Another negative cash flow question

3 Replies

Would you buy this property with initial negative cash flow?

Property purchase price: 435k

5 condo units under one roof total property tax is approximately $7900. Hoping to convert back to apartments after possible purchase in hopes of saving on property tax. Important to note that there's no HOA. These are the only condos in the neighborhood.

Each unit rents for $790 currently (rents can/will be increased to $850)

20% down payment, 4.5% 30 yr mortgage

After accounting for 5% vacancy, 10% repairs, 10% Capex, and 10% property management cost, it comes to us being short approximately $110/month.

Brick building in a nice area with great tenants.  New roof 4 years ago.  New HVAC in 4/5 units in last 3 years.  Solid B class property with great rental history.  Very well maintained property with no deferred maintenance.

I have the income from primary job to cover any major expense thrown our way (including roof if worst case scenario).  

Thank you all for the reply.  It is much appreciated.  

@Milan Joshi have you been quoted a 30 year loan at 4.5%? That seems pretty low for a commercial loan.

But, even if that is the loan, I dont see a lot of upside, unless there are ways to lower expenses by quite a bit. Just raising rent still only get you positive $200/month for 5 units. I wouldnt want to be less that $500/month cashflow initially.

As Jason points out, for 5-unit + purchase you'd need a commercial loan (vs. conventional), and so you could expect higher rates and probably not the fixed 30 year variety, and this could further hinder your cash flow.  Everyone has their own take, but I've heard it said many times (and I agree) that doesn't make sense to purchase something that cash flows negative, it's too risky.

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Depends on how far over you are in negative cash flow.  If it's greater than $1/month then NO.

Never base the success of an investment, where start off accepting losses, on the words, "Hoping and hopes".  That's not investing...that's speculating, and you'd be rationalizing the deal to be a good one.

Also, just because you have the money (current job) to cover the negative, doesn't mean it's OK.  What if I told you it would be a good idea if you worked at a full time job, and then started to work on a side job...paying your employer, and this was fine with you because your first job gave you more money than you knew what to do with, and you "hoped" that the side job would give you a promotion (apartment conversion), transfer you to a closer location saving transportation costs (tax savings) and give you a raise (rent increase) but you didn't know when/if yet?