Buying cashflow properties

[Rami Sobhani]

What would the reason be to buy a negative cash flowing property (lets say negative 400 a month) ? Does it make sense to do that as a first time investor and home buyer?

[Nicholas L.]

@Rami Sobhani

possibly if you are house hacking

otherwise, no

[Bob Stevens]

Quote from @Rami Sobhani:

What would the reason be to buy a negative cash flowing property (lets say negative 400 a month) ? Does it make sense to do that as a first time investor and home buyer?

 NONE, unless you need tax rights off

All the best 

[Ned Carey]

@Rami Sobhani  generally  NO ! ! !

There are exceptions, are there renovations you can cost effectively make to turn it into a positive cash flow property? Are rents below market so that you can quickly raise them to positive cash flow?   Are you substantially below market so that you have instant equity when you buy?  

However let me be clear, Buying a property that once you have renovated and stabilized if it doesn't have positive cash flow it is almost universally a bad idea. 

[Eliott Elias]

Only way it makes sense is is you buy so cheap you can sell tomorrow no question for a large profit. 

[Scott E.]

In general no it doesn't make sense to buy a negative cash flow property.

An example of where I once bought a deal where this DID make sense though - I bought a property that was occupied, and the seller wanted to lease the place back from me after closing. They couldn't afford much but I agreed to let them stay month-to-month which "technically" lost me money every month as the lease payment didn't cover my PITI. But I was flipping the house anyway, and it would be 4-5 months before I got my permit. So I let them stay, collected some rent, and then got them out when I was ready to start the remodel.

If you are buying a deal solely for the purpose of holding it as a rental, it would not be wise to buy something that loses $400 per month. The only reason I can think that you'd want to do that is if you were EXTREMELY confident in your ability to:

1. Raise rents in the next couple of years

2. Lower your payment via refi in the next couple of years

[Abby Shemesh]

@Rami Sobhani

There are several reasons that someone would take on a negative cash flowing property. 

1. You require a tax write off 

2. You will add renovations that will make a positively cash flowing property in the near future (make sure if this is your strategy that you do you market research and do not take the "ready, fire, aim" approach!)

3. You are buying the property way under market value and immediately step into equity that outweighs the negative cash flow (although this is a short term strategy as negative cash flow and all of the headaches that come with it gets old real quick!).

4. You are buying the property on seller-carry terms that are so attractive that the positives outweigh the negatives (this is a rare situation but nevertheless, we see it at least 4 to 5 times a year for sure). This may give you the breathing room and runway to engage in renovations that would increase rents and the value of the property down the road. This is a a narrow strategy and does not work in every market so do your research before diving in. 

I hope this helps. 

[Larry Turowski]

Quote from @Eliott Elias:

Only way it makes sense is is you buy so cheap you can sell tomorrow no question for a large profit. 

 This. I bought a property during Covid with a non-paying tenant that I carried for about a year because I got it at such a good price. They’ve since left, I’ve got a paying tenant and it is now worth over four times what I paid. 

[Bruce Lynn]

Not unusual at all to do this, but you want to know what your exit strategy is?

Can you raise rent?

How fast or when can you raise the rent.    I know around me there were many properties that didn't look like that great of a deal when purchased, but rents and prices have gone up like crazy the past 3-4-5 years, so what was negative year 1 is now double the purchase price in value and probably up 30% or more in rent.  So could also depend on where you think market is going.

Some people say they only want to buy cash flowing properties...and I don't have a problem with that, but they also have missed out on plenty of opportunity in many cases as well.

Think about anyone who builds a new apartment complex or does a flip.....negative cash flow day one, but hopefully windfall once you get it finished and filled up.

[Eric Gerakos]

No.

[Chris Seveney]

@Rami Sobhani

If you are buying a $750k home for $550k and it’s in a highly appreciating area which you may have a different use for it later on.

In cash flow areas with little to no appreciation it’s not a wise move. For example I am in and around Washington DC and have bought negative cash flowing properties and five years later they have great cash flow

[Mark Cruse]

If I found a property in a specific area I was targeting it may go down. In DC, multis are very expensive and its very competitive. Most will probably bypass if the numbers dont work. For me, Iḿ a skilled and senior investor that evaluates the long haul. $400 is steep  but if I know I can add value, raise rents and be cash flowing maybe the next year it could work. In Anacostia or Deanwood there is still room for tons of appreciation. If I get a 4 unit with negative flow, as stated the next year i could be cash flowing with all the tax benefits that come with it. In addition, that 900k building will most likely be a 1.5 million building well within 7 years. Again, it would have to be several beneficial characteristics to make me roll with it but it can happen. I cant see me doing that in Baltimore or Hagerstown......................

[Don Konipol]

Quote from @Rami Sobhani:

What would the reason be to buy a negative cash flowing property (let’s say negative 400 a month) ? Does it make sense to do that as a first time investor and home buyer?

Really it’s the same reason I sometimes invest in land.  Land is usually negative cash flow as having to pay property taxes, some times HOA fees, mowing, etc.  I buy if I expect to be able to sell for a large profit in the future.  Same thing for a negative cash flowing property.  Problem is you either have to be very right in your predictions, or have lots of cash in reserve, because otherwise the “alligator’ may eat you alive! 

Lots of people hate cash going out (me too!), but if I’m being compensated through a higher risk related return, I’ll do the negative cash flow investment.  

I can give you examples of negative or no cash flow investments I made where I made large profits….and a few that resulted in rather painful losses.  But that may go back to the studies that show that for most people a $10k loss is more painful than a $10K gain is pleasurable.  If given a 50/50 chance of losing $100k or winning 125K most people wouldn’t play, however those odds are so good that over the long run someone playing would end up a billionaire.  

[Rami Sobhani]

@Don Konipol yes please provide me with examples thank you

[Daniel Martinez]

don't do it, not on your first deal.

invest virtually before you buy a negative cashflow property with no upside

[Daniel Martinez]

Quote from @Don Konipol:

Quote from @Rami Sobhani:

What would the reason be to buy a negative cash flowing property (let’s say negative 400 a month) ? Does it make sense to do that as a first time investor and home buyer?

Really it’s the same reason I sometimes invest in land.  Land is usually negative cash flow as having to pay property taxes, some times HOA fees, mowing, etc.  I buy if I expect to be able to sell for a large profit in the future.  Same thing for a negative cash flowing property.  Problem is you either have to be very right in your predictions, or have lots of cash in reserve, because otherwise the “alligator’ may eat you alive! 

Lots of people hate cash going out (me too!), but if I’m being compensated through a higher risk related return, I’ll do the negative cash flow investment.  

I can give you examples of negative or no cash flow investments I made where I made large profits….and a few that resulted in rather painful losses.  But that may go back to the studies that show that for most people a $10k loss is more painful than a $10K gain is pleasurable.  If given a 50/50 chance of losing $100k or winning 125K most people wouldn’t play, however those odds are so good that over the long run someone playing would end up a billionaire.  

 we buy land and make it cashflow. We are creating infinite returns leveraging land. It is all we do. No houses, only land. We had 1 land deal cashflow $7k a month for 12 months. We love land. Most of our land deals we make $100k on each in 6 months or less. One came in over the weekend, looks like $250k profit on 9 acres we are just buying and relisting. More land than houses...

[Sara Frank]

Depends on WHY it has negative cash flow. If its because the in-place tenants are paying well below market rent - then it could be a good deal as long as you are able to raise those rents asap or get new tenants in there. If its vacant and the numbers arent shaking out then can you add value through renovations and subsequently raise rents? If its vacant, fully renovated and still negative cash flow then its probably not the best idea. Depends on your goal with the property