Would you negatively cashflow on a SFR?
Investor · GA · Member since 2018 · 20 posts · 11 votes
Hey BP Nation!
if you could rent out your primary residence, but would negatively cashflow approx $200/mo to do so, would you do it? Is there ever a point where the cashflow loss "makes sense" for you? Specifically, I bought my home 18 months ago with 101% financing. I am in this home for less than $2500 total. I have the opportunity to rent it out for about my PITI payment, but after all said and done I would be about -$200/mo cashflow. The upside is knowing I can confidently pay the difference with my income and move on and purchase another home to live in. This next home would likely be a roommate situation where I can cover the payment as well, or a duplex with a similar outcome. I am considering if the $200 monthly loss is worth it to take a new opportunity.
So, what are your thoughts? In my position, would you allow yourself to negatively cashflow to take on new opportunities?
No, never...ever.
Would you work for free?
No, never...ever.
Would you work for free?
@Patrick Culleton you are not even doing half the math-just the payment! I see that you are a realtor-sell it! I only do investments and that means they pay me.
No. Definitely not. You’ll be way more than $200 negative after repairs and other expenses too. Sell it!
What opportunity are you speaking of? The one the tenants are getting?
Saying your income can afford it is strange since it's the equivalent of saying you would be OK to work a second job and pay the employer for that privilege...just because your other income "can cover it".
Primary residences rarely make good rentals. Need more details on asset value vs rent and your loan terms.
I have had break even rentals cashflow-wise because of shorter loan terms like 15 or even 10 years. They paid down over $1000 per month though.
If it's low cf because you are paying down your mortgage massively and you feel the house will appreciate massively for some reason over the next couple years, rent it out maybe. If not sell it.
If you're seen a lot of appreciation of the homes value, you might want to wait until the 2 year mark for tax purposes. Close only counts with horseshoes, hand grenades and stretching carpet.
@Patrick Culleton
Certainly not for the long term. If you were talking about a situation somewhere like Billings, MT and you were renting it out from like Dec-Apr because you got relocated elsewhere for work and it would just sit vacant otherwise, that would be about the only situation where this might make some sense to me.
I think it depends on the value of the home, how much it would appreciate, and how long until the mortgage is paid off to 20% to stop paying private mortgage insurance. Once your not paying PMI you may start making money and or at least breaking even. Doing this is going with the risky assumption that appreciation is going to be more than the amount of money you sunk into this. If I was even going to consider this I would speak with a good agent that is well versed in the rental market in your area. Find a good agent if you dont already have one. I am an agent in Bozeman MT and my father is an agent in Billings MT @Patrick Culleton's comment pinged my notifications when he said "Billings"
You may also be able to sell the rental and put the built up equity into your new "house hack" and also to make sure you get the 20% down. You can put the info into a calculator to see how much you can save on interest by doing this. There is also such a thing as Interest Rate buy Downs. Depending on your lender, its possible to buy down your interest rate with higher fees at closing to effectively save a lot more in interest in the long term. Once again, talk to your agent and lender. I recommend going to more than one lender as some are more willing to work with you than others.
I think it depends on the value of the home, how much it would appreciate, and how long until the mortgage is paid off to 20% to stop paying private mortgage insurance. Once your not paying PMI you may start making money and or at least breaking even. Doing this is going with the risky assumption that appreciation is going to be more than the amount of money you sunk into this. If I was even going to consider this I would speak with a good agent that is well versed in the rental market in your area. Find a good agent if you dont already have one. I am an agent in Bozeman MT and my father is an agent in Billings MT @Patrick Culleton's comment pinged my notifications when he said "Billings"
You may also be able to sell the rental and put the built up equity into your new "house hack" and also to make sure you get the 20% down. You can put the info into a calculator to see how much you can save on interest by doing this. There is also such a thing as Interest Rate buy Downs. Depending on your lender, its possible to buy down your interest rate with higher fees at closing to effectively save a lot more in interest in the long term. Once again, talk to your agent and lender. I recommend going to more than one lender as some are more willing to work with you than others.
Lot's of rationalizations that cost you money, that you have to recover before you see any real profit. Appreciation isn't real money...until you access it. Until then, it's virtual...and up for grabs as far as sustainability. If the economy goes south, all that appreciation could go with it...but cash flow doesn't.
Hey BP Nation!
if you could rent out your primary residence, but would negatively cashflow approx $200/mo to do so, would you do it? Is there ever a point where the cashflow loss "makes sense" for you? Specifically, I bought my home 18 months ago with 101% financing. I am in this home for less than $2500 total. I have the opportunity to rent it out for about my PITI payment, but after all said and done I would be about -$200/mo cashflow. The upside is knowing I can confidently pay the difference with my income and move on and purchase another home to live in. This next home would likely be a roommate situation where I can cover the payment as well, or a duplex with a similar outcome. I am considering if the $200 monthly loss is worth it to take a new opportunity.
So, what are your thoughts? In my position, would you allow yourself to negatively cashflow to take on new opportunities?
People are jumping on the "No" bandwagon because you will have negative $200 cash flow. However, you financed 101% of the property's purchase price. Now if you had put 20% down instead of negative 1% down, would that suddenly make your property an inherently more attractive property to rent? Of course not. If you had put down tens of thousands of dollars (is that not considered cash flow?), then yes, you would probably have positive monthly cash flow, but you'd also have tens of thousands of dollars less money in the bank!
Saavy investors look at their portfolio's overall picture and overall cash flow. That should never be subordinate to making sure that each and every single one of your properties maintains positive cash flow. To be honest, I'm a tad impressed that you're only into your home for 2.5K but can rent for just $200 negative cash flow.
If renting this home will mean you will be able to acquire another property with a roommate situation, I would bet that your 'overall' cash flow will improve. If so, then I really don't see why you should go ahead and do it.
If you sell the house, would you have to bring money to the table or is there enough margin to get out from under it? Are you relocating or just thinking of using this property as an investment and living elsewhere?
There are those that view real estate as an ATM and if it doesn’t positive cash flow it is a loser that should be immediately dumped. God forbid that it is a negative cash flow property! And there are those that view real estate as an investment and look at all the numbers, not just free cash flow.
I personally look at real estate as a long term investment and am not worried about the monthly cash flow. Generally the amount of money you have to put in every month is far less than the principal reduction on your mortgage. Who cares if you have to put in $200 every month if your principal reduction is $400 or $500 or $600 a month?
What is your current principal reduction every month?
NOPE!
Sell it, and start again... That way, you can still get your duplex.
The negative cash flow can get worse if the market turns and with that 101% financing you've got could exacerbate it.
It is totally OK to sell Real Estate too.
Hey BP Nation!
if you could rent out your primary residence, but would negatively cashflow approx $200/mo to do so, would you do it? Is there ever a point where the cashflow loss "makes sense" for you? Specifically, I bought my home 18 months ago with 101% financing. I am in this home for less than $2500 total. I have the opportunity to rent it out for about my PITI payment, but after all said and done I would be about -$200/mo cashflow. The upside is knowing I can confidently pay the difference with my income and move on and purchase another home to live in. This next home would likely be a roommate situation where I can cover the payment as well, or a duplex with a similar outcome. I am considering if the $200 monthly loss is worth it to take a new opportunity.
So, what are your thoughts? In my position, would you allow yourself to negatively cashflow to take on new opportunities?
People are jumping on the "No" bandwagon because you will have negative $200 cash flow. However, you financed 101% of the property's purchase price. Now if you had put 20% down instead of negative 1% down, would that suddenly make your property an inherently more attractive property to rent? Of course not. If you had put down tens of thousands of dollars (is that not considered cash flow?), then yes, you would probably have positive monthly cash flow, but you'd also have tens of thousands of dollars less money in the bank!
Saavy investors look at their portfolio's overall picture and overall cash flow. That should never be subordinate to making sure that each and every single one of your properties maintains positive cash flow. To be honest, I'm a tad impressed that you're only into your home for 2.5K but can rent for just $200 negative cash flow.
If renting this home will mean you will be able to acquire another property with a roommate situation, I would bet that your 'overall' cash flow will improve. If so, then I really don't see why you should go ahead and do it.
Increasing the DP in order to convert a negative CF property into a positive one is an illusion. All you're doing is paying all that negative CF upgront.
There are those that view real estate as an ATM and if it doesn’t positive cash flow it is a loser that should be immediately dumped. God forbid that it is a negative cash flow property! And there are those that view real estate as an investment and look at all the numbers, not just free cash flow.
I personally look at real estate as a long term investment and am not worried about the monthly cash flow. Generally the amount of money you have to put in every month is far less than the principal reduction on your mortgage. Who cares if you have to put in $200 every month if your principal reduction is $400 or $500 or $600 a month?
What is your current principal reduction every month?
...and all that negative CF is a cost to you that you have to recover before a profit is made. The equity pay down was free when you let the tenant pay it down through positive CF. Also, what are you gaining when you are simply taking money out of your bank and transferring it to the floors of your rental? It's the same money...just relocated. What's worse is you have to pay for it in order to use it again when it's in the floorboards of the rental. It's free for you to use when it's still in your bank.
There are many variables that are not discussed. You have a loan that sounds like it's inverted. At 101% financing if you sell you will be writing a check to lose the property if you haven't paid down principle or if the property hasn't appreciated. If you had a 30 year mortgage and lost 200 a month you'd pay 72,000 for the property over the life of the loan. However if the rate is fixed and you make incremental increases you would pay less then the 72,000. What is the house worth now? I am not a fan of negative cash flow but to answer this we need some more info. Because if this deal was here in Oregon you could raise rents 10% or so yearly and in a few years you'd be solvent. If you could raise rents over three years to a push. If the property was worth 200k you'd be in for $7200 and over 30 years you'd have a great asset for a very small investment. Because even assuming only 2% growth in value you have approx 400k for a 7,200 investment. That's a great cash on cash and a 185% IRR.
Atleast apply for a 501c status if your going to run a charity . Can I be your tenant ?
LOL nice!
Negative cash flow to me sounds like you're running at a loss and therefore the IRS would take pity upon your soul and reward you with a tax advantage.
In Australia, this is a concept and even a strategy known as 'negative gearing'. One day, you'll own a house that someone else has 'mostly' paid for. Weigh up the losses - either a hit right now in selling it, or a hit (with upside from the IRS) over time?
Interestingly, the whole reason I fell into rental investing was my first home in Missouri. Bought it without the wife being there, when she moved in she decided it was too small, so rather than take the hit of selling it so soon, rented it out. While it does cashflow, it's only $190 a month.
If I could live without the $200, I would keep it. But that's me.
There are many variables that are not discussed. You have a loan that sounds like it's inverted. At 101% financing if you sell you will be writing a check to lose the property if you haven't paid down principle or if the property hasn't appreciated. If you had a 30 year mortgage and lost 200 a month you'd pay 72,000 for the property over the life of the loan. However if the rate is fixed and you make incremental increases you would pay less then the 72,000. What is the house worth now? I am not a fan of negative cash flow but to answer this we need some more info. Because if this deal was here in Oregon you could raise rents 10% or so yearly and in a few years you'd be solvent. If you could raise rents over three years to a push. If the property was worth 200k you'd be in for $7200 and over 30 years you'd have a great asset for a very small investment. Because even assuming only 2% growth in value you have approx 400k for a 7,200 investment. That's a great cash on cash and a 185% IRR.
Yes and what he said! Nigel, do you ever go to the international convention of people called Nigel?
@Michael King I didn’t know about it. That would have been fun.
@Patrick Culleton. Keep your current home, since you bought it as primary I assume you like it. Take your extra income and buy an investment. Your primary home is always a liability, enjoy it. Be smart on your investments and buy low so there is lots of income to pay for your primary.
@Patrick Culleton
No to renting it out w negative cash flow.
Need more numbers to see your options.
What did you pay for the house?
What do you owe now?
What can it sell for today?
If this house appreciated over the last few years in this good market and you can sell it and walk away with money that you could apply to a actual good investment then that is the direction i would go.
Also Im pretty sure keeping this will negatively affect your ability to finance another property. Bank will def look at negative cashflow
Why would you start out in the arrears? Imagine what the out of pocket would be when repairs are needed, you need something coming in to cover your costs. Even cashflow properties end up in a slump where the repair costs dig into their profits and they don't see any profit for some time but you're jumping into it on the negative, no good.
You bought this property as your primary residence. This is not an investment property, its for you to live in and personal enjoyment.
If you want to get out then sell it but id say wait another 6 months (total 24 months) in case you end up in a capital gains situation...I believe its 24 months but check if its something you're considering.
Good Luck!!