Negative monthly cash flow

35 Replies

Currently I have a home in Alabama on a streamline va loan that I recently refinanced. It is a 15yr loan at 3.25% and the balance is 119k. The nearby comps indicate that I'm about even. I collect $765 a month after pm fees and my mortgage is just under $1000. Any ideas to bring it to positive cash flow? Or at least break even? Every six month I'm knocking $3500 off the mortgage and in about five years I could sell for a profit but I rather not continue paying $200 a month in the mean time. The option to do away with the pm is not practical I live in Washington. I thought I had a good idea by doing the 15 yr refin and save $60k in interest over the life of the loan. But that proves to be wrong for cash flow and I wasn't looking into actually become an rei till recently. Thank you all in advance for advice and for being welcoming to a newbie.

Hey Dustin,

 Price other PM companies but I doubt you'll save $200/mth.

Are the tenants quality enough to try long distance land lording?

Update units to bring in higher rents?

Hopefully rents are on their way up!!

Aaron

I had the same insurance for years, and after looking at the slow increase in premiums over time they had doubled my premiums.  Call around and see what other offers are out there.

When you say "mortgage", does that payment include taxes and insurance (PITI rather than just PI)?

Who pays utilities?

When you initially did the 15 year loan term, were you living there? 

How much annual depreciation do you take on your tax return that might be offsetting some of that negative cash flow? 

Not saying that negative cash flow is a good thing, but sometimes it arises from circumstance where your goal may not initially have been monthly positive cash flow. 

If it were me, and if it's a good property, I would deal with it on my tax return.  

Refi would be a good option but that's going to cost you either up front or on the backend of the new loan.

Another option would be to cut your losses and get out of it, then put your efforts in a different / better deal

Originally posted by @Joe Villeneuve :

Refi again...at 30.

I agree with this if the investing goal has changed and positive monthly cash flow is the new goal. 

Not sure what the OP's goal is: Does he want a property paid off sooner? Does he want to save all that money that would go toward interest for the 30 year term?  Without knowing what the actual investing goal is, hard to give advice. Especially when the potential goals in this instance are obviously going to conflict. 

Originally posted by @Steve Babiak :
Originally posted by @Joe Villeneuve:

Refi again...at 30.

I agree with this if the investing goal has changed and positive monthly cash flow is the new goal. 

Not sure what the OP's goal is: Does he want a property paid off sooner? Does he want to save all that money that would go toward interest for the 30 year term?  Without knowing what the actual investing goal is, hard to give advice. Especially when the potential goals in this instance are obviously going to conflict. 

 It really doesn't matter.  The OP has already stated the negative cash flow is the issue.  The only way I see is to get the mortgage payment lower (maybe see if he can get the property taxes lowered too).

the only thing you can really do to get better cash flow is to refi to a 30 like joe said and to get insurance estimates to lower the insurance payment.  Theres also hiking up the rent price but that is a matter of what the rent is like in your area.

if after all that you still cant cash flow then i would sell the house and buy a new one that does cash flow.  I doubt the appreciation alabama is that great to the point where you would want to keep that house in hopes of appreciation gain.

Refi to 30 years as above.

Raise the rent?

@Dustin Little , welcome to BP.  I actually use 15 year loans to acquire rental properties.  It does hurt cash flow.  Some make me a little money, some lose money.  There are a few things that would be helpful to know.  As @Steve Babiak mentioned, knowing if the taxes and insurance is included in your mortgage is pretty important.  Other important factors include are housing prices in that neighborhood going up or down?  What is your financial situation?  Very good paying job or no job, or poor paying job.  How long till retirement?  How nice is the home and neighborhood?  I have a very negative cash flow property, but it is next to my personal residence.  I lose $140 per month not counting any repairs or maintenance and that is managing it myself.  The good side is I control who my neighbor is.  Next To buy a home that nice for $140 per month is nuts.  It is by far the nicest rental I own.  Third I bought it for no money down, the owner financed 20% of the purchase price on $200 per month payments at 2% interest, with a 5 year balloon. With a 15 year note 20% of principal will be paid down in 5 years so if needed I can refinance and pay the balloon off then the property will go to breaking even.  Finally I don't need the income, I do OK in my day job, but I am less than 15 years from retirement so having it paid off before I retire is pretty important.

If you need the money you should either refinance or sell it. If you have a good paying job and can afford it I would it ride for awhile and get the fast pay down and tax benefits. A lot depends on your current situation. If you bought a property that is cash flowing say $200 per month the two would offset each other somewhat. You still must deal with vacancy, repairs, and Capex.

Thank all of you for so many great responses. To sum up some of the questions, I am active duty military as well as my wife. We are not in need of positive cash flow which is why I refin to the 15 yr streamline. However, my goals have changed since o began my research in becoming an REI and positive cash flow seems to be the goal. The house does help bring down my taxable income and after reading everyone's responses I am now thinking I maybe breaking close to even when considering the taxes. Repairs are my only expense for the property the pm fees is included in the dollar amounts previously mentioned. Utilities are paid by the tenants and the yard is their responsibility as well. I think I will stick out the current situation after looking into the taxes and insurance possibilities. Everyone is very professional and helpful in BP and I want to thank you all for being so welcoming.

@Dustin Little

Do you have other assets you are trying to invest in? What is the return before the principal pay down portion? If the extra money would just sit in a savings account it might not be such a bad investment to pay down the house this way. It psychologically sucks doing things this way but you are essentially just investing in the house over and over gain and saving interest costs along the way.  Of course, I would also argue that putting all your eggs in one basket is not necessarily the most prudent move but it might be your only option at this point unless you want to pay more cash to go back to a 30 year loan. 

Welcome!

My husband is active duty and we own 3 properties back east that I self manage! it has it moments but overall the savings and financial benefit is awesome!

If your not hurting for the cash flow I wouldn't worry about it! Than again we are investing for cash flow 15 years from now ;)

Can you sell it and buy something close to home you can manage yourself?

@Sue Kelly

Funny how everyone just has jumped ship away from California...... It's a interesting thing. My daughter is 23 she has had her real estate license for 20 months and has closed 15 deals. I'm very proud of her, last week she sold a young couple 23 and 24 years old a duplex in Riverside, Ca. After expenses they make $350 THEY ARE OUT THERE you just have to find them..... MLS deal by the way

good luck

Jim

unfortunately, even though I purchased in 2009 the house is only even with what I owe. So, if I verse to sell I would lose in closing cost. As of now I think I need to look at it as I originally did, a long term retirement investment.

I'm active duty and am doing the same thing but I live in the area still so I self-manage. I pay $43 out of pocket but my lease is Witten to go up $100 at the end of the first year so I will start to be positive. If you are renting to other military time your rent increase at the beginning of the year when bah and pay is increased that way the renter dos not feel the increase as much. If you are looking to reduce the deficit, look at insurance. I found that USAA was very expensive $1300 vs $700 for covering a rental house. I know that I now buy my personal residence like an investment so they will cash flow. I’m sure you see it that way now too.

@Dustin Little

I have a rental on a VA loan, it was originally my first home, then we moved. I have refinanced it twice. The first was to get it from a 5/1 arm to a 30yr fixed. The second time was to drop 1% off the interest & save about $125/month in payments. Since it was a VA streamline they didn't require an appraisal, we are still upside down on the property so this saved our bacon on that property.

We were able to have all the closing cost rolled into the new loan, so nothing out of pocket.  I would get the facts from your lender and see what it will cost & how the numbers would look if you were to re-fi the property.

Also, it never hurts to protest your tax valuation to see if you can find some savings.

So: Call your bank, see what your numbers would look like with a re-fi.

Shop for insurance

Protest your taxes

Look for a new PM/evaluate your rents vs market rent.

If you think you can bring the property into the positive range, after all that is done, then go for the re-fi.

I would avoid holding anything for negative cash flow unless you have tons of money, you can't afford to hold too many negative deals for too long before you end up broke.

Just my two cents worth.  

Everyone says sell it when it's not cash flowing. But they don’t account for the cost of selling. My guess is that if you are not cash flowing there is not tons of equity in the house. You are long distance so you would likely use an agent which will be 5% minimum of the 119K that would be about $6000 so you can hold that property at a $200/month loss for 30 months before it would make sense to have sold it. A lot happens in 30 month with values, equity and rents.All that being said you may be able to sell to the current renter and avoid the real-estate agent saving money. I would not go buy a negative cash flow home but you are in it and it may cost you more to sell than to lose money until rents increase to cover the house. The real question that you must ask yourself is do you think rents would come up to $1000/month in the next 2.5 years is if so can you cash flow $200/month for that time period. How much longer do you have on your mortgage?

The best advice I can tell you is to look at everything and decide what is best for YOU. Everyone has great ideas and plans when they get started in REI but they make mistakes along the way. I can talk all day about the mistakes I have made and the mistakes that I didn't make by making mistakes. You have to THINK about what you want or need to do and then DO it. It may make sense for you to hold on to the property and loose some money each month even if for no other reason than that being your motivation for learning more and avoiding future mistakes. You have already gotten more out of this one property than most people will get in a lifetime. You have learned what does or does not work for you and you have learned that you can buy a rental property and the world will not end. To me, that is worth $140 a month for the next 15 years!

As for me, I would go out and buy another house! Does that sound crazy? If it does then it might just work! You already have one house that produces negative cash flow. There is only one way for you to go from here; UP. Go back and look at what you did or did not do. Figure out what did or did not work and learn from that. Then go find and buy a house that makes enough cash flow to cover the house that is negative. If selling the house is going to cost you money and keeping the house is going to cost you money then at least you still have the house which, even if loosing money, is going to appreciate over time. Keep the house until the equity is such that you can make money and use the second house to cover the negative side.

Sorry, To me, there is not rationalization that would make me want to keep a house that has negative cash flow. The first rule of REI is the same as the first rule of Poker...stay in the game. Notice I didn't say "stay in a bad hand"...because that's the fastest way of NOT staying in the game.

Holding onto a house with negative cash flow, is like adding to a pot just because you've already put a lot of your chips in this pot, and you don't want to lose them...like you have a chance with a bad hand.  No matter how much you add to that pot, your cards won't change, and you'll be out of the game in not time.

Throwing bad money after good, is the fastest way I know, to get kicked out of either game.

What is the break-down of your mortgage payment?

You interest should be $325/month.  Your yearly principal payments should be about $6000/year.  So basically you are paying $200/month to get about $500 in principal.  You also should be getting about $1000/year in tax deferral which means from a tax point of view you should be close to breaking even.  

If you can pay the $200/month and for any repairs and you think their is appreciation potential, it might be worth holding onto.

Is the loan assumable?  It might be worth just selling if you can get someone to take over the loan - even if you have to pay commissions/closings.  I think the big risk is that your repairs/capital expenses exceed the equity that you build up.

 

Hey @Dustin Little ,

Greetings from Alabama :) Good luck with this investment. Sounds like you have a good plan. Please let me know if we can help with anything.

Deedee

Insurance $53

Tax $37

Principle $542

Interest $344 (3.375%)

Total Payment  $975

Maturity Date 10/2029

Balance (I was a little off) $121,690

Comps in the area are for sale for about the same price and are rent at or below my current tenants, who are possibly PCSing (moving) in July.  The home is only 6 years old, very little maintenance is required, tenants pay utilities and maintain yard. The PM cost 10% which is lower then most for the area, and the rent is $850/mo.

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