Negative cashflow on Rental Property .
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
Sell 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
Raise rent by $50 next year and self manage instead of $250/month (10%) property management and you’ll break even.
@Vinh Huynh yea man that's the main reason I don't do single family rentals anymore. Either they don't cash flow in the stable markets you want, you have to pick them in less than desirable neighborhoods to make them cash flow, or they cash flow but only a few hundred bucks a month and it's just simply not worth the effort. Multi family all the way from here on out
@Joe Villeneuve “negative cash flow investing isn’t investing”
That statement sounds like a ton of sense to you and half the folks on here, even has a certain ring to it. Maybe right a book on it. Sounds like you got that down.
That statement doesn’t make sense for everyone.
I know a guy that had the best cash flow investment ever. Every month he would
Receive a ton of cash flow. Peanuts. He had a peanut machine route. Was always raving about how much he made. Now the machines are getting rusty in his garage.
Your cash flow investments that you love are this guys peanut machines. You love them, not everyone wants them.
the guy has 125k to put down most likely his income is high. That’s just a guess.
I sold a house two years ago that was cash flowing 8k a month. When I bought it with 35k down it just about broke even(yeah you would have said I should sell that too) after a few years it was cash flowing 2,000 a month. But I never used the money to live on. I just kept reinvesting. no matter what I did it just kept throwing off cash. Rents went up every year. High rent growth NYC will do that. Just like Cali.
But it was raising my tax basis. Killing me to pay so much income tax on it.
So I sold it. It had appreciated a ridiculous amount. I bought a bunch of....never guess...non cash flowing assets.
Sounds like he would rather invest and have that investment grow in value...not receive income. Kind of like stocks. Some people want dividends(utility companies) others want growth(Amazon)
Cash flow investing is a type of investing. It’s not the only type of investing.
You're not wrong.
The problem with any blanket statement is how it's applied...and when it;s applied.
There are two sides of the fence, and both sides explain, and justify their opinions here all the time...which is great.
In my opinion, here are some of the greatest problems I see in REI:
1 - Thinking you have to choose between CF and equity. The goal should be both...not either or. One without the other is foolish.
2 - Thinking that buying for cash flow is a long term investment with THAT property. It should be a continuous string of properties, using the same money...and more money, as it is gained from the previous rentals...and flips. Sticking with the same property means (as it was stated above) a financial problem. When you think you've accumulated a large CF amount, you end up getting hit by CAPEX (usually more than one)...and all the CF goes back to zero (or worse). Moving through rentals works the same as moving through flips...just a different vehicle and timeline...but with income and equity, not just equity.
3 - Not understanding the difference between "own" and "control"...and how control gives you a much greater return, with far less cost to you.
4 - What risk is
5 - Not understanding the Market Analysis is far more important than Property Analysis
6 - Not understanding how Money Works
7 - Not having a Plan, not understanding what a Plan is, and not understanding how to develop one.
@Vinh Huynh, managing this yourself is a piece of cake. I use home warranty companies as my 'first line of defense'. If there is a problem, they are the first one called. If it is beyond the scope of the home warranty company, THEN I become engaged. I have spent a LOT of time, money and effort into 'bulletproofing' my places. I'm starting to reconsider the need/desire for the home warranty.
I use Chase Quikpay to collect my rents. Due on the 1st, late on the 3rd. Yes, I am tough. But my places are nice and slightly under market. If my tenants don't want to live there, I will have a new one in a week after they move out.
Yes, even my Cali property @ $3200 a month. ;-)
Last, but not least, treat your tenant how you would want to be treated. And then go SLIGHTLY over that to stand out. I send out $100 gift cards for Xmas to my tenants that pay on time for the year. Since they ALL pay on time, that's a few gift cards. But it creates a bond on their part as I am a GREAT landlord. For me it's a business expense, cost of doing business.
$250 a month is $3000 a year in YOUR pocket vs someone else.
Best of luck, but IF you want to sell, let me know. ;-)
I agree with Michael. Nowadays, many students and young men and women are renting rooms. I would rent each room out for $850.00 per month. That would increase your cash flow. I would also rent the master bedroom for $950.00 and if there is a garage you can ask for an additional $100.00 per month. Just thinking out the box. Good luck!
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.
I agree with Michael. Nowadays, many students and young men and women are renting rooms. I would rent each room out for $850.00 per month. That would increase your cash flow. I would also rent the master bedroom for $950.00 and if there is a garage you can ask for an additional $100.00 per month. Just thinking out the box. Good luck!
Yeah, it is possible to break this up into a cash cow property. Room rentals @1000 per? Then consider garage at 250 ( classic car or toy guy), then add parking/storage at @75 each. Or option B, insurance / corporate rental/ assisted living, traveling nurses etc is more hassle obviously but one can utilize this house in parts if more cash flow is needed.
@Vinh Huynh
I also live in Southern California. I know that I cannot make any money investing in properties here. That is why I am looking to invest in out of the state properties which usually always have positive cash flow. I agree that you should sell it, get your cash out while you can and invest in out-of-state properties.
Cali is massive, you can get OOS numbers in some 100-500 mile away places and still be in CA. Closest OOS for IE guy is Vegas, which has better initial CF but that might have little to do with total profits in the bigger pockets scheme of things.
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...?
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...?
Can you spell 13.8% national average PM fees after the ups and extras? Joking as come back, but it is actual.
@Vinh Huynh
Rent the property without a property management company?
That should break even
Could it qualify for a sober-living home/group home? I've heard you can make more money per room this way. Probably more work but worth looking into...
Unless you've straddled both of these worlds (Midwest/South and the West/East Coasts) it is really difficult to understand how different these markets really are. For example, when living in Northwest Ohio in the early 1980's, my wife and I were paying $250/month in rent for a small one bedroom apartment. Recently, a friend has told me that her daughter, living in the same town, is sharing a two bedroom for $300/month each. In the early 1990's my wife and I rented a 3 bedroom/two full bath house in Sausalito for $1,700/month. Just last month, we leased our 500 square foot condo on Russian Hill in SF for $3,000/month. Anecdotal evidence for sure but it illustrates just how disproportional these markets can be/have been for the past 40 years.
@Vinh Huynh Structural Engineer here in Los Angeles. Take advantage of the California ADU ordinance and either build a back unit detached ADU or convert the garage to an ADU (cheaper option). You just need space in your driveway to park 3 cars. New construction cost in LA area is about $200/SF (can vary greatly based on what kind of finishes you put in). Garage ADU conversion should only cost you $20k. It will add a whole additional rentable unit which you could rent for around $1,200/month in current market. PM me if you want to learn more about ADUs. Best of luck with your investment!
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.
You can sell this and buy five $100,000 properties in Louisville, Kentucky and make $1,000 to $1200. a month.
@Vinh Huynh Iin my humble opinion I would raise the rents at end of year ie if <12 mos < 10% in CA with 30 day notice. Good luck been there done that.
@Bill Brandt Hi Bill . Yes , you are right . Overpopulation is major issue in mega city like LA and it’s getting worse .For us , it takes us 1.5 to 2 hours to commute is very normal. Since higher demand but limited supply , appreciation should happen .
I’ve driven in that “stuff” when I come for the LA car show. I’m chanting to myself, why don’t these people get a new job or a new house? At least buy a motorcycle and split lanes. In Vegas we think a 10 minute delay is the end of the world.
@Brian Bellanca
Where did you put your money if you don't mind me asking?
@Vinh Huynh Hey, since everyone is telling you what to do with your property. I thought I might join the fun.
Here's a couple of Value Add Opportunities right in line with what others have mentioned so far.
I was thinking, maybe you could turn the attic into a Airbnb rental.
Then take one of those rooms and convert it into a 6 Bed Hostel (Combination on the Bathroom, ofc.)
Finish that crawl space and rent it out to little people.
While you're at it, why not do a built in snack machine for your 420 friendly tenants?
If you really want to maximize your ROI, go ahead and list that garage as "Move-In" ready!
I'm joking! In all seriousness, I wish you the best of luck!
@Vinh Huynh
This won’t get you to cash flow break even, but what about management costs?
I have a friend who owns a home in SoCal that he literally just breaks even on. He lays 7% for property management. 10% in expensive markets seems absurd to me. So if you’re paying that much, see if you can shop it around or negotiate with your current manager.
We have been self-managing our four units in San Diego for about three years using Tenant Cloud. We bullet-proofed our places before we rented them out, and hardly ever have to fix anything. When we do, we call professionals to fix (water heater went out, had it replaced, stuff like that.). We vet our own tenants personally, because of bad choices property managers have made in the past. Turnover is a pain in the ***, but there are companies that will place tenants for you and manage the move out if you need help with that.
Tenant Cloud are Cozy are two online systems that are free and make it easy for us. By the way, we are in Mexico currently, and three months ago, we were in SE Asia!
I would self-manage and if you feel like you need to, you can always hire a property manager again. There's plenty around; they like the 10% they earn on houses in Cali. Seems like you'd only need the PM when you have a tenant move out our have an issue with one, if even then.
@Vinh Huynh Are you renting to one family or one individual? What if you rented it out to roommates? Young professionals who are already friends. Perhaps you could get a little more out of each of them. Please note I would definitely NOT recommend renting rooms out to people who don’t know each other as that is doing for all kinds of trouble. An idea from a newbie for what it’s worth.