Renting properties at or below mortgage payment

9 Replies

Is it a bad idea to invest in properties where you would be able to collect rent that is equal or a little less than your mortgage payment? Or does anyone have a rule of thumb on how much profit they typically expect to make monthly on a property?

First step for you is to study investing in income properties.

Generally a rental property will have in the range of 4% -50% of rental income going toward expenses to maintain the investment before debt repayment (mortgage). 

Your suggestion would be considered a negative cash flow investment. You would need to contribute out of pocket each month to keep the investment afloat.

this is only a good idea if you have reason to believe that the area will be appreciating quickly, which is called speculation and akin to gambling not investing. me personally, I would rather put my money on black than bank on market appreciation. negative cash flow rentals are a time suck and money suck.

As noted above, up to 50% of gross rental income normally gets eaten up by expenses (taxes, management fees, utilities, landscaping, repairs, capex, etc). That's before you pay any debt service. To answer your question: No, it's generally not a good idea to lose a bunch of money every month.

Well even if the rent is equal to the mortgage, you'll still be in the negative after repairs, CapEx, vacancy, etc.

Why would you specifically be thinking of investing at a negative cash flow? For any particular reason?

The only time I'd say it's an okay idea is if either: 

  • The area you're investing in is expecting so much appreciation that you will easily profit off that (watch out for mortgage interest though...the appreciation needs to be higher than what you pay in that and expenses to make it profitable)
  • You have some specific reason for wanting to do it- family ties, future home, major long-term hold, etc.
  • Maybe I'm forgetting another one, but those two are all I have for now...

That's not investing. That's going out and getting a brand new car with the expectation that you could sell a depreciating asset for more than what you paid for it. It's just not how successful people operate. The other way to think about this is would you want 10, 20, 100 of these if it had negative cash flow?  NEVER!!! Dump the thing and either hang on to the cash while you find a performing asset or 1031 into something that does perform. It's questions like these that make me glad that this site/forum exists. Absorb information and you'll quickly learn why I've said what I've said.

i can only see it if you were upside down on an already owned property and you had to move and rented it to negate some of your loss

so my question is how much profit should you look for in a rental property as a rule of thumb as far as in gross rent over mortgage

There are some rare and complex circumstances where I see this would be beneficial. You could theoretically structure a deal where you are cash flowing negative, but have an overall positive ROI. This would need to be structured that if your rent is at or below your mortgage payment, the portion of the mortgage payment going towards principal is more than all other expenses (and hopefully more than budgeted capex).

There might be some added tax benefits for this if you add in depreciation to help push you to a lower tax bracket. 

That in mind, I wouldn't chase these deals, especially if you are in "growth mode". 

I think the 50 percent rule is dumb, but that may be just me. Taxes, maintenance, vacancies, management are all different on each property. I do not like blanket rules like that. 

Having said that, I think it is equally unwise to buy a property with negative cash flow let alone rent less than the mortgage. You have to see huge appreciation to see any gain. 

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