Negative cashflow on Rental Property .

260 Replies

Originally posted by @Cody Z. :

@Joe Villeneuve

RE: STR - That would be something like Air BnB or VRBO which would be a nightly rate and would allow the owner to command a higher rent over the month cumulatively. I've spoken with plenty of investors who swear by STR. That turns a non cash flowing property when leased annually into a positive cash flowing asset.

RE: An asset being “positive” - What you’re saying is misleading to new investors. Whether a property has positive cash flow or not does not define whether or not it is considered an asset, book definition or performance wise. For example, if I paid $3k annually (-$250/ month cash flow) and someone is paying ~$2.2k toward my principal, interest, taxes, etc then i am still making a profit. In addition, I’m picking up appreciation and the tax benefits.

BP members get lost in cash flow numbers and obviously it depends on the investors goals but saying it’s not an asset because of cash flow - especially when it’s rented for most of the monthly payment can be misleading to people starting out.

 "...if I paid $3k annually (-$250/ month cash flow) and someone is paying ~$2.2k toward my principal, interest, taxes, etc then i am still making a profit..." 

No you're not.  The money you are paying towards the principle isn't new money.  All you're doing is taking money out of your bank (cash) and transferring it to the principle payoff of the property.  It's the same money....just in a different form.  That's not profit.

Now, if you have positive cash flow, the source of that money paying down the principle is coming from the tenant...NOT YOU.  That is when it is new money...profit.

Great responses for both sides in this thread. Interesting read/opinions. Let’s not over complicate your situation. You’re into the property for 125k. Let’s say you lose 500/mo for 15 years(90k). You’re in for 215k. Let your tenants pay down the mortgage. Factor in maintenance of 60k over the life of the investment. 275k. This asset will probably be worth 6-700k 30 years from now. Also, you’ll be able to leverage it down the road, tax benefits, etc.... It’ll be a win for you, eventually. It sounds like you want to diversify your portfolio as opposed to invest in RE. Let the guys looking for $200/door/month go invest in the Midwest. That isn’t your game. Ca real estate is a whole different animal.

@Joe Villeneuve

Sorry I disagree - just because you don't completely cover the PITI doesn't mean someone didn't cover 95% of the your costs. For example, if this same percentage of rent was applied against your payments for the life of the loan you would effectively paid very little towards a property you own outright not including appreciation, taxes benefits, etc. Just because the property doesn't completely cash flow doesn't mean you take a loss...

Originally posted by @Joe Villeneuve :
Originally posted by @Vinh Huynh:

@Jason D. I see . The only thing I am thinking right now is waiting for raising rent gradually to cover up my expenses . 

 ...and while you wait, for something you can't be sure of, and have no control of...you're losing more money by the month.

 Not necessarily. There's this thing called appreciation as well. It's been pretty strong in California the last 6 years or so.

I understanding that exiting can be expensive.  Super expensive when you calculate the net purchase and net sales.  But cutting your losses may be the best option.  That said...you can't change the numbers so any "extra" money saved or earned will have to come from YOUR hard work.  Can you axe the PM and take rents/communication directly?  Can you do any work to add value?  Just my two cents.  But even bad deals are learning experiences, you just pay for the education.

Originally posted by @Cody Z. :

@Joe Villeneuve

Sorry I disagree - just because you don't completely cover the PITI doesn't mean someone didn't cover 95% of the your costs. For example, if this same percentage of rent was applied against your payments for the life of the loan you would effectively paid very little towards a property you own outright not including appreciation, taxes benefits, etc. Just because the property doesn't completely cash flow doesn't mean you take a loss...

 Who covered the other 5% of the loss.

Originally posted by @Scott R. :
Originally posted by @Joe Villeneuve:
Originally posted by @Vinh Huynh:

@Jason D. I see . The only thing I am thinking right now is waiting for raising rent gradually to cover up my expenses . 

 ...and while you wait, for something you can't be sure of, and have no control of...you're losing more money by the month.

 Not necessarily. There's this thing called appreciation as well. It's been pretty strong in California the last 6 years or so.

 Why do you assume that the cash flow positive property isn't appreciating as well?

Originally posted by @Joe Villeneuve :
Originally posted by @Scott R.:
Originally posted by @Joe Villeneuve:
Originally posted by @Vinh Huynh:

@Jason D. I see . The only thing I am thinking right now is waiting for raising rent gradually to cover up my expenses . 

 ...and while you wait, for something you can't be sure of, and have no control of...you're losing more money by the month.

 Not necessarily. There's this thing called appreciation as well. It's been pretty strong in California the last 6 years or so.

 Why do you assume that the cash flow positive property isn't appreciating as well?

 I never said it wasn't. 

Originally posted by @Scott R. :
Originally posted by @Joe Villeneuve:
Originally posted by @Scott R.:
Originally posted by @Joe Villeneuve:
Originally posted by @Vinh Huynh:

@Jason D. I see . The only thing I am thinking right now is waiting for raising rent gradually to cover up my expenses . 

 ...and while you wait, for something you can't be sure of, and have no control of...you're losing more money by the month.

 Not necessarily. There's this thing called appreciation as well. It's been pretty strong in California the last 6 years or so.

 Why do you assume that the cash flow positive property isn't appreciating as well?

 I never said it wasn't. 

 Then include it in the positive cash flow property when you compare the two options.  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 = $145k
   3 - Total cash flow = -$12,000
   4 - Down Payment = $80k
   5 - Accumulated negative = $92,000
   6 - Accumulated Positive = $145,000
   7 - Net Gain = $53,000

B)  $150k 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.

@Tanner Marsey Hi Tanner , thanks for your idea . I didn’t know I created such an interesting topic . What you have mentioned is what I thought and I hope too . I don’t deny the fact that Positive Cash Flow Property is great investment but it seems like hard to happen in Cali where profit mostly comes from appreciation. San Diego is great city too . I have been there so many times but can’t stop falling in love with SoCal Vibes.

 Then include it in the positive cash flow property when you compare the two options.  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 = $145k
   3 - Total cash flow = -$12,000
   4 - Down Payment = $80k
   5 - Accumulated negative = $92,000
   6 - Accumulated Positive = $145,000
   7 - Net Gain = $53,000

B)  $150k 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.

 You’re gonna have to go over this math again. How many errors are there?

Start small, in #2 20% of $150k is $30k not $20k, I know, $10k, who cares. 

But in #1 you have $405k in appreciation and yet you say the net gain is only $53k? I’ll take $400k in appreciation in 5 years and who cares about any other number.  If it sat empty at that rate it would be a good deal. 

I don’t know what “appreciated return” is. But you if you mean gain from appreciation you need to change property #1, line #2 from $145k to $405k and you’ll see your numbers swing a little but in favor of the California property. 

But then what do you mean by “appreciated value”? In #1 $805k is about the value of $400k at 15% for 5 years. But then in #2, you actually have a lower appreciated value than you started with, are you saying those houses are actually worth less every five years?

But once you fix line #2 on property 1 I don’t think it will matter as it will have a net gain over $300k compared to #2’s $60k. 

As I study your example. Maybe you only made a couple mistakes. Maybe house #2 is supposed to be $100k? If so then you’ve spent 1/4th as much money as the $400k house and made 1/5th as much money once you fix property #1, line #2. So your investment is worse, (80% as good) but not oh my goodness worse like it is if you did mean $150k property. (Around 65% as good.)

@Vinh Huynh

Pay attention to the location of the people that are giving you advice.... people in appreciation markets seem to be telling you that you’re alright. People in cash flow markets seem to think you’re nuts. You’ll be good. Go find me some long term buy and hold investors in CA that regret doing so.... you won’t.

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 

 ah, Rancho Cucamonga, been there before. 

So you've bought the property... hopefully you can make it work otherwise you may be in a pretty bad situation which is why I recommend rental arbitrage: Airbnb Arbitrage: Renting vs Buying

But... -$300 isn't so bad when you're first getting the property going so I wouldn't be too worried yet. 

I guess the real question is what are your goals? Are you trying to build equity and net worth? or do you want more passive income?

If the home is appreciating steadily you might not be making positive cashflow but you may be making a profit by calculating how much it's growing in value over time. 

If it's your only property then you can cut expenses by doing stuff yourself and of course by raising the rents.

Good luck.

@Vinh Huynh I agree with finding a better location to have positive cash flow. What you could do to break even could be to rent out the rooms separately. So if you have a 3 bedroom house renting for 2200. You could rent out each room for 800 and the master bedroom for 900 to atleast make your payments and costs on the property.

@Steve K. Hi Steve . Thank you for your thoughtful idea and opinion . Yes , I treat this property as my retirement and my time frame is around 20-25 years . At that time , I can use the rental for supplemental income plus paid off property for my retirement. Like you said , Positive Cash Flow is one of mechanism to build wealth but there are some different way too . Appreciation is the one of them.

We don’t know what’s gonna happen in 20 -25 years but we can predict the trend. Since LA and Orange County are over populated now , moving to this area is great option, especially youngsters. I did carefully research before I decided to buy this prop in this city like high rating school district, very convenient to commute , high-demand job, low crime rate,etc. With all of those factors , it took me just couple days to find good tenants. Turn over seems like never be a problem in this area. However , since I saw I still have negative cash flow , I just want to get some idea how I can manage property more efficient. To be honest , $300 loss is not really a big deal since I can offset that from different property. Everybody has different opinion and different backgrounds so I respect all. Personally , you gave me a detailed and thoughtful analysis so I really appreciate that. Thinking about retirement is more less with low risk and stable income. Hopefully , it won’t disappoint me.

@Vahn, you're probably need to look at your # and see how much rent can you raise and cut cost. Can you managed the property yourself for now? And probably pay insurence in full so you can saved some money. 

Originally posted by @Bill Brandt :

 Then include it in the positive cash flow property when you compare the two options.  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 = $145k
   3 - Total cash flow = -$12,000
   4 - Down Payment = $80k
   5 - Accumulated negative = $92,000
   6 - Accumulated Positive = $145,000
   7 - Net Gain = $53,000

B)  $150k 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.

 You’re gonna have to go over this math again. How many errors are there?

Start small, in #2 20% of $150k is $30k not $20k, I know, $10k, who cares. 

But in #1 you have $405k in appreciation and yet you say the net gain is only $53k? I’ll take $400k in appreciation in 5 years and who cares about any other number.  If it sat empty at that rate it would be a good deal. 

I don’t know what “appreciated return” is. But you if you mean gain from appreciation you need to change property #1, line #2 from $145k to $405k and you’ll see your numbers swing a little but in favor of the California property. 

But then what do you mean by “appreciated value”? In #1 $805k is about the value of $400k at 15% for 5 years. But then in #2, you actually have a lower appreciated value than you started with, are you saying those houses are actually worth less every five years?

But once you fix line #2 on property 1 I don’t think it will matter as it will have a net gain over $300k compared to #2’s $60k. 

As I study your example. Maybe you only made a couple mistakes. Maybe house #2 is supposed to be $100k? If so then you’ve spent 1/4th as much money as the $400k house and made 1/5th as much money once you fix property #1, line #2. So your investment is worse, (80% as good) but not oh my goodness worse like it is if you did mean $150k property. (Around 65% as good.)

Originally posted by @Bill Brandt :

 Then include it in the positive cash flow property when you compare the two options.  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 = $145k
   3 - Total cash flow = -$12,000
   4 - Down Payment = $80k
   5 - Accumulated negative = $92,000
   6 - Accumulated Positive = $145,000
   7 - Net Gain = $53,000

B)  $150k 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.

 You’re gonna have to go over this math again. How many errors are there?

Start small, in #2 20% of $150k is $30k not $20k, I know, $10k, who cares. 

But in #1 you have $405k in appreciation and yet you say the net gain is only $53k? I’ll take $400k in appreciation in 5 years and who cares about any other number.  If it sat empty at that rate it would be a good deal. 

I don’t know what “appreciated return” is. But you if you mean gain from appreciation you need to change property #1, line #2 from $145k to $405k and you’ll see your numbers swing a little but in favor of the California property. 

But then what do you mean by “appreciated value”? In #1 $805k is about the value of $400k at 15% for 5 years. But then in #2, you actually have a lower appreciated value than you started with, are you saying those houses are actually worth less every five years?

But once you fix line #2 on property 1 I don’t think it will matter as it will have a net gain over $300k compared to #2’s $60k. 

As I study your example. Maybe you only made a couple mistakes. Maybe house #2 is supposed to be $100k? If so then you’ve spent 1/4th as much money as the $400k house and made 1/5th as much money once you fix property #1, line #2. So your investment is worse, (80% as good) but not oh my goodness worse like it is if you did mean $150k property. (Around 65% as good.)

 Bill, you are of course correct.  I shouldn't have answered this at 2am...my fault.

The math is correct, the typing is not.  I will add an additional post here below with the typos (noth the math) corrected.

Does that make sense?

@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.

@Vinh Huynh you should dispose of this property. You aren't getting enough benefits for the equity that's tied up. However, your not a seller. You are a buyer! It's too hard to get your cash back with a rental that has that low of a cap rate by just selling it. You can take all your equity with you if you trade up to a much bigger property.

For example:

I would take your 125k in equity towards my office building that worth 2.25m. If you have the ability to make the rest of the down payment and go to bank, now you have flipped your bundle of benefits.

I am not a fan of negative cash flow properties. But in many markets, it’s hard to find any properties that cash flow. If the area is appreciating and renters paradise you can minimize the loss by keeping the vacancies minimal to none. Hope property values doubles or triples by your retirement.

@Vinh Huynh its a good question you have and a good spot that your in. As you’ve noticed most investors disagree with your strategy. That can be a good or bad sign.

I wouldn’t pay too much attention to the investors that have different objectives.

If your income is high enough to fund your lifestyle you can get a lot of bang for your buck long term by investing in low/no cash flow investments. Especially in an area history of rent growth/appreciation.

Some folks can’t afford that strategy which puts a high barrier to entry. Couple that with the high priced real estate and you have two high barriers. High barriers to entry are usually present in the best investments.

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