Is it OK to buy into a Negative Cash Flow Property?

110 Replies

Hello, 

Newbie here!

I'm putting an offer in on a triplex in southern California for about $950k

Its in a desirable area and it brings in about $5k a month in rents. The rents are about as high as they can go, so I can't increase them. 

If I put 25% down, consider some for capex, vacancy, repairs and property managment, I'm looking at about $300 negative a month. (property mgnmt is $450). 

I don't need the cashflow and see it as a long-term investment. 

Given these scant details, does it seem just wrong to go negative? (there are no properties in so cal areas that are positive when you factor in prop mgmnt and 25% down). 

Or would I be better off just paying off the home I am living in?

I would not choose option A or B. I would just find a different deal.

buying a deal that doesn't cashflow isn't an investment, it's a money pit. I doubt a bank would even loan on that.

@Kenneth Muench - unless you have a compelling reason to buy for either appreciation or a future cashflow jump, I personally find it REALLY hard to buy into negative cashflow. i don't know your particular situation but if you have the sort of money you mention, there are probably other possibilities outside of CA you might be interested in exploring, including paying off your home.

What drove you to this triplex in the first place, just out of curiosity?

If my memory from the BP podcasts serves me right, this is called speculating. With 200 - 250k at your disposal you could easily find a SFH house in South Orange County in the 600-700k range. With your down you should be able to cash flow between $200 to $500 for the right property. Rents in the right area down here for a 4 bed 2 1/2 bath are starting @ $3k a month and only going up from there.

Long story short, if you can't cash-flow on that property I would find one that will.  

If you search long and hard I think you could find a multifamily property that at the very least broke even. I found a client 2 4-plexes last year, in Orange and Anaheim, that cash flowed about $500-600/month with potential for about $1000 more per month after rehab + raising rent. He manages them himself though. 

Prices have risen since last year so finding a great deal requires a lot of time and patience. 

If you plan to hold for 15+ years I think seeking appreciation on these type of deals is a good play, but I wouldn't be willing to accept negative cash flow to do it.  

Unless there is some possible rezoning angle(either to separate units or commercial) or something similar, this looks like a pass.  

It sounds like a high down payment on a SFH might be a better option, if you are looking for an appreciation play.

Clint-

I agree. It's a bad bet to rely on appreciation to bail you out. That's speculation. 

I understand the frustration of digging through properties to find a good deal but they're out there. However, at the expense of subsidizing a buy and hold is a bad strategy. Also, this is supported by a lot of the BP podcasts. 

Just my view but I would like to hear from someone with more experience. 

Thanks,

Chris 

Originally posted by @Jon Magnusson :

If my memory from the BP podcasts serves me right, this is called speculating. With 200 - 250k at your disposal you could easily find a SFH house in South Orange County in the 600-700k range. With your down you should be able to cash flow between $200 to $500 for the right property. Rents in the right area down here for a 4 bed 2 1/2 bath are starting @ $3k a month and only going up from there.

Long story short, if you can't cash-flow on that property I would find one that will.  

 Why pay 17 times the annual rent ($36,000 x 17= $612,000)  vs less than 16 ($950,000 ÷ $60,000)? 

Nothing wrong with negative cash flow if you have the rent growth and appreciation to cover it.

Never buy negative cash flow.  If that was a good thing, do you think it would be called "negative" cash flow?

"I don't need the cashflow and see it as a long-term investment."

Great, then I'll go find you a different property where you have $400 negative cash flow, but doesn't cost you as much.

Let's see now.  You're rationalization for negative cash flow is future returns?  Great.  How far into the future?  How about 1 years?  Let's say in 10 years you sold this property and  made a "profit" of $????????

Now, up to that point, with no other problems, you "lost" $3600/year...or $36,000 over a 10 year period from your "negative" cash flow.  That means, you would have to sell the property for at least $36,000 more than you bought it...plus all the other costs that you paid out of pocket for, just to break even.

This is NOT an investment...it is, as @Alexander Felice so aptly put, a "money pit"

@Chris Viola Yes, I totally agree. It's very speculative to rely on appreciation and rising rent. 

When researching 4-plex deals in Orange County I often come across properties that have not appreciated at all in the last 10 years. 

Anything is possible, but I wonder how much appreciation one can expect from a property that already does not cash flow. It can happen, but I'd prefer not to bet on it.

Originally posted by @Joe Villeneuve :

Never buy negative cash flow.  If that was a good thing, do you think it would be called "negative" cash flow?

"I don't need the cashflow and see it as a long-term investment."

Great, then I'll go find you a different property where you have $400 negative cash flow, but doesn't cost you as much.

Let's see now.  You're rationalization for negative cash flow is future returns?  Great.  How far into the future?  How about 1 years?  Let's say in 10 years you sold this property and  made a "profit" of $????????

Now, up to that point, with no other problems, you "lost" $3600/year...or $36,000 over a 10 year period from your "negative" cash flow.  That means, you would have to sell the property for at least $36,000 more than you bought it...plus all the other costs that you paid out of pocket for, just to break even.

This is NOT an investment...it is, as @Alexander Felice so aptly put, a "money pit"

 Geez Joe, this property is not in Podunk, MI. The historic appreciation is probably in the 7%+ range with rents growing 5%+!  Do the math.  

@Kenneth M.

 I live in a equally or more expensive area in the bay area and it is very difficult to find a property in a good neighborhood (A or B) with positive cashflow with 25% down and paying for management. 30 to 35% down payment is pretty common here.

The thing that bothers me about the property that you listed is that there is no chance of increasing the rent from when you buy and the negative cashflow would be long term (unless rents grow). I think the best bet in these type of expensive markets is to find under performing properties (below market rent) and increase the rents to improve overall numbers.

Good luck

@Bob Bowling

I think my favorite investing quote is (and its in all legal investment verbiage) is "Past performance is no guarantee of future results."  

If you are an investor who can afford to speculate and a $3600 / year loss (using Joe's math) doesn't phase you then go for it.  No risk no reward.  Personally and IMO that's not the best strategy.  I'd rather cash flow $2400 / year.  That's a $6000 / year swing btw.  

Just sayin' 

@Kenneth M.

Hey Kenneth, have you looked into using the properties as short term rentals?  just doing quick math... if you rent each unit out at $100/night and average 20 days a month, that's $6,000/month and now you're magically in the black.  The units would need to be in a desirable area for rentals, and it would mean a little more work on your end but could make sense.  check out airbnb or vrbo for what rentals go for in that hood and look at the calendars to see how often they are rented 

Hey Kenneth! Well, it's definitely an appreciation/speculation-only play, for sure. And that's a lot of negative cash flow (and don't forget to add in potential repairs or vacancy issues on top of that!) and for an extremely high purchase price. But, maybe appreciation will play out on the other side, who knows (I'd definitely get really educated on buying for appreciation and make sure you have as sturdy of ground as possible going into it).

But right or wrong answer aside...what is your ultimate interest in this particular property? What is it you are wanting to accomplish with investing in a property in general?

Medium hipsterinvestment logo black300dpiAli Boone, Hipster Investments | [email protected] | 310‑957‑2101 | https://goo.gl/x52ZKJ

Originally posted by @Jon Magnusson :

@Bob Bowling

I think my favorite investing quote is (and its in all legal investment verbiage) is "Past performance is no guarantee of future results."  

If you are an investor who can afford to speculate and a $3600 / year loss (using Joe's math) doesn't phase you then go for it.  No risk no reward.  Personally and IMO that's not the best strategy.  I'd rather cash flow $2400 / year.  That's a $6000 / year swing btw.  

Just sayin' 

 I love how you guys say my 40+ year appreciation rate and rent growth rate is speculation but your 1-5 year rent rate, vacancy rate, collection rate, expense rate is guaranteed.

REI is a business and should be treated as such. If you want to buy on only todays numbers then I could of sold you some Blockbusters a few years ago. See how that is a pretty poor strategy?

@ Jesse T. How would rezoning into commercial change things? I'm asking because I have a SFH sitting on an acre, and the land is now zoned commercial. .

Thanks in advance.

Contrary to what most people say, negative cash flow is not always a bad investment. That Being said you need to know this market intimatly, both the progression of rents and property values.  If you know you are going to make some huge capital gain on it, then negative cash flow of this amount for a few years is a calculated risk. Keep in mind though that even most real eztate professionals don't know the market well enought to invest this way.

Medium logo lf re cire box white bboxRussell Brazil, Associate Broker w/ Long & Foster | [email protected] | (301) 893‑4635 | http://www.RussellBrazil.com | MD Agent # 648402, DC Agent # SP98375353, VA Agent # 0225219736, MA Agent # 9052346 | Podcast Guest on Show #192

In my opinion, this really depends on what the rest of your financial portfolio looks like.

How have you distributed your money among stocks, bonds, other homes or other assets? If you're already heavily invested in capital gains stocks and your primary residence, I would say that you are introducing too much risk into your overall portfolio by buying (with leverage) an appreciation-only triplex.

If you have a lot of other investments which generate cash-flow like dividend producing stock or cashflow REI and you like to gamble, I don't see a problem at all with buying this property hoping for some appreciation.

Also, I would be wary saying you don't need the cash flow if you are only offsetting the negative cashflow with income from your job.  I would want to be able to pay off the monthly mortgage with other non-job related income before trying to scoop up something like this.  Job security is nearly nonexistent these days.

I want to play poker with some of you guys.  LOL

For all those that said it's somehow OK to have negative cash flow, let's not lose sight of the initial question and who it came from.  The first line in the posters original post says,

                                                          "Newbie here!"

Now, are you actually saying that it's a good idea for a Newbie to start out with negative cash flow?

Originally posted by @Joe Villeneuve :

For all those that said it's somehow OK to have negative cash flow, let's not lose sight of the initial question and who it came from.  The first line in the posters original post says,

                                                          "Newbie here!"

Now, are you actually saying that it's a good idea for a Newbie to start out with negative cash flow?

Typically, I'd agree with you.  However, we aren't aware of this individual's risk tolerance or financial situation.  A quick Google search shows that this individual is a C-level officer at his job.  This sort of purchase could fit very nicely into a larger overall portfolio and any potential loss from cashflow or capital gains loss would be well within his risk tolerance.

You mentioned there is no upside in the rent, so only reason to buy is for future appreciation in value?  I know a lot of people got burnt around 06 to 07 for speculating. I would not make the move personally. 

Originally posted by @Joe Villeneuve :

For all those that said it's somehow OK to have negative cash flow, let's not lose sight of the initial question and who it came from.  The first line in the posters original post says,

                                                          "Newbie here!"

Now, are you actually saying that it's a good idea for a Newbie to start out with negative cash flow?

 Yes, IN Southern California where houses sold for $100,000 in the 70's and $200,000 in the 80's and $400,000 in the 90's and $800,000 in the 00's. 

This happens no matter your experience or skill level.  Now compare rent increases over that same time and compare them to Podunk. 

channeling Rich Dad here....

If you want to buy a losing asset like a car or a negatively cash flow trophy home, go buy some cash flowing properties first to pay for it. :)

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