Negative cashflow on Rental Property .

260 Replies

Originally posted by @Joe Villeneuve :
Originally posted by @John Hickey:
Originally posted by @Joe Villeneuve:
Originally posted by @John Hickey:
Originally posted by @Joe Villeneuve:
Originally posted by @John Hickey:
Originally posted by @Joe Villeneuve:

@Bill Brandt  

Here's an example comparison over the first 5 years:

A) $400k property; 20% DP; $2400/yr negative cash flow, 15% avg Apprec/yr-

1 - Appreciated value = $805k
2 - Appreciated return = $405k
3 - Total cash flow = -$12,000
4 - Down Payment = $80k
5 - Accumulated negative = $92,000
6 - Accumulated Positive = $405,000
7 - Net Gain = $313,000

B) $100k property; 20% down; $7,200/yr positive CF, 10% avg Apprec/yr -

1 - Appreciated value = $146
2 - Appreciated return = $46k
3 - Total cash flow = -$36,000
4 - Down Payment = $20k
5 - Accumulated negative = $20,000
6 - Accumulated Positive = $82,000
7 - Net Gain = $62,000

Now, before you can say:

1 - You can raise rents...so can I
2 - As I raise the rents, I will reach positive CF...except taxes and insurance also are going up. A negative CF property quite often is like stairs going down hill. No matter how many steps you add, the hill keeps going down too.

...and, the big one.

I have $7200/year I can invest into another CF property. If I get a total of $36,000 in CF over that 5 year period, I can invest it in at least 1 more of the same property...and in year 6 I can buy a 3rd. That means while you have one property gaining in equity, and most likely still negative in cash flow, I have 3 properties...all gaining in cash flow...AND equity.

Another issue is starting point...as in "how much money are we starting with"?  Assuming the comparison is based on the same person, the same starting point for both options, that being $80k in cash, the B) option allows for the purchase of 4 of the same properties.

So the revised B), using the same $80k starting point, is as follows:

B) $100k property; 20% down; $7,200/yr positive CF, 10% avg Apprec/yr - x 4

1 - Appreciated value = $146 x 4 = $584k
2 - Appreciated gain = $46k x 4 = $184k
3 - Total cash flow = -$36,000 x 4 = $144k
4 - Down Payment = $20k  x 4 = $80k
5 - Accumulated negative = $20,000 x 4 = $80k
6 - Accumulated Positive = $82,000 x 4 = $328k
7 - Net Gain = $62,000  x 4 = $248k

I have $36,000/year I can invest into another 4 CF properties. If I get a total of $144,000 in CF over that 5 year period, I can invest it in at least 4 more of the same property...and in year 6 I can buy a 3rd set of 4. That means while you would have one property gaining in equity, and most likely still negative in cash flow, I have 12 properties...all gaining in cash flow...AND equity.

The more you talk the more it reminds me of that peanut route.  

Your saying this guy should sell his one investment property in a great market to take a haircut on fees, closing etc.  

Then he should start building a portfolio of smaller, cheaper cash flowing properties most likely far from his house....12 of them! 

How many flights to the Midwest, days away from family is that?

How many LLCs should he open.....he'll be on a first name basis with his lawyer. Accountant will need him to send all kinds of signatures....be filing taxes in new state. Register his LLC with the state Dept of that state depending on where.

 His taxes will be a phone book. Maybe he can use old returns in his fax/copy/scanner.   The amount of paperwork he’ll be signing  a year he’ll need plenty of scrap. 

Better buy a good scanner printer. You’ll be printing and signing a ton   

Not too mention maintenance and expenses.  Most markets Maintenace expenses are 50%.  Probably not so after a few years in Cali   

 In 25 years he’ll replace 36 hot water heaters instead of 3. 

12-24 roofs, countless fridges, stoves, toilets  

No doubt he’ll need a managing agent. Have to watch them. 

Commercial mortgages hello. 

Commercial insurance as well.  

Sounds like a job. 

The guy wants an investment property, he’s got a job.   

 Can you spell P...r...o...p...e...r...t...y  m...a...n...a...g...e...r...?

 Yes, I mentioned he’ll need a managing agent.  

 I don’t see a response to the post, do you have one? the spelling thing is cute.  I’d rather read a real response.  

 The number of properties is a comparison of value using the same starting point but different directions.

You're correct when you mention the number of properties potentially being an issue, but the PM can take care of that...and eliminate the need for constant travel.

In addition, a "boots on the ground" partner will do the same. The reduction in cash flow to this REI would substitute for the cost of the PM, but the Partner would have a vested interest in the property.

I mentioned that I never hold a property longer than 5-7 years due to the CAPEX issues you mentioned.

5-7 years? That’s a very short window.  Get him hammered on realtor,lawyer, title fees. Taxes on the gain. All kinds of stuff I  love to avoid.  

I would invest along side him. Keep the cash flow. Keep it simple. He is thinking long term. Retirement.  The way I see it his strategy has way more tax advantages with a lot less headaches.  

I’d bet unless Rancho Cucamonga cracks off into the sea with the rest of Cali  his investment would beat your 7 in ten years.  

Checking back here down the road.  

 Tax advisors take care of the tax issues.  1031 exchanges work well here.

5-7 years, if property bought correctly (right micro-market), isn't an issue.

@Vinh Huynh , You know, it seems as if you have a good head on your shoulders and thought the purchase through. Actually, I'm really saying that not to you but to everyone else who's been posting... haha. I'm wondering like some other people why we're on page 10 when your question has already been answered a dozen times over. 

Correct me if I'm wrong, but you never asked anyone whether or not it was a "good investment". You just wanted advice on how you might increase the income! 

@Victor S.

8.5 pages of people from the Midwest and south that are all about cash flow telling a guy who bought in ca for retirement/appreciation/the long game to sell asap.

Vinh, 

what you've done is invest in a 'growth' market Vs an 'income' (cash flow) market.  so, your value/gain would come with the higher appreciation potential of SoCal.  That said, appreciation is never a sure thing and sure prices have risen since 2010 and economy looks strong right now but, but let's face it California can be more volatile than many areas and so you may net our fine on appreciation in the near term or you may not...

In general, it's best to at least be break even cash flow, then even if appreciation doesn't happen you haven't been burning cash to own the property.

Dan

he is not cash flow investing. he is investing for appreciation.  if in the right location, it works well.  many in CA have had this work well for them.  you buy in an appreciating, growing area.  you make negative cash flow at first. eventually you break even or get positive cash flow. some time in the future you are sitting on a huge amount of equity.  this is the "get rich slow" method, it is tough, but can often work.

@Vinh Huynh perhaps you can rent it out as a STR in the future or put multiple tenants in there and rent it per room, for example to students. Rent appreciation is very likely to tilt the numbers. Do you really think your property will rent for the same amount in 5 years in Rancho? Meanwhile your tenants are paying down the mortgage AND your property is appreciating. Hold onto it and find a way to squeeze more income out of it. Time and market appreciation will take care of the rest.

Originally posted by @Douglas Wirth :

he is not cash flow investing. he is investing for appreciation.  if in the right location, it works well.  many in CA have had this work well for them.  you buy in an appreciating, growing area.  you make negative cash flow at first. eventually you break even or get positive cash flow. some time in the future you are sitting on a huge amount of equity.  this is the "get rich slow" method, it is tough, but can often work.

 This seems beyond the comprehension of some. At a modest 5% appreciation over 15 years the property will be worth $1,053,613, after investing $100K and $300/mo for a little while. And it will be cashflowing long before 15 years are up. Of course the OP should self manage, but that begs the larger question.

Originally posted by @Rob Massopust :
Originally posted by @Benjamin Maciel:

@Vinh Huynh ID TAKE THE NEGATIVE CASHFLOW FOR 7% INCREASE IN VALUE EACH YEAR- SELL IT AT YR TEN! $$$$

$300 A MONTH IS NOT GOING TO CHANGE YOUR LIFE—- A COUPLE HUNDRED THOUSAND IN 10 YRS WILL.

YOU CAN BEG FOR $300 IN AN AFTERNOON ON A STREET CORNER TO COVER UP THE EXPENSE.

 7% per year in appreciation is aggressive, we are out of that market.

$300 in an afternoon, really then we all should be doing that! 

DONT FORGET TO PUT "IN MY OPINION" AT THE END OF THAT.... TAKE INTO ACCOUNT INFLATION ETC--- 7 % IS A EASY NUMBER, ESPECIALLY WHERE WE ARE IN CA. 

Originally posted by @Johann Jells :
Originally posted by @Douglas Wirth:

he is not cash flow investing. he is investing for appreciation.  if in the right location, it works well.  many in CA have had this work well for them.  you buy in an appreciating, growing area.  you make negative cash flow at first. eventually you break even or get positive cash flow. some time in the future you are sitting on a huge amount of equity.  this is the "get rich slow" method, it is tough, but can often work.

 This seems beyond the comprehension of some. At a modest 5% appreciation over 15 years the property will be worth $1,053,613, after investing $100K and $300/mo for a little while. And it will be cashflowing long before 15 years are up. Of course the OP should self manage, but that begs the larger question.

 A modest appreciation, you are assuming all trees grow to the sky.

If a house in Rancho Cucamonga hits over a million we are all in big trouble. That means the dollar has been debased to almost nothing, interest rates are at 1% or less and everyone is making $300k per year. Economic shambles

Cant assume that figure what so ever - in my opinion

I do not feel we will have a crash like 2008 but more like a flat line and slight decline until prices align with wages - and wage growth has been flat for 30 years.

@Rob Massopust Hi Rob, thanks for your idea. If everything you have mentioned is correct , my property that I live in Monterey Park in Cali still $40k -50k something instead of $700k or $750k now . I do agree that house appreciation is not always true , but I know for sure after 20-30 years it will more expensive than today. We all know that living expense now is way different in 1989 and minimum wage too. So let’s see what happen . At least, my house will keep it up with the inflation. 

Originally posted by @Vinh Huynh :

@Rob Massopust Hi Rob, thanks for your idea. If everything you have mentioned is correct , my property that I live in Monterey Park in Cali still $40k -50k something instead of $700k or $750k now . I do agree that house appreciation is not always true , but I know for sure after 20-30 years it will more expensive than today. We all know that living expense now is way different in 1989 and minimum wage too. So let’s see what happen . At least, my house will keep it up with the inflation. 

 We are hoping but its never a linear progression. 

https://inflationdata.com/articles/inflation-adjusted-prices/inflation-adjusted-housing-prices/

The original poster said “help I am cash flow negative, how do I fix this?”

When someone says that then they are not “investing for appreciation,” they are investing for cash flow and they have failed, they know it and they want to fix it. The correct answer is then to rework (Airbnb) or sell this money losing business and move on.

But no, everyone has instead convinced him that he is a brilliant “investor for appreciation” and he is going to hit a million dollar pay day! 

Complete nonsense.

@Joe Villeneuve  too much BS.  Can’t sell me on it.  OP sounds like he ain’t sold either.  Does he need to tweak the investment? Yes   That’s why he’s here   He wants to help the cash flow   Not change his investing strategy   

Good luck.  In ten years I think his one house will lap your 7 time and again.  20-30 years? 

Your houses will keep up with inflation. 

His will be a rocket ship   

Just so @Account Closed . Not all neighborhoods are created equal. Some are mature and static, others going up or down in their demographics. There are places that appreciate slightly faster than average, and then there are those "rocketships".  Portland, Oakland, Brooklyn, and my own Jersey City are among the latter, driven by real gentrification and demographic change.

But you have to be able to distinguish these places from simple speculation bubbles like S Florida in the middle of the last decade. Have those Houston neighborhoods that have boomed changed, or are the same people simply paying more? I see that in some of the solid NYC suburbs, no change, just people struggling to pay more.  That seems unstable to me.

Originally posted by @Farzan Setayesh :

@Johann Jells

Did you know when you sell (unless 1030 exchange) all the depreciation you had need to pay?

 I'm sorry, I didn't get that. If you're arguing not to want appreciation because you'll have to pay capital gains, that's idiotic. Whether you take your gains as income monthly or as a sale, the taxman gets his bite.  FWIW my plan is to retire on my plentiful cashflow in my cost free apartment and leave worrying about capital gains to my kids after I'm dead. 

@Vinh Huynh nobody would fault you for putting 300-1000 per month into the market but negative cash flow is a no no. You must have tax benefits that equal your out of pocket. Buy another and in time they will be paid off and you have a million in todays dollars.

I just do not get this "cash flow" model of "investing".  The issue is NOT cash flow!  It's return on investment.  For example, I put a large amount of money into a property, say 2 million.  It produces a positive cash flow of $100/month.  Woohoo!!! I have positive cash flow!  But my return on investment is $1200/yr on 2 million dollars.  This is less than 0.01% return on investment.  This is the worst investment ever.

Or, I buy a property with that 2 million dollars that has positive cash flow of $200,000/yr, or a ten percent return on investment/yr.  Not bad.

You can never be sure whether the value of a property is going to increase or not.  So you're best off choosing properties with the best return on investment possible, in markets that you hope are going to increase in price (and rent).  That way, even if the market doesn't increase, and rents don't go up, you still are making money.

Originally posted by @Account Closed :

@Joe Villeneuve too much BS.  Can’t sell me on it.  OP sounds like he ain’t sold either.  Does he need to tweak the investment? Yes   That’s why he’s here   He wants to help the cash flow   Not change his investing strategy   

Good luck.  In ten years I think his one house will lap your 7 time and again.  20-30 years? 

Your houses will keep up with inflation. 

His will be a rocket ship   

"In ten years I think his one house will lap your 7 time and again. 20-30 years?"

How do you figure?  I take my appreciation out in 5-7 years, and invest in in the next house(s), so my appreciation is growing too.  By pulling out my cash, and reinvesting it with the added profits from the inflated equity (appreciation), I'm increasing the amount of money I have invested.  My money is working overtime for me.  

I'm expanding my cash flow, increasing the number of properties (or property values with the same number of properties), and eliminating/reducing my CAPEX/maint. costs. This increased cash flow (which you don't have with a negative CF property) is added investment money. This means I am going to be already at the destination your "rocket ship" is heading for...waiting for you.

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