Rental Property Investor · Los Angeles, CA · Member since 2019 · 25 posts · 52 votes
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
Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
7y
Eventually you’ll raise rents to break even. Everyone will give their two cents but you gotta do whatever is right for achieving your goals. I have a condo in Southern California that “cash flows” 70 bucks a month. It’s in a great area, won’t sit vacant for more than 1-2 weeks to switch over tenants. And because the hoa I avoid a lot of maintenance issues. While I could sell and go make 1000 dollars a month cash flow in other markets.... I’ll hold. When the tenants pay This thing off it should net me 2000/month or more in cash flow.
For anyone that has not noticed it yet there is no way in he** a 500K property is going to have all in expenses as low as $2500 per month including mortgage. Forget about the lost opportunity value of his equity.
Long term $300 negative cash flow is dreaming in technicolour. No possible way.
Rental Property Investor · Los Angeles, CA · Member since 2019 · 25 posts · 52 votes
7y
@Thomas S. Hi Thomas , you are right . I haven't included the maintenance fee for my property but to be honest , the old owner has remodeled and fixed all the major damages ( roofing , plumbing and flooring) . I have rent it out for over a year but I haven't paid anything for maintenance yet .
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Bill Brandt just a couple points on your comment. He's likely negative $800/mo when you include proper reserves, not $300. So that $36,000 in the hole at year 10 is really probably closer to $100k in the hole.
If you were to take that $800 negative, and make it a $200 positive cash flow, compound the interest at 10% over 10 years, he's behind by $206k if he had sold and purchased a cash flow positive property.
Would you bank on $200k appreciation in 10 years? If you include the capital gains tax on the future sale, hes probably closer to $300k behind, and that's only 10 years.
That's why I would sell this property, and move my investment to a cash flow positive market.
Los Angeles, CA · Member since 2018 · 14 posts · 13 votes
7y
Hi Vinh,
I know the area well - Definitely a hard market to cash flow in. If you're in this investment strictly for cash flow there is only a couple things you are going to be able to change: Increase Revenue, Reduce Costs. Try switching from a property management co to self manage to get rid of the fees. You can use a free site like Cozy.co to manage the rental payments and make them automatic. Increase rents after the lease term is up.
Also, depending on how long you've had the property selling might not be the best bet. You are going to pay the real estate agents 6% on the sale, get hit with depreciation recapture on your taxes, and if there is any profits left at the end of the day you will pay capital gains on that (unless you qualified the property as a primary residence and haven't taken the exemption within the past 5 years). I just got out of a property in LA for the same reason - made sense when it was my primary residence but after moving out the numbers didn't make sense compared to letting that money work elsewhere.
Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes
7y
I'd bet all MY cash flow that, the way things are going in CA these days, the OPs property taxes will be creating a significant headwind to any appreciation (which is speculative, BTW) over the next decade.
I'd take the capital losses associated with the transaction after selling and stick the money in an ETF or mutual fund, then sit on my butt for the next 10 years and get a modest return, all the while thinking of the "lost" opportunities of having to manage my PM, trying to evict a tenant in the state of CA, paying for turnover.
If you have a PM anyways, better to invest in a cash flowing market someplace else where the return is positive. Heck, you may get appreciation ON TOP of your cash flow, too.
"Live where you want to live; invest where the numbers make sense."
I'd bet all MY cash flow that, the way things are going in CA these days, the OPs property taxes will be creating a significant headwind to any appreciation (which is speculative, BTW) over the next decade.
I'd take the capital losses associated with the transaction after selling and stick the money in an ETF or mutual fund, then sit on my butt for the next 10 years and get a modest return, all the while thinking of the "lost" opportunities of having to manage my PM, trying to evict a tenant in the state of CA, paying for turnover.
If you have a PM anyways, better to invest in a cash flowing market someplace else where the return is positive. Heck, you may get appreciation ON TOP of your cash flow, too.
"Live where you want to live; invest where the numbers make sense."
@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 .
What your market is telling you is to NOT invest for cash flow there. You don't invest where you live, just because you live there. Knowing the market isn't the starting point. Investing in a market that makes money is...then, know more about THAT market than the one you live in.
I agree. There’s lots of unknowns. But you need to back your numbers down. You’re counting reserves (somehow of $6k per year for 10 years) and extra negative cashflow sent to pay down the mortgage as money that’s been spent. Neither of those 2 amounts are being spent.
One’s being held to pay future expenses, and certainly not $60k in reserves on one property, and the other is paying down debt and lowering interest expense. So he’s getting a guaranteed return on that extra money.
So the real difference is between $36k and maybe $100k on the high side. But yes I would put the odds at $200k (40%) appreciation in 10 years as pretty likely. Certainly I would expect a double in 25 years. (Less than 3% per year.). Of course they aren’t guaranteed but I’d say likely.
It’s not an optimum strategy, but neither is selling and taking a massive loss to invest in an area he knows nothing about. He’d be better off with a stock index fund.
Thanks for at least listening. Neither of us has a dog in this fight, I don’t win if he stays, I assume you don’t win if he invests out of state. Just hoping to provide a counter balance.
Newbie mistake. Expenses have nothing to do with yesterdays costs. They are averaged over the life of the property. They would be approximately 50% of the monthly rental rate assuming your rent was in line with the value of the property. In your case rent should be 4-5K in real world terms. CA is not the real world. .
Rental Property Investor · Los Angeles, CA · Member since 2019 · 25 posts · 52 votes
7y
@Brian Bellanca Hey Brian , thank you for your sharing. Thank you for your idea on how to cut cost and raising profit . Yes , LA is getting more and more expensive in term of housing. It's hard to get positive cash flow over here . I am thinking my rental property will be my retirement so I keep it for long term . There are several reasons I would like to keep this property :
1) This is nice area and personally I think I would bet on appreciation. (around 3 % per year) . It still has some potential to grow.
2) I am not type of high risk taker so for me going out of state to invest some cash flow area wouldn't good idea. I do know that high risk , high reward . If that's the case , I would like to choose : Stocks, ETFs or mutual fund.
3) Personally I think this area is more attractive to renters so the turn over will be low.
Anyways , again thank for sharing your tips and would like to hear more from you and everyone .
Hey Jason. I was considering the $30k in commissions a pretty massive loss.
But, on top of that he has to sell to an investor as he has a new renter living there. I assume a year lease. So he can’t sell to anyone that wants to live there
So if it’s a $500k rental with negative cash flow, as an investor, how much will you pay for it? $400k? Maybe less maybe more? That’s a massive loss. He basically loses his $125k downpayment between commissions and lower price and walks away with nothing. So he has nothing to invest in this new cash flowing property everyone’s suggesting.
He could always try to buy the tenants out but in California he certainly will be in a weak position. If I was paying $2200 in rent and just moved in it would take at least $20k to get me to move, maybe more, depending if the spouse loved the place and what I made at work.
Dammed if you do and dammed if you don't. There is no winning in this situation. It will be a flip of the coin to see if he can hold on long enough to break even.
Specialist · Santa Barbara, CA · Member since 2017 · 38 posts · 21 votes
7y
I am dealing with the same issue right now in Santa Barbara CA. I am eating a few hundred a month. It will be a few years until I can refinance and break even but worth it to secure a nice socal property.
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
7y
@Johann Jells is interesting and I am on his side of the argument for your investment.
Well located, high quality real estate usually has a lower cash flow. When was the last time properties in SoCal had a positive cash flow? Well they do, but only after you own them for awhile. I believe that long term owners of such real estate end up with more wealth. Johann Jells is from Norther Jersey, which is on the periphery of some of the best real estate in the country.
You put 25% down. If you lose $300 a month, then in three years, it is the equivalent of putting another 2% down. Not the end of the world. By then, hopefully you can raise the rents a bit more to offset this.
Housing in California is pricey because the demand exceeds the supply. It is a difficult place to build new housing stock. It is a State with a dynamic economy and high demand to live there. Therefore appreciation and strong demand will be a factor in your market into the future.
One slightly negative factors is that your negative cash flow might be higher if you encounter repairs or turnover. Another is that it is a difficult place for most to invest because of the larger cash outlays required.
Phoenix, AZ · Member since 2019 · 33 posts · 12 votes
7y
I'm no pro but I think you should sell and look outside if California if cash flow is what you want. As rent goes up so do other expenses, and I saw early in the thread that in 52 no thanks you will be positive. IDK about you but 52 months is a long time to be paying on an INVESTMENT.
Now if you want to turn around and sell this property in 5 years for a profit or reside in it yourself at some point then that is a different story.
Rental Property Investor · Palmdale, CA · Member since 2016 · 122 posts · 88 votes
7y
@Vinh Huynh, our personal goals are different and it’s important not to compare California market to the other markets where cash flows are high with a very little appreciation. I bought my primary residence in Palmdale, California in 2013 and it appreciated more than 60% within the past 6 years. I strongly suggest you hold onto this property if you have a good W2 income to manage the negative cash flow because you are investing for retirement. When you are investing for retirement and you are in your thirties or forties, you have to consider the value of your property 20 years from today. Note that almost everybody wants to live in California, so we may not see reduction in property prices any time soon. I suggest you read a book written for those investing in California titled “Buy and Hold Forever” by David Schumacher. You will love it because it provides real world examples and most of his properties are located here in California. I wish you good luck on your investment journey.
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.