he’s invested (not spent like when selling) that same $30k in negative cashflow this house will be worth less than $600k? $700k? Plus he’ll just owe another $30k less  

i’m Waaaay more concerned about the property being in the renter’s paradise called California than plus or minus $2-300/mo. In cashflow. Nobody’s life is changed by that amount of money, especially when they own a $500k rental. 

@Johann Jells Hi Johann, thank you for your sharing . I do agree that its hard to find positive cashflow in our area . What I am expecting for is the same what your shared : high value area , hight rent and easy to attract the renters. I am treating it as my retirement too so I would say this is my low risk investment. 

@Bill Brandt

Hello fellow Las Vegan..  Wouldn't he likely be losing 10-12% or more per year in opportunity costs/potential gains, compounding annually on top of the $3,000 he's already losing?  

Seems like thats ALOT of catch-up ball he'd be playing..  And seems like a lot to bank on, some random house in Rancho Ooghamuga gaining another 30-50%..  

Originally posted by @Brandon Carriere :

@Johann Jells

Where's this crystal ball of yours?  Can I borrow it?  Asking for a friend..   :-)

 It's a different type of investing, and it usually takes some local knowledge. It can pay off tremendously versus the slow and steady cashflow.

My 1st property bought in 97 is now worth as a teardown 56 times my 25% down payment , based on an identical lot sold across the street. Would take a lot of negative cashflow to have made that a bad investment. But it did cashflow from the 1st and I have very little to complain about. Another property bought in 04 did not cashflow at first, but it has now doubled in value with no end in sight as it is in a dramatically gentrifying area that is finally hitting its stride.

@Brandon Carriere

10-12% on $2-$300/mo isnt even factoring in if we’re ignoring the time out fo the market, the new loan costs, the lower price he gets as a rental, the time involved researching any/every market, vacant time looking for new tenants, etc etc etc. 

I dunno his situation any better than those that say sell sell sell move to another market constantly. We don’t know if he has any equity. Maybe he bought as a primary and would only break even if he sold? Especially since he has to sell to an investor that honors the current lease. 

The house he has isn’t some random house, it’s one he bought, but the one he bought out of state per other’s suggestions would certainly be random. 

$600k was only a 20% gain in 10 years, that’s 1.5%. He probably would get closer to $750k, that’s 3.5%. 

It just gets old to hear the cashflow story from people that will not even entertain anyone else’s opinions. You want cashflow on any property? Pay 100% cash. It will probably cashflow. But it turns out leverage is good. 

I hate owing money and I hate paying interest. So I did all 25% down 15 year loans, kind of a middle ground between paying all cash and paying 5% down 30 year loans. Now 15-20 years in I’ve got more and more paid off properties but all that money is being snowballed in to paying off other loans. I assume more than half the people on BP don’t need real estate cashflow any more than they need their stock portfolio to cashflow, but they keep getting beat over the head with “this is the only correct way, this is the only metric that matters!”  

A guy who grew up in the modest Midwest can’t spend the cashflow from 12 paid off Vegas properties. Maybe I should start posting that if you’re property isn’t cashflowing over $1200/mo you should sell sell sell. 

Ps.  Everything above is just an extended rant of seeing people post the exact same opinion to every poster without bothering to read or learn anything. I apologize, I was going to say in advance, but I guess it’s in arrears, since the rant is over now. :-)

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here