Feeling Lost - First Property Looks Cash Flow Negative :(

30 Replies

Hello Bigger Pockets!

My name is Tim, a new member of the community. I eagerly want to learn as much as I can from all of you as I begin learning the ins and outs of real estate investing.

Unfortunately, I am realizing that I made a poor decision when I purchased my first property. I purchased a 2 bed/2 bath condo in my area with the intent to live in it for a bit before ultimately renting it out as my first investment property. Now, looking deeper into potential expenses, it looks more and more like my purchase will be cash flow negative on a monthly basis.

My question for you all is this - have any of you been in the situation? Have you thought that you had a decent rental property, and then came to realize that you probably will not be cash flow positive based on what you can charge in rent? What did you do? Should I abandon ship and sell the property once it is time for me to move out of it?

I learned a valuable lesson here and realize now how poor my initial analysis was. Looking for some advice, tips, or motivation! 

Thanks!

Tim

Updated over 2 years ago

1

Updated over 2 years ago

Update - I failed to introduce myself! My name is Tim, a real estate rookie living in San Diego, CA. I am currently stationed here as a member of the US Navy. I am originally from New Jersey and spent 5 years in Rhode Island studying Accounting and Business Administration at Providence College. I am interested in becoming a buy and hold rental property investor of small multi-family properties to begin. Any tips, words of wisdom, or advice would be greatly appreciated!

Hey Tim!  Welcome to BP!  This is a great time for you to evaluate what exactly went wrong in your analysis and use that information for future deals.  If it yields a negative cash flow, I would think of selling it and moving on to the next, hopefully positive yielding, rental.  Good luck, can't wait to see what you accomplish!

@Tim L. - I am the self-appointed negative cash-flow queen...Every single condo that I bought in San Francisco started with negative cash flow... That is just how the game is in hot markets like SF or SD...

What is concerning me are two things:

1. I bought knowing it would be cash negative... You probably did not do your homework to not realize that before the purchase... :-))

2. I was cash negative because I was taking out 8% interest (back in 2009)...Once I refinanced it, it was cash positive.... At 4% interest, if you still dont cash flow, you probably never will....

So you have got a decision to make there whether to keep it or sell it....

ps - I am now contract to buy a condo in SF now.... After 20% down, rent covers interest payment, tax, HOA, plus some portion of principal payment...I still have to pay about $300/month in principal payment....

Good you are realizing this now than letting it fester. 

However, before you give up i'd look at your line items and see if there is any potential ways to either 

1) Decrease any of your expenses

2) Achieve some kind of rent premium. Can you rent per room? Short term rental options, Airbnb? Any add value to kick rents higher?

If it's an absolute bust you can sell, lick your wounds and crush it with what you know now.

@Tim, I've been there! I bought a 5-unit building that would have great cash-flow if it had higher occupancy and if the air-conditioning units didn't keep breaking . . . but after 3 years of negative cash flow and no sign of appreciation, I threw the towel in and sold it. 

I agree with @Bjorik Mutize , is there any value add that you can realize? Converting to a STR could be a great option for increasing rent. In my case, the property was in a C-class neighborhood and STR was not an option.

@Tim L. I'm sorry to hear this has taken a negative turn for you, I applaud your looking to make the best of a bad situation!  Converting it to a short-term rental may be an option, but be sure to check into local regulations before you make any moves in that direction - San Diego has pretty strict regulations (and your condo HOAs might forbid it) so know what you're up against if you're thinking about going that way.

The first property is usually the one where we all learn from our mistakes. In your area, it would be pretty hard to find a property on the mls that will cash flow. I would look in different landlord friendly markets and avoid HOA fees if you can. A 4-plex might be a wise choice on the next one.

By the way, you will be much better off having jumped in than the people that keep waiting for the perfect property and never purchase anything. 

Eric

Agree with @Bjorik Mutize as well, it all boils down to decreasing cash-out and/or increasing cash-in. When you said you looked deeper into potential expenses, what is it that you found out now that you didn't know before buying the property? 

I closely follow the student/young professional rental market in SD and have rooms rented out individually. Areas that would cash-flow negative if I rented out as a whole unit can at least break even and usually even provide a good cash cushion depending on who/how you market (furnished? wrapping utilities? shared or private bath? etc) @Tim L.  Happy to chat if you're considering that route. 

@Tim L.  thanks for your service  

Most of the responses are from people in very different markets than San Diego. As has already been mentioned, any retail purchase of SFR in San Diego will be cash flow negative yet many investors purchase them. Are they making a poor investment?

Virtually any purchase of RE in San Diego has produced outstanding return regardless of when it was purchased if it was held at least 10 years.  How?  Both market and rent Appreciation!  

About a year ago I looked at rent and market appreciation on the average San Diego SFR. Average rent had risen ~$500/month over the previous 3 years. In addition, the average San Diego SFR had appreciated $152k in the previous 5 years.

There are multiple ways to make money on buy n hold RE.  Cash flow is one of the slowest methods.

So the decision to sell should not be based solely on the cash flow.  Is it likely to produce a good return?  Is it free of landlord headaches?  The decision to sell likely needs to be based on more than its projected cash flow.

Good luck

@Dan Heuschele I agree 100% with Dan. It is not all about cash flow. I purposely took negative cash flow on one of my rentals just to get it rented out. I had a choice to have someone pay 90% of my mortgage while I pay the other 10% or I pay 100% of my mortgage while looking for the right tenant. I knew the appreciation would be outstanding in the long run so I looked at the 10% as an investment into my own property. I year later I was able to rent it out for positive cash flow and recoup the money I put in it.

The San Diego market seems to be more of a appreciation market where you will get your money back on the resale.

@All - Thank you all so much for the responses. I really do appreciate the warm welcome to BiggerPockets and the great community that this is.

To respond to the majority of you all, the most beneifical part of this entire realization was that I have a ton to learn from this as I move on to bigger and better deals. I now know how crucial that initial analysis is and that money is made when a property is purchased. @Eric Mayer I appreciate your last point about having jumped in. I am happy that I did jump in even though I may need to jump out. These lessons learned will serve as the basis for future (hopeful) success!  

The short term rental option would not be applicable due to my HOA's regulations unfortunately.

Those of you recommending to sell - @Tyler Weaver @Keyonte Summers @Robert Kirkley @Dennis M. @Bjorik Mutize  - Isn't there concern about losing money on the sale? I will be living in the area for at least another 2 years. Would it be more prudent to simply hold to see if appreciation can cover the costs of the sale 2 years down the line? Or is it better to simply cut ties with something thats already dead?

@Diane G. @Dan Heuschele @Jay Weathersby Based on your historical analysis Dan, it would appear that a few years of negative cashflow might be a decent investment into future cashflow and appreciation. Doesn't the idea of "banking" on future rent and market appreciation scare you? Or is this simply the name of the game in a market like San Diego?

Again thank you all!!

San Diego, isnt a cashflow area and the term investor really applies here. The negative cashflow in the long run is probably smaller than the average appreciation over the course of 20 years. I use 20 years because any expectation less than 5 is not an investment, but really speculation that the rents or values will increase. If you need the money, (since the military traditionally doesnt pay well), then you may need to cut bait just for living purposes. However, if you can put it into your budget that this is just a longer term hold and that over the course of time, value and cashflow will come to you, then your investment will pan out. You may have purchased with a VA loan financing it 100% which means that, of course will have negative cashflow in San Diego. @Kat He has the right idea in short term living, however you as the owner need to understand your HOA bylaws and what are the plus's and minus's in that choice. I'd love to be in that conversation with Kat and you if you make that choice, or would be happy for any offline convo.

Originally posted by @Tim L. :

@All - Thank you all so much for the responses. I really do appreciate the warm welcome to BiggerPockets and the great community that this is.

To respond to the majority of you all, the most beneifical part of this entire realization was that I have a ton to learn from this as I move on to bigger and better deals. I now know how crucial that initial analysis is and that money is made when a property is purchased. @Eric Mayer I appreciate your last point about having jumped in. I am happy that I did jump in even though I may need to jump out. These lessons learned will serve as the basis for future (hopeful) success!  

The short term rental option would not be applicable due to my HOA's regulations unfortunately.

Those of you recommending to sell - @Tyler Weaver @Keyonte Summers @Robert Kirkley @Dennis M. @Bjorik Mutize  - Isn't there concern about losing money on the sale? I will be living in the area for at least another 2 years. Would it be more prudent to simply hold to see if appreciation can cover the costs of the sale 2 years down the line? Or is it better to simply cut ties with something thats already dead?

@Diane G. @Dan Heuschele @Jay Weathersby Based on your historical analysis Dan, it would appear that a few years of negative cashflow might be a decent investment into future cashflow and appreciation. Doesn't the idea of "banking" on future rent and market appreciation scare you? Or is this simply the name of the game in a market like San Diego?

Again thank you all!!

>Doesn't the idea of "banking" on future rent and market appreciation scare you? Or is this simply the name of the game in a market like San Diego?

Our plan is to purchase value adds such that we achieve a short term equity increase that reduces the immediate need for appreciation.  Purchase, add value, refinance, rent at top of market to achieve a short term outstanding return on investment due to the value add.  Evaluate the indicators to have confidence of continued long term appreciation (market and rent) to ensure that the long term return is likely to continue.

Some things to note:

  1. We have never got all of my investment (down plus value add costs) out of the refinance. It is very challenging in the SanDiego market. Play with the numbers realizing the refinance LTV to see why.
  2. The cash flow after the value add and refinance is not significantly different than the cash flow prior to the value add and refinance.  Do not expect the rehab, when associated with a refinance, to help the cash flow.  This is not obvious, but is my experience.  I recently calculated my rent to value ratio on one of my two last value adds.  The ratio before the value add at the initial RE value was virtually the same as the ratio after the value add using the increased rent but also the increased value of the RE.
  3. Short-term, the value add provides great return on investment. In addition, it reduces the investment amount that is left in the RE. This in effect reduces my investment amount which increase the return as a percentage of investment for any appreciation. To word it differently, it is basically the same as purchasing with a LTV that is beyond what an investor could obtain via a conventional loan but having a conventional loan. If my investment is 5% of RE value and the property appreciates 5% then I have achieved 100% return. It magnifies the return from any appreciation.
  4. Traditionally the appreciation has provided a great return over the long term.  Note if you purchased in 2007 you likely were positive in 2015 in San Diego.  That is a long time without return if that was all I relied on for my return.  However, if I made money on the value add, then I still can have a solid annualized return during the years that there was no appreciation. 

Good luck

Originally posted by @Michael Zau :

San Diego, isnt a cashflow area and the term investor really applies here. The negative cashflow in the long run is probably smaller than the average appreciation over the course of 20 years. I use 20 years because any expectation less than 5 is not an investment, but really speculation that the rents or values will increase. If you need the money, (since the military traditionally doesnt pay well), then you may need to cut bait just for living purposes. However, if you can put it into your budget that this is just a longer term hold and that over the course of time, value and cashflow will come to you, then your investment will pan out. You may have purchased with a VA loan financing it 100% which means that, of course will have negative cashflow in San Diego. @Kat He has the right idea in short term living, however you as the owner need to understand your HOA bylaws and what are the plus's and minus's in that choice. I'd love to be in that conversation with Kat and you if you make that choice, or would be happy for any offline convo.

>isnt a cashflow area and the term investor really applies here.

How long have you invested in RE in San Diego? 

I know of zero San Diego RE investors that have been invested at least 5 years who are not cash flow positive if they have not taken significant cash out.  I go to a few RE meetups, I associate with quite a few San Diego RE investors so I am referring to more than a handful of San Diego RE investors that each have achieved positive cash flow.

The numbers from June 2018 (so basically year old numbers) show that the average SFR rent had increased of $500/month over the previous 3 years. This was average, so a vast majority did not have any value add. This implies an average SFR purchase from 3 years prior would have had to be on the order of at least $500/month negative to not to have cash flow (excluding for a refinance that extracted money).

There is a big difference between initial cash flow and actual cash flow.  Actual cash flow is determined by the cash flow over the entire holding period.  San Diego's long term cash flow is outstanding.  Buy n hold is a long term play.  The cash flow needs to be evaluated over the long term.

Good luck

@Tim L. That's the thing man. Look at the opportunity cost of you holding onto something upside down vs. taking the loss now. Sure you can hold and wait for appreciation but i think there are many, many threads that state don't bank on that especially where the real estate cycle is today.

But yea i say if you can creatively figure out how to add-value then great. If not, take a haircut then move to something that will bring you money.

About 90% condos and th with a HOA fee here in Northern CA is cash negative. It is not common that hoa due over $1,000 eating up most of rent. For SFHs in urban CA almost all are negative cash flow assuming a 20-30% down. Often it is a place to park excess cash since CD pays nearly nothing making 3-4% cap rate investment attractive.

What @Julie McCoy said 100%! I am a big proponent of Airbnbs and a self proclaimed rule breaker but after getting burned several times by bending the rules, I recommend that everyone know the regulations that are currently in play and any that may be coming down the pike so that you don't get stuck with fines. 

@Tim L. short answer for me is, it depends. if you purchased with VA loan (0% down) and say you are negative $100 a month in a market like San Diego, I would personally take that all day long. putting $250k down and being negative is a different story, but even for that scenario there are investors who'd be ok with it.

Best of luck!

@Tim L. Well, this is outside of my investment rules, banking on appreciation etc. But if population and job growth is projected to out pace new development, and you are currently in the property, it could make sense to hold for a while.  There are risks associated with that though.

I considered buying a condo on the waterfront in San Diego in maybe 2011 or so, and it was about 540k, but last I checked about 2 years ago similar units were selling for about 900k. 

first of all, relax. You purchased a property in one of the best places to own RE in the country. SD and most of California are not cash flow markets. Think of this as more of a 401k type investment. You’ll put some money in now (hopefully not for long) and the return down the road will be great. Everyone from the Midwest and south and other markets will tell you to sell.... which is a viable option IF it aligns with your goals. I’d look into hoa and see if a raise is coming or any special assessments. If not, hold it for now. See what happens. I am selling my condo in Orange country because I feel a raise of hoa fees coming and I’m just sick of the petty stuff that comes along with the hoa, that said I purchased in 2015 and will wash my hands of this property and I’ll make out pretty good. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you