Negative cashflow on Rental Property .

260 Replies

@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 :(

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.  

@Vinh Huynh

Not sure what your local ordinances allow, but have you considered a model such as padsplit? Basically separate people rent each room and is managed by padsplit. The total rent received is generally a good bit higher than if you just have one person/family renting. Seems to work really well in high priced areas and people would pay $1000 for a bedroom.

@Vinh Huynh I also live in Southern California. It’s tough to get positive cash flow here. But the long term appreciations can be better than a lot of out of state investments. If that’s you’re target for the rancho property and you want to hold on to it, you can pull cash out of it and invest in positive cash flow properties (possibly out of state) to balance out the negative cash flow in the rancho home.

@Vinh Huynh

Don’t kno anything about the Cali market but based on the info given, I’d say shop around for cheaper insurance (without losing any coverage) and same for property management. Apart from that, are there any repairs/upgrades that can be done for a minimal upfront cost that will get you a higher rent? Are U paying for utilities that maybe you shouldn’t be? Again just based off what I’ve read. Hope it helps.

@Vinh Huynh , Just an example for the nay-sayers out there who don't live in CA... My hairdresser is retiring this year with two $4mm homes in Palo Alto. She's selling one and moving closer to San Jose, and the other one she's just keeping and renting  with positive cashflow until she thinks she feels like getting the equity out. Call it speculation or whatever you want, but this is not an isolated story around where I live and invest. 

@Vinh Huynh

First, any way you can self manage to lower costs? Second, this type of speculative investing is one of the things that crashed the housing market a decade ago. I lived in CA then. People buying negative cash flow properties on interest only loans thinking they would just resell at a profit in a few years before the principal came due. House of cards investing.

Originally posted by @Robert C. :

@Vinh Huynh , Just an example for the nay-sayers out there who don't live in CA... My hairdresser is retiring this year with two $4mm homes in Palo Alto. She's selling one and moving closer to San Jose, and the other one she's just keeping and renting  with positive cashflow until she thinks she feels like getting the equity out. Call it speculation or whatever you want, but this is not an isolated story around where I live and invest. 

YUp  wish I would have kept my two homes in Palo alto but I drank the cash flow kool aid.. worse thing I ever did.. one would be 3.0 now the other 4. o and I was in them less than 1 mil total in 1989.. now 1 mil in 1989 was a tidy sum compared the mid west or fly over country.

out in non appreciation markets there is NO other reason to own rentals other than some positive cash flow and mortgage pay down and tax breaks..  NO other reason at all.   

I have a property in Rohnert park right next to the Graton Casino I bought in mid 90s for 27k  4 acres tax's 200 a year just sits there.. just put it on the market for 3 million will take two though  :)  its all perspective.. and where you live I made more on my bay area properties in appreciation than I could have possibly hoped to make in a life time leveraging small dollar rentals or drip income at 200 a month per door.. but to be fair I am not an investor I am a business owner and we create income with commission s Points  interest delta building new homes etc etc.. average investor cant do that .. they don't have the skill sets or experience to get the financing to pull this stuff off.

So I totally get the buy a rental house try to scale it for the average W 2 or high income earner who is focused on their career.  

Originally posted by @Anthony Wick :

@Vinh Huynh

First, any way you can self manage to lower costs? Second, this type of speculative investing is one of the things that crashed the housing market a decade ago. I lived in CA then. People buying negative cash flow properties on interest only loans thinking they would just resell at a profit in a few years before the principal came due. House of cards investing.

 Yup that was the definition of gambling.. Bay area or CA is like any other place you need 10 year holds .. not buy and flip with no value add in 12 months that is total speculation.. lots of people made a killing do ing it.. myself included but lots of folks got their clocks cleaned as you mentioned.. U cant buy a mid west or fly over country asset and get cash flow at 200 a door then sell in 2 years you will lose money no question about that.. with recapture and sales cost.. so same thing you need those to go up somewhat I value to make sense of them.

@Vinh Huynh

You overpaid for the property and now you are under charging rent!

I am charging 2700-3200 for 500k houses in LA area

@Vinh Huynh

It seems like you need to hope the market goes up in value. Then I would sell and find a 2% property in the Midwest!

@Jay Hinrichs , Yeah, hearing stories about what it was like around Silicon Valley in the 80's always gets me pumped up. There's still always that little voice in my head that asks "can it really keep going up". But from what I hear from the multi-decade investors is that everyone always thought it couldn't keep going up no matter when they bought.

@Anthony Wick , I agree that "negative cash flow properties on interest only" was a terrible idea for many people. However, I don't think that means that you can't buy a long term investment with some negative cashflow IF you can afford it. A lot of people who were able to hold on also made out very well around here. In fact, I sometimes think one mistake some of my friends made during the crash is that they were afraid to do anything with their property when the chips were down. Had they just sold the property they were psychologically "stuck in", and re-invested, they could have recovered with a 100%+ gain instead of a 50%+.

Anways, I don't actually think this is a good strategy for everyone. But it makes the decision making process easier for certain folks when you can tell them to just focus on the basics like location and curb appeal. There are a lot of high earners who could be putting their money to work sooner, except they are too focused on cashflow in a market where it is TOUGH to hit positive numbers. (It can be done, but they don't have the time or inclination to aggressively search, when that time could be used more productively elsewhere). Or, in the worse case, I've seen casual investors get into trouble because they think a property cashflows, but are buying a real stinker in terms of maintenance/tenants. The over-emphasis on cashflow actually distracted them from the things that come more intuitively, such as neighborhoods they already know are solid. 

@Vinh Huynh

I want you to come back in two to three years and explain what happened.  When you sell this property for 700k, I will call it a win.

@Robert C. I think so too, it seems like California thing. No Cal is more rigorous in term of cash flow but value keeps rocketing .I used to live in SF too .

Originally posted by @Robert C. :

@Jay Hinrichs, Yeah, hearing stories about what it was like around Silicon Valley in the 80's always gets me pumped up. There's still always that little voice in my head that asks "can it really keep going up". But from what I hear from the multi-decade investors is that everyone always thought it couldn't keep going up no matter when they bought.

@Anthony Wick , I agree that "negative cash flow properties on interest only" was a terrible idea for many people. However, I don't think that means that you can't buy a long term investment with some negative cashflow IF you can afford it. A lot of people who were able to hold on also made out very well around here. In fact, I sometimes think one mistake some of my friends made during the crash is that they were afraid to do anything with their property when the chips were down. Had they just sold the property they were psychologically "stuck in", and re-invested, they could have recovered with a 100%+ gain instead of a 50%+.

Anways, I don't actually think this is a good strategy for everyone. But it makes the decision making process easier for certain folks when you can tell them to just focus on the basics like location and curb appeal. There are a lot of high earners who could be putting their money to work sooner, except they are too focused on cashflow in a market where it is TOUGH to hit positive numbers. (It can be done, but they don't have the time or inclination to aggressively search, when that time could be used more productively elsewhere). Or, in the worse case, I've seen casual investors get into trouble because they think a property cashflows, but are buying a real stinker in terms of maintenance/tenants. The over-emphasis on cashflow actually distracted them from the things that come more intuitively, such as neighborhoods they already know are solid. 

I grew up in the 50 60 s in Cupertino when it was nothing but orchards and 280 did not exist.. LOL..  when houses got to 100k there I thought the same thing no way can it go up.. so what can I say..  Bay Area is world class real estate you have to look at Bejing Singapore Hong Kong  Honolulu  Paris London Zurich for comps not the US>  and same with Beverly hills areas of prime so cal..  

@Jay Hinrichs , And now Menlo Park apartment complexes have been selling over $800k per door. This year, there are some being listed at $1mm a door! Honestly, I'm not sure how people really make it out here unless you bought real estate (cashflow be damned) or lucked out on an IPO. If you didn't get in on one of those two things in the last 10 years, you were probably priced out of the area. 

Originally posted by @Robert C. :

@Jay Hinrichs, And now Menlo Park apartment complexes have been selling over $800k per door. This year, there are some being listed at $1mm a door! Honestly, I'm not sure how people really make it out here unless you bought real estate (cashflow be damned) or lucked out on an IPO. If you didn't get in on one of those two things in the last 10 years, you were probably priced out of the area. 

Over on my aircraft owners and Pilots forum I am a member of.. some of the bay area pilots are now talking about a bubble etc.. although these guys all own 500k  to 10 million dollar planes.. so they will probably be OK..  But its fun to watch the BP investors talk about it.. then watch the Jet set talk about it..  same conversation  LOL

Originally posted by @Bob Prisco :

@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 

Bob let's keep our facts straight: more people are moving into CA than leaving; A LOT more in fact the population is increasing by ~400,000/year and they’re actually struggling with population growth and a housing shortage. The property this thread is about in particular is in one of the fastest growing areas in the whole country: https://www.globest.com/2018/05/08/surging-populat...

Just for the record.

run a rentometer on your property. you should easily get $2500 /mo unless your lease started at a slow time like Christmas. my neighbors are both paying $2600/mo for 3/2 and a 4/2 in Rancho below baseline but above foothill. above baseline gets even higher rent. most apartments are 2200/mo at least here and a few idiots I know are paying $2800 for luxury apartments. Funniest thing I heard on a podcast lately was how rancho is the bell aire of the inland empire, but it is true.

@Jay Hinrichs , That's why I try to keep my head down and just focus on my numbers and strategy. Sometimes when I talk to too many people who are all talking about bubbles, it really messes with my head! You don't want to be the sucker that stays, and you don't want to be the sucker that goes. :)

@Steve K. well this is very surprising to me . Everyone I know that lives there , and I know many are getting out. San Fran I could not believe what I saw. Santa Cruz, terrible. Orange county, homeless everywhere.  Super high taxes, housing prices are so over inflated, 2 mill for a " normal " ranch.  Oh well, , but the fact of the matter regarding THIS post, why buy a prop with negative cash flow if your looking for cash flow. If one does not care about cash flow, and is hopeful the price will increase, then great. But I believe the question was , how do I generate cash flow on this prop , well unless you can raise the rent to 3k + you cant. So IF this was purchased for cash flow it was a bad investment . 

Good luck 

Updated about 2 months ago

I would like to add, why only 2200 per month? That seem super cheap. I LI, 3k a month gets you not much, and your area is much nicer.

Updated 2 months ago

I would like to add, why only 2200 per month? That seem super cheap. I LI, 3k a month gets you not much, and your area is much nicer.

@Vinh Huynh , as long as you have a good job and can afford the $300 a month negative cash flow, i’d keep it.    It’s a ‘slow roll’, but I think you might regret selling it in 20-25 years if you were to sell it.  Rents are not keeping pace with purchase price, that is true.  But that will usually be the case in California.  

I own 1 property in San Diego, 6 in AZ.  I’ve looked at selling my property in Cali at least a dozen times, maybe more.  I still own it, and it does quite well.  Now.  It wasn’t always the case, but that’s a different story.  

My vote:  keep it.  You’ve already done the hard part by acquiring it.  If you want cash flow for the NEXT property, that’s a different story.

Best of luck.  

Yeah, I think RC is the nice area of IE, good public schools? Might have low hassles to LL is one bonus. Long term could be a winner and likely very easy to sell. 2200 seems super low, could be around the corner to $3k+ idk. Good luck!

Don’t forget simple compounding magic. A 61% gain in 10 years isn’t 6.1% per year. It’s only 4.9%. So if the historical average is 5.4% for RC, the last 10 years have actually been under average. 

Just like Las Vegas’ 150% return over the last 10 years is only 11.5% annually. :-)

Ps. More people have been moving out of California than in for more than a decade. But they keep banging out new babies. That, and “international” population growth  

Pps  the population growth was 400k per year a decade ago, for the last 10 years its been 300k, for the last 3 years its been under 200k. So it is slowing, down 50% in 10 years  

“International migration to California has remained strong over the past 10 years: But about 1.2 million more people left California for other states than came to California from other states. Natural increase—more births than deaths—added 2.8 million residents. Overall, California gained 3.1 million residents over the past 10 years.”

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