Negative cashflow on Rental Property .
Rental Property Investor · Los Angeles, CA · Member since 2019 · 25 posts · 52 votes
Negative cashflow on Rental Property .
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesSell this house and buy a property that does cash flow.
No matter how hard you try, you can't change the math.
9 - 10 will always be equal to a negative number
260 Replies
Sorry if I got off in the weeds. I was trying to say that you can live a comfortable life with 4 paid off rentals and 12 will bring in more money than I can spend without wasting it.
Very long story short I was also saying I gave up cash flow for 15 years with short amortization loans so I could retire early.
I chose having paid off properties over having a couple hundred in cash flow per property per month. I tried to explain why with my aversion to debt and paying interest. It was part of my long winded explanation why I couldn’t care less if a property was positive or negative $200/mo. It just isnt/wasn’t life changing money. Having paid off properties is.
Your mileage may vary.
- Rental Property Investor · Jackson, MS · Member since 2018 · 39 posts · 29 votes7y
@Vinh Huynh With so many other opportunities out there, I wouldn’t want to put $125k into something that still cost me an additional 300/mo.
For the same money, I could sell you 16 units in Mississippi near a major university, rehabbed and under professional management that cash flow over $1500/mo day 1. And while you collect your $1500/mo, other people are paying off your mortgage.
- Member since 2019 · 1 post · 1 vote7y
@Scott Rubzin what do you think of WI for investment purposes?
In west coast, majority of rentals come with negative cash flow even you put a heavy down. In Northern CA coast last 35 years homes never cash flow. But there is strong demand for rentals from day one. Investment with 20% down in CA is rare these days.
Want cash flow go to Midwest where there is no appreciation after factoring in inflation. Want both is hard initially.
When investing in real estate, it’s always in your favor to have the ability to put down 25% to automatically have a good equity position in the property. If you are at a $500 negative cash flow per month, you may need to leverage other properties that you own to cover the gap for a while. Another positive to this situation would be the self funding aspect of the property since you are renting it out, so if possible, hold it for a while and apply an equity play strategy and use it to fund your next down payments to acquire more properties from a home equity line of credit. Always run a pro forma to know the P&L projection prior to the acquisition.
@Vinh Huynh When investing in real estate, it’s always in your favor to have the ability to put down 25% to automatically have a good equity position in the property. If you are at a $500 negative cash flow per month, you may need to leverage other properties that you own to cover the gap for a while. Another positive to this situation would be the self funding aspect of the property since you are renting it out, so if possible, hold it for a while and apply an equity play strategy and use it to fund your next down payments to acquire more properties from a home equity line of credit. Always run a pro forma to know the P&L projection prior to the acquisition.
If it were me I'd be hesitant to sell right away because it appears you'll be looking at a loss and don't intend to invest out of state anyway. From the info you've provided, stating you want this property as a nest egg for retirement, I think it makes the most sense to hold (assuming you make enough in your day job to continue investing in this property by making the payments of course). Sure, it's a speculative play, but those saying "negative cashflow investing isn't investing" ignore the dictionary definition of investing:
"the output of money or capital in order to gain profitable returns, as interest, income, or appreciation in value."
Southern CA is highly likely to remain a desirable place to live so it seems like a fairly safe investment. A quick google search reveals Rancho Cucamonga property has appreciated 61% over the last 10 years, so if this trend continues on pace, you'll be looking at about $30,000/yr. appreciation which breaks down to $2,500/mo. profit. Hard to find that kind of financial gain on a SFR in any market that cash flows well, even subtracting your current negative cashflow, which will reverse itself in a few years as you are able to raise rent. Plus your tenants are paying down your mortgage, so all of this looks pretty good for your plan to sit on this property and have it benefit your retirement plan. A few hundred a month negative for the first few years is actually fairly negligible long term in a high appreciation market.
Sure it's speculation, but so is investing out of state, or in any investment vehicle for that matter. Throwing a dart at the map in a market you don't know intimately and putting your money in the hands of complete strangers thousands of miles away seems like the greater gamble in this situation to me. Just because a property cashflows more day 1 does not mean it will be a better investment over time. Sure if you were looking to quit your job and live on rental income you'd need cash flow, but for a more long term retirement play like you have described, CF is much less important. True wealth building is about more than just initial cash flow.
In the meantime, some ideas for ways to mitigate the monthly losses would be to make capital improvements in order to raise rents quicker, look into repositioning it as a short term rental/corporate housing, collect as many fees as you can (be diligent with late fees, collect additional pet fees) and lower expenses by being as hands-on and bootstrapping as much as possible until you can start making positive cash flow on this thing: self manage, mow the lawn, minimize vacancies by screening very well, make repairs and do turnovers yourself, all the things you wouldn't be able to do when investing out of state. Good luck!
- Realtor · San Francisco, CA · Member since 2017 · 408 posts · 361 votes7y
Have you looked into whether you would make more money on Airbnb?
If you want to PM me I'd be happy to run the numbers for you.
From what I can tell there are no ordinances in RC for Short Term Rentals..
- Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes7y
Originally posted by @Bill B.:
Sorry if I got off in the weeds. I was trying to say that you can live a comfortable life with 4 paid off rentals and 12 will bring in more money than I can spend without wasting it.
Very long story short I was also saying I gave up cash flow for 15 years with short amortization loans so I could retire early.
I chose having paid off properties over having a couple hundred in cash flow per property per month. I tried to explain why with my aversion to debt and paying interest. It was part of my long winded explanation why I couldn’t care less if a property was positive or negative $200/mo. It just isnt/wasn’t life changing money. Having paid off properties is.
Your mileage may vary.
I'm on your plan. 15 year notes that will retire when I turn 65. It's so funny to hear people shy away from non-cashflowing investments who would have loved to buy Apple stock in 1990, or any of the other famous tech stocks. Growth stocks by definition don't pay you, and are appreciation plays. Can you imagine someone giving stock advice that no one should never, EVER buy growth stocks and only buy value stocks that pay dividends? They'd be laughed at. Growth RE is the same, but because we usually buy on leverage and get the loan paid and depreciation to boot, there's a lot more parts that work in our favor than pure appreciation.
Lets just look at depreciation, I had 45k in income vanish from the taxman this year, thanks Depreciation! What wonderful nonsense to depreciate an appreciating property. The OP will be saving around $2k in taxes from depreciation, offsetting more than half his $3600 negative cashflow.
@Vinh Huynh, I get a lot of friends/family asking me real estate investment advice (as I'm sure many people here do). And when it's someone with a strong W-2 job, and not really looking to do REI full time, I tend to suggest there's nothing wrong with buying a nice property in a good location that can be rented for break even or close-to break even. That's how a lot of people save up for retirement - get renters to pay off mortgages on a handful of properties and also hopefully earn some solid appreciation over several decades. I think that message gets buried here on BP, because the community is filled with much more active investors who are looking to accelerate their retirement timeline to the n-th degree, often starting with limited financial means.
I don't know if that describes you Vinh, but I'm guessing it might.
Now, going back to your actual question, you don't have a lot of options for getting to cashflow positive. You could try renting it as a short term rental or furnished apartment if you think the location would work, but that would take more management. There could also be the possibility of remodeling to achieve higher rents, if there's value add. Otherwise you either need to just wait for rents to increase, or refinance with more money down.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes7y
CA residential is a more price appreciation driven market. With real estate cycles in most other states you might see a smaller upside and decline in values.
In places like CA and NY you can see wild swings in values based on the cycles almost like a roller coaster. Many people that bought at the bottom in CA had rent growth and appreciation make them positive with huge gains even though they might have started out neutral or negative cash flow. Right now you likely have bought close to the top cycle in CA. So it might take longer for your rent growth to get to a neutral position especially with all of the legislation they are trying to pass there that is in favor of residential tenants.
I do not know much about CA but have lot's of clients who have big gains and 1031 exchange into commercial passive NNN assets and they tell me lots of things going on in the markets. The question is do you need the cash flow today or are you willing to wait for the down cycle and then the next upcycle to happen? It could be many years before you have any considerable upside if any.
I have clients in CA that get maybe 1 to 2% on their money and equity is trapped so they want to 1031 out and own in another state because they do not want to hold long term in CA for another full cycle for hopefully values to go up even higher than they are now.
I think cash flow can be a debatable subject. My clients tend to have various views depending on annual income. Those making 150k a year, versus 300k,500k, 1 million etc.
Some investors want zero returns today. Investors have told me before that have tons of income and cash flow they would rather make cash flow in future years or big equity gains when the tax environment is more favorable to them.
What I have learned over 15 years talking to thousands of investors from all walks of life,income, and net worth levels is that their specific goals and modes of investing are unique and vast. Basically these negative cash flow properties investors are (building banking) them instead of producing positive income right away. I did see in the last downturn when people were holding more than one negative cash flow property and then the downturn happened. Their expected rents per month dropped as tenants left or asked for residential monthly rent reductions.
Then a small negative cash flow can turn into a BIG negative cash flow and if that investor cannot hold on until the next recovery of the cycle, rents, and values they can be in a lot of trouble financially.
@Vinh Huynh, you will most likely cash flow negative as house ages and requires maintenance. You have over $100k invested that is absolutely NOT returning anything. You will not retire rich with this kind of math in real estate investing. Love the cash flow not the investment a.k.a house.
- Lake Elsinore, CA · Member since 2018 · 2 posts · 6 votes7y
@Vinh Huynh my suggestion would be:
(1) to drop the property management company and self manage. You live in LA and Rancho Cucamonga is a short drive away. I self managed my property in AZ and while at times a headache it paid off. It amounts to a 10% savings, putting $220 per month back in your pocket.
(2) I’d also shop around for cheaper home owners insurance. I’m not sure what you are paying but I recently lowered my bill by about $40 per month on my primary residence.
(3) Raise the rent slowly. Check what rents are going for in the area for comparable properties. This can be done quickly on Craigslist. After investigating, can you raise the rent by 1% or 2% without the tenant moving out? This could result in an extra $22 to $44 per month.
With these potential savings you may get closer to breaking even. Hope this helps. Good luck.
- Realtor · Las Vegas, NV · Member since 2018 · 218 posts · 147 votes7y
Rancho Cucamonga has appreciated over 61% the last 10 years.. You obviously realize thats probably the best 10 year gain period in the history of the world for those that bought in 2009-10.. Using the last 10 years as a benchmark is plain silly.. To expect 61% gains over the next 10 years starting at the top of this cycle is likely unreasonable.. As @Joel Owens said, he may have to wait a full cycle just to be in a near neutral position.. To each their own I guess.. I wish him luck, and hope he has a good W-2 job..
- Rental Property Investor · Rockford, IL · Member since 2018 · 84 posts · 140 votes7y
Wow! This is a great thread. I always assumed that low or negative cash flow was a bad thing and not for me. While I still think I should try to get a deal with good cash flow... there are some great counterpoints from some knowledgeable folks on BP here.
- Rental Property Investor · Toronto, Canada · Member since 2012 · 102 posts · 95 votes7y
@Vinh Huynh your plan is a good one if you don’t want to go far in RE investing. You’ll just pour $ into this property for a decade or two
It is necessary to put this one investment into perspective. Obviously the argument supporting one property ownership is much different than that of someone looking to grow a business. One property, viewed as a single nest egg for retirement, with $300 - $1000 per month negative cash flow is much different than looking at having 50 doors with each one having the same equity/same negative cash flow. This should be viewed as a retirement fund requiring a personal monthly contribution ($300 - $1000) on the part of the owner. Contribution level will vary based on maintenance requirements over time. In essence a variable forced savings plan. A retirement fund disguised as a real estate investment.
This thread is based on a single property not a business. The decision one way or the other is not particularly important. This is not a wash, rinse, repeat plan that would be a sustainable business scenario. That is not the intent.
@Vinh Huynh
Im not familiar with California nor do I like negative cash flow real estate. I think there are better investment vehicles out there that are less hands on/risk adverse.
Here in south Florida there are similar investment strategies. Sometimes they pan out..sometimes they dont. Is there a better of both worlds in your area? If you are counting on this 20 years from now maybe an outlying area that you know will become as desirable(closer to the ocean, etc.)
Im not a fan of properties that dont appreciate either but maybe find a middle ground?
If the market adjusts it will delay your strategy by 5-15 years... is it still a good deal? If your forecast works out.. are you making more than an 8% annualized return? Good thing is you’re not alone over there with that strategy and tenants are doing debt paydown. If this is play money for you maybe just make it 600 negative cashflow and pay down some principal first few years. If you’re going to be losing money at least lose it efficiently.
Another thing.. your numbers are wrong. I would use 10% of your total return earmarked for cap ex/ maintenance. This is your money so dont let your emotions cloud the math. Maintenance/life expectancy of materials/equipment is a reality.
- Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes7y
@Vinh Huynh why buy a property for NEGATIVE cash flow ? Are you expecting it to increase substantially in value ? IMO not a good strategy especially in CA, when many are leaving that state. . Sell it and look out of state ,double digit net caps are to be had
Good luck
Originally posted by @Brandon Carriere:
Rancho Cucamonga has appreciated over 61% the last 10 years.. You obviously realize thats probably the best 10 year gain period in the history of the world for those that bought in 2009-10.. Using the last 10 years as a benchmark is plain silly.. To expect 61% gains over the next 10 years starting at the top of this cycle is likely unreasonable.. As @Joel Owens said, he may have to wait a full cycle just to be in a near neutral position.. To each their own I guess.. I wish him luck, and hope he has a good W-2 job..
Let’s not get completely hyperbolic. The appreciation in RC of 6% avg over the last 10 is not even close to “the best 10 year gain period in the history of the world”, but actually pretty close to the historical national average of 5.4%/year going back to 1970. So I think the OP can expect his property to appreciate if he holds. But sure if want to be more conservative: use 3% and he’s still looking at the equivalent return as a property cash flowing $1250/mo with flat appreciation in a higher risk market. Also if you’re right and we’re at the top that would apply to every property, not just this one so not sure what your point is there, he’s already bought the place so not super helpful to recommend he goes back and times the market better. He’s already indicated he plans to hold for a long time which means through market cycles, and people have been saying we’re at the top for 6 years now on here and anyone who listened to them missed out so that’s been bad advice. Generally speaking encouraging people to try to time the market and steering them towards high risk strategies is bad investing advice in my opinion, and yes I would place OOS investing for high cash flow in the “high risk” category, possibly the equivalent of buying a stock with a 13% dividend yield thinking that’s a smart move because the cash flow is great when in reality the company is likely desperate to raise cash and approaching bankruptcy, just like rust belt properties with high cash flow might seem good to a short-sighted investor, when in reality those properties are cheap because locals have witnessed decades of out migration/ industrial decline and realize those properties are on the cusp of economic and functional obsolescence. They may cash flow for a few years but over time a few hundred dollars allocated to capex is not enough to maintain these properties and they implode. OP mentioned he doesn’t have an aggressive investment strategy, and has no desire to go OOS anyway but wants a retirement nest egg near where he lives so for somebody like him the saying “it’s not timing the market but time in the market” applies, and I think this property is pretty good as far as meeting his goals. Would I be recommending he buy 20 of these properties, or even this one if he was considering the purchase? Maybe not, but since he already owns it and it’s a stable rental, I’d recommend continuing to hold for at least a few years so as not to sell at a loss. Owning property in an appreciating market has been one of the most consistent wealth building mechanisms up until now and I expect that trend to continue. Call me crazy if you want!
- Real Estate Agent · Minneapolis, MN · Member since 2014 · 40 posts · 30 votes7y
@Vinh Huynh while there are a few different ways to force equity into a property and with that raise rents, it sounds like this just isn't an investment property. This isn't uncommon, as most places don't cash flow. My advice to you would be to cut your losses and sell it. Go find a property that is already generating profit for you, or that has a clear option that you feel comfortable executing to add value. Sorry that probably isn't what you are looking to hear :(
- Rental Property Investor · Houston, TX · Member since 2018 · 18 posts · 7 votes7y
Cash flow is not the only reason to invest in real estate. For that reason, you should decide if the property is worth holding onto for one of the other benefits which include tax savings, appreciation and amortization. If you keep it then you could purchase another cash flowing property to offset the loss on the first. That is what I did.
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