Would you negatively cashflow on a SFR?
Investor · GA · Member since 2018 · 20 posts · 11 votes
Would you negatively cashflow on a SFR?
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo, never...ever.
Would you work for free?
69 Replies
- Rental Property Investor · Houston, TX · Member since 2017 · 144 posts · 42 votes6y
@Patrick Culleton
Maybe!
Is it in a super high Appreciation area?(think galleria area in Houston, Or artsy South Austin Neighborhoods)
Can your personal finances or other passive income sources take care of the difference?
Did you go through a heavy rehab on the property and your capital expenditures are expected to be low for the next 5 to 10 years?
Are you a high net worth individual who does not need cash flow and can take a little bit of risk on and appreciation play?
What I'm getting at is that there are scenarios were a can work but it depends on your situation and your experience level and investing in.
- Investor · Oklahoma City, OK · Member since 2017 · 23 posts · 7 votes6y
@Patrick Culleton
Well technically a flip/rehab/spec sale transaction is negative cash flow. So not sure how you could do it any other way.
- Investor · GA · Member since 2018 · 20 posts · 11 votes6y
Wow! Lots of discussion in 48 hours. To clarify to all those that have asked, the -$200/mo cashflow is total cashflow, not just PITI. The rent is enough to cover PITI. Without factoring management, I would likely be about -$200/mo after considering repairs etc. Thanks all for the great feedback! It is interesting to see how people can look at the same situation and feel completely different about it. It's all about what lenses you are looking through :)
@Dennis M. - Lol! That was a great laugh, thank you.
@John Teachout@John Teachout - I could sell and net a small profit after commissions. I am not relocating, just thinking of moving elsewhere.@Greg M. - Thanks for the feedback! My current principal reduction is ~$250
@Erik B. - Thanks for the feedback. Here are the numbers you asked for:
Sale price: $157,000
Balance: ~$156,000
Market Value: $180,000-$185,000
- Investor · GA · Member since 2018 · 20 posts · 11 votes6y
@Russell Brazil - Hope some viewers stop and read your comment. Loving the discussion in here. It might give some the opportunity to pause and think about things from different perspectives.
@Adam Mitchell - Yes, approx $25-$30k equity.
- Rental Property Investor · Portsmouth, VA · Member since 2016 · 38 posts · 13 votes6y
From an investor perspective I wouldn’t but my brother did he was only looking for someone to pay the note and he wasn’t after cash flow he felt confident in that area. however he is not an investor
Originally posted by @Joe Villeneuve:
Like any business, you don't start making a profit until you recover all of your cost.
Buying equity doesn't gain you anything...it costs you more. You are taking cash from your bank and spending it when you transfer it to the property. Your bank account goes down, and your cost goes up...that's a negative result...in both cases.
Joe, I'm sorry, but you are so focused on one tiny aspect of the business that you can't see the entire picture. The only thing you are looking at is the money that comes out of your pocket. You're absolutely failing to see you other pocket that is being filled with more money.
Let's put it this way, if like you say, money out of pocket is bad, it is a cost that is to be avoided, then you should want property #1 and not want property #2:
Property 1: Every month the property free cash flows $200. In addition to the FCF, the monthly principal reduction is $300.
Property 2: Every month the property requires a cash infusion of $200. The monthly principal reduction is $1000.
Now according to you, property #2 should be a loser that needs to be dumped. Every month it's costing you $200. While on property #1, every month you're gaining $200.
Which of those properties do you want?
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Greg M.:
Originally posted by @Joe Villeneuve:
Like any business, you don't start making a profit until you recover all of your cost.
Buying equity doesn't gain you anything...it costs you more. You are taking cash from your bank and spending it when you transfer it to the property. Your bank account goes down, and your cost goes up...that's a negative result...in both cases.
Joe, I'm sorry, but you are so focused on one tiny aspect of the business that you can't see the entire picture. The only thing you are looking at is the money that comes out of your pocket. You're absolutely failing to see you other pocket that is being filled with more money.
Let's put it this way, if like you say, money out of pocket is bad, it is a cost that is to be avoided, then you should want property #1 and not want property #2:
Property 1: Every month the property free cash flows $200. In addition to the FCF, the monthly principal reduction is $300.
Property 2: Every month the property requires a cash infusion of $200. The monthly principal reduction is $1000.
Now according to you, property #2 should be a loser that needs to be dumped. Every month it's costing you $200. While on property #1, every month you're gaining $200.
Which of those properties do you want?
First, to say I'm only looking at one small part is wrong (I said that nicer than what I was thinking of saying). You've obviously never read anything I've written, or couldn't understand it.
Second, and this goes to your other statement regarding "one small part", how in the world can anyone answer which property is better with the limited info you've given to compare? Not to mention all the rest of the data that makes up the limited info you are using to compare? Based on what you're accusing me of doing, maybe you should look in the mirror.
- 6yKevin FengPro MemberNJ · Member since 2019 · 29 posts · 13 votes
@Patrick Culleton Nope. Negative cash flow is never good, don't work for free.
- Rental Property Investor · Member since 2019 · 93 posts · 110 votes6y
Based on your numbers you’ve provided and taking the assumption that you’ve owned the property for two years or so ( I base this off the principle reduction) you have the following:
24,000-29,000 in equity
$200 X 24 months is $4,800
24,000/4,800 is 500% over two years. Divide the years invested at this will get you to an IRR of 250%. So the question to all the people saying no, what kinds of returns are you looking for because from my point of view 250% IRR looks pretty darn good? My guess is that these people didn't run the actual numbers and are just guessing off some advice they read in a book
Side note: I find the comments where people talk about Saying no because they are an investor but they don’t back up their statements with numbers. Remember as an investor we are only as good as the numbers. And the data on this seems to me to be a win. If you can get better returns sell. But I don’t see a lot of triple digit returns in the first two years and this one is producing those returns.
- Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes6y
Originally posted by @Nigel Guisinger:
@Michael King I didn’t know about it. That would have been fun.
Some pub owner in England decided that the name was declining so decided to host Nigels from around the world. Looked like a fun gathering and there was one from the US. Nigel Mansell was a fantastic formula 1 driver with an awesome mustache. I had a friend in school called Nigel.
- Property Manager · Erie, PA · Member since 2019 · 9 posts · 3 votes6y
@Patrick Culleton
If you were farther along in your mortgage term it would make more sense, but in your case I don’t like it.
- Member since 2018 · 21 posts · 12 votes6y
@Patrick Culleton
All those who answered "NO" failed the riddle. If you want to make a positive cashflow on this property then simple pay off 25% or 20% of the mortgage principle and then you'll get rid off the PMI insurance and have a smaller mortgage to pay. But, to be able to keep the property with no money down and have it fully paid off after 30 years and start a positive cash flow in just a few years as rental price ALWAYS go up year after year statistically, is a no-Brainer. Just look at the $2400 yearly loss as a part of the investment, instead of putting down 25% down payment, you're putting down $2400 for the first year and less for each subsequent year until you start positively cash-flowing.
I’ve bought properties that were “negative” due to having extremely aggressive amortization (say, 5-10 year). I don’t even view them as negative.
If they’re negative due to aggressive principle reduction thats not even negative as principle reduction isn’t a cost (not even to the IRS)
im wondering how many of the people commenting here own property.- Member since 2019 · 43 posts · 20 votes6y
@Patrick Culleton
You already mentioned a roommate situation, so why not get a roommate or two to defray your current house payment? Or AirBnB your spare rooms? It might give you enough spare income to buy another property.
Originally posted by @Salomon W.:
@Patrick Culleton
All those who answered "NO" failed the riddle. If you want to make a positive cashflow on this property then simple pay off 25% or 20% of the mortgage principle and then you'll get rid off the PMI insurance and have a smaller mortgage to pay. But, to be able to keep the property with no money down and have it fully paid off after 30 years and start a positive cash flow in just a few years as rental price ALWAYS go up year after year statistically, is a no-Brainer. Just look at the $2400 yearly loss as a part of the investment, instead of putting down 25% down payment, you're putting down $2400 for the first year and less for each subsequent year until you start positively cash-flowing.
you will get rid of PMI, but your pmt will still be the same amount.
OP, are you expecting this house to keep appreciating? Sounds like a gamble, but if the area is growing, you might want to let it ride for another year or two and reassess. Otherwise, just sell it a move on.
- 6yCalvin OzanickBusiness MemberProperty Manager · Janesville, WI · Member since 2017 · 708 posts · 297 votes
I would stay as far away from losing money as possible. You need to at least make some money. Now, if you were losing that money, but that was after every expense, along with your 30-35% in reserve accounts, then I would say it could work, but I would still not recommend it.
Wisconsin Property Managers4.7416 Reviews Originally posted by @Joe Villeneuve:
Originally posted by @Ian Boyd:
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.
I agree, my only thought is that should the economy go south so can cash flow. Obviously it depends on your market and about a million other factors.
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Ian Boyd:
Originally posted by @Joe Villeneuve:
Originally posted by @Ian Boyd:
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.
I agree, my only thought is that should the economy go south so can cash flow. Obviously it depends on your market and about a million other factors.
Typically it doesn't. In many cases it increases. Less buyers, more renters.
- You have the potential to make $$ in 2 different spots.... (1) The "front end"....... each month you make a net profit that goes in your pocket... (2) The "back end"..... you make $$ when you sell it...... The better investments make you $$ in both areas..... The principle pay down only becomes "real' on the back end when you sell...... until then, its not "real profit". If you are losing $$ on the front end, you had better make a much bigger profit on the back end. The issue is how confident are you about what the numbers will be when you sell a monthly negative cash flow property? I see a lot of the YES people are in markets where they cashed in when they sold...... which is great........ but you are relying on appreciation...... which is far from guaranteed
Join the conversationCreate a free account to reply, vote on answers and follow this thread.