Analysis - Too Late? Negative cash flow :-(

22 Replies

Hello,

I could really use some help analyzing my first rental property. I financed this particular house - newly built in 2013 - as my residence using a VA Loan, (no money down) for 168,000. The home is located in Killeen, Texas which is a military town in case you haven't heard of it. It is quite possibly the lowest value home in this neighborhood. I'm on a cul-de-sac with a 320,000 home on the left and a 200,000 home on the right. I will be moving out at the end of this month and already have a tenant in place, renting for 1200. The low rate was a personal favor to someone I know, and after one year the rent will go back to 1300 and stay there.

If I'm doing this analysis correctly, I believe I'm projecting a negative net cash flow. This is a bit vexing to me especially because the other homes in the neighborhood are renting for a similar price but have much higher values overall.

EFFECTIVE GROSS INCOME (10YEARS) @1300/mo.

Potential Rental Income = 156,000

Vacancy = 15,600

Concessions/Delinquent Rent = 1560

Net Rental Income = 138,840

OPERATING EXPENSES

Insurance = 15,000

Taxes = 24,326

Repair/Maintenance = 15,000

Property Management = 15,600

Landscaping/Pest Control = 4500

NET RENTAL INCOME AFTER OPERATING EXPENSES = 64,414

MORTGAGE EXPENSE (~$800 a month principal and interest) = 96,000

NET CASH FLOW = ................. - 31586

My question, aside from whether I am computing these numbers correctly, is should I consider selling this property instead of holding onto it? I have also already made an additional 8,000 in improvements.

What would you do as an experienced investor if this was YOUR first property? Thank you! -Zach

Hi Zacharias,

Welcome to BiggerPockets.

Geee, I'll be your friend for $100/ month favor. Not a good idea when you are in a negative cash flow situation, but it is a good friend.

One thing you didn't do is add rent increases. When you are projecting that far out, you should plan on 2-3% increases in rent. So the picture isn't quite as bad as it seems.

That being said, I would probably try to sell and look for a property that you can get to positive cash flow.

Well, I didn't really plan on this being a rental property. But it wouldn't make sense to have a neg cash flow. He is a good friend, I probably wouldn't do it for anyone else. I'm wondering what keeps other owners in this neighborhood renting instead of selling. Who knows. Maybe they're not as motivated with cash flow and more focused on equity appreciation.

It could be those other owners plan on some day moving back, houses that rent for $1,300 that are worth $168k don't make sense, especially with Texas property taxes.

The most expensive house I have as a rental is worth about $125k (I have a LOT less in it) and it rents for $1,250, I have other houses that are worth around $100k that rent for $1,150,,,as you can see the rent doesn't necessarily increase relative to the value of the house.

Thank you for the input. This just confirms my suspicions. I have to wait until after I return from overseas to sell unfortunately, hopefully I can get a decent price on the sale. It was not well thought out, but oh well.

You paid retail and financed 100% of the house. It isn't your fault. That does not cashflow anywhere.

You could try to refinance and put more down if you want to make it cashflow.

Maybe I'm missing something @Zacharias Salva  but I'm looking at the numbers you provided and trying to work backwards, and in 1 month increments instead of the full 10 years. So I took the above numbers and divided them by 10 years, then once again by 12 months to get monthly amounts. 

I'm seeing the following, please correct me if I'm totally wrong. 

Rental Income: $1200

Mortgage Payment: -$800 (Doesn't include taxes?)

Maintenance: -$120

Insurance: -$125 (Really this high? Consider a smaller or different coverage?)

Taxes: -$202

Also, if this is the only rental property you have, why spend almost 10% on property management? If you're giving your friend a deal on the rent, couldn't he take care of the repairs and the lawn? This is a single family house correct? On a newly built house, you should only have about 3-5% maintenance costs. Just my opinion. 

Assuming you are in the real estate business to make money, why would you hold any unit that had negative cash flow? (Unless it was strictly an appreciation play which is not a game you want to play in TX.

That said, sell, cut your losses and find something with positive cash flow.

Also, placing more money down may get rid of negative cash flow, but that does not turn it into a deal. You must account for the return on that capital invested.

Hi @Zacharias Salva  

I'm new here, and this is my first post, so please excuse me for trying to provide any advice with no history to back anything up.

While I would always agree that investing for a positive cash flow is important, it ultimately depends on your situation. Lets say, for example, that you go overseas and do not have any mortgage or rent expense. Now, if you continue to pay the difference on your mortgage payment (minus your rental income) you could still be better off. You have to look at your mortgage principle pay down in your calculations to get the big picture. Assuming you took a 30 year mortgage at around 4% (equating to an $800 payment), over 10 years you would have paid down a little over $35,000 in mortgage principal. While I agree that investing for capital appreciation is a speculative game, it's probably fair to say that over the long term your property valuation will at least stay the same if not increase. So even if it didn't increase and only stayed the same, you would have built $35,000 in equity, that cost you $31,586 out of your own pocket. Not a great return, but it's something. And if you factor in rent increases over the long term, that would be even better.

If you can trim down your expenses as @Roman Pak  stated above, you could be pretty close to break even point and at least enjoy principal pay down even if you can't get it to cash flow.

If you sold today for the same as what you paid for it, you are still out of pocket on your closing costs, realtor fees etc. You financed 100% so have no equity.

All I'm saying is, before you sell it and have nothing to show for it, you can at least try to trim your expenses, break even on the cash flow, and build equity on the principal pay down (ignoring appreciation) that you can later use for further investments.

Originally posted by @Zacharias Salva :

Hello,

I could really use some help analyzing my first rental property. I financed this particular house - newly built in 2013 - as my residence using a VA Loan, (no money down) for 168,000. The home is located in Killeen, Texas which is a military town in case you haven't heard of it. It is quite possibly the lowest value home in this neighborhood. I'm on a cul-de-sac with a 320,000 home on the left and a 200,000 home on the right. I will be moving out at the end of this month and already have a tenant in place, renting for 1200. The low rate was a personal favor to someone I know, and after one year the rent will go back to 1300 and stay there.

If I'm doing this analysis correctly, I believe I'm projecting a negative net cash flow. This is a bit vexing to me especially because the other homes in the neighborhood are renting for a similar price but have much higher values overall.

EFFECTIVE GROSS INCOME (10YEARS) @1300/mo.

Potential Rental Income = 156,000

Vacancy = 15,600

Concessions/Delinquent Rent = 1560

Net Rental Income = 138,840

OPERATING EXPENSES

Insurance = 15,000

Taxes = 24,326

Repair/Maintenance = 15,000

Property Management = 15,600

Landscaping/Pest Control = 4500

NET RENTAL INCOME AFTER OPERATING EXPENSES = 64,414

MORTGAGE EXPENSE (~$800 a month principal and interest) = 96,000

NET CASH FLOW = ................. - 31586

My question, aside from whether I am computing these numbers correctly, is should I consider selling this property instead of holding onto it? I have also already made an additional 8,000 in improvements.

What would you do as an experienced investor if this was YOUR first property? Thank you! -Zach

You have your cash flow upfront!  That would be the $33,660 that you did not have to come up with on the closing date for a  20% down payment.  I'm not going to compute your numbers but lets say that had you done conventional financing you'd maybe be a hundred or two cash flow positive at the time of purchase.  A smart investor would rather have the tens of thousands of CASH NOW than the possibility of dribbling income that is going to be taxed each year.  I'll take all the good (and some of the bad) properties that you have if I can control a $168,000 asset for a few years payment of $100 a month! 

Immediate cash flow does not mean profitability. 

I also think you are probably wrong that properties in the same location are renting at similar rents yet are vastly different in value.  That does NOT make sense unless there is an identifiable reason. 

Also, you should learn how to correctly analyze income and expenses.  There are lots of online calculators.

Thank you all very much for the input. I was not expecting so many people to chime in. What a truly outstanding, mutually supportive, and motivated forum community!

@Zacharias Salva

I have a strict policy of not renting to friends or relatives, You will be the last person paid, you will get plenty of excuses & little money.. Unless the HOA requires a certain person to do the landscaping I'd exclude that, have the tenants responsible, also like @Roman Pak

said, the insurance is high, get with your agent, get a policy for a rental & require the tenants to obtain renters insurance..

If I were in your shoes I would start interviewing property managers.. Have them place someone for you.. Your friend can find something else...

@Matt Laird ,

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Raymond 

Lawn care plus the $100 a month is too much to do when you are negative on cash flow. If you are planning on moving back and you want someone in there who you know will keep things a certain way while you are overseas or something like ok, it is not such an issue but as an investment maybe not. Other then that I would charge market rent. Let your friend know that you have looked at the market and you are negative cash flowing if not at market rent. You could offer it to them at market or just go to a property manager and screen other tenants.

There is a point to be made that it was a no money down deal so that might makes something marginal more acceptable. I am not sure how long you would be negative/break even though. Overall, it might be better to just sell the place. I would compare the sell now cost to the one year holding at market rent to inform your decision but a lot of people would say sell now.

Not sure why you did a 10 year numbers. One year is usually what people present their numbers on.

@Raymond B.  

Thanks for the info.. I was actually using my phone & was unable to get it to work.. 

One more suggestion would be to appeal your property taxes and see if you can get them lowered down.

@Zacharias Salva  

I'm an agent in the area, and based on what you described, I would recommend holding onto it as a rental.  You didn't include the equity you are building, nor the tax benefits in your analysis as best I could see.  @Christopher Brown had a pretty good first-timer post on that. And even if you have a negative cash flow of, for example, $100/month, after 360 months you will have a $168k asset owned free and clear after $36,000 invested. The annualized return on that over 30 years is pretty meek (under 5%, I think), but it is a conservative scenario and doesn't include the money you would make AFTER owning it free and clear, where your returns would skyrocket with no mortgage to pay. Also, with the VA loan, you are already underwater, and will be likely be looking at paying $10k or more just to sell it now.  Once you have some equity in 5-10 years time, that might be a better option.  Just my opinion.

That said, there is only so much negative cash flow a person can handle.  If you don't have a job that can afford the outlay each month, then its not a good place to be in.

BTW - are you in White Rock Estates?  That's my best guess based on the neighborhood you described.  Just curious (though I have a rental in that neighborhood, too).  Also, White Rock is doing fairly well for the area, and I am hopeful will retain its home value in the near to mid term.

Thank you Brian. It's located in Andalusia off of East Trimmier. One of the Eddie Vale developments. I ran my numbers again and my losses were a bit exaggerated with my first assessment. This is a beautiful new home and built rather well to boot; the market here is stable and they are almost finished with the stagecoach/195 hwy connection which I think 'might' begin drawing this area into the north Austin commuter distance.

Where do you see this market headed with some of the units on fort hood getting deactivated?

Ah, I was close, @Zacharias Salva  

I quickly took a look at everything sold within .5 miles of Andalucia in the last year and the year prior.  The median price fell from $191,950 to $184,000 in that time (comparing 60 home sold, 23 in the last year and 37 in the year prior).  However that is not by any means cause for alarm.  A big part of that is that more recent sales are predominantly resales instead of new sales, and in a neighborhood where the builder is still selling, resales will be somewhat discounted.  Also, the builder is just finishing up in Spanish Oaks, and builders are more inclined to sell the last of their inventory in a neighborhood at a discount.  I would never recommend expecting appreciation in Killeen, but you are in a great neighborhood and one that I expect to retain its after-inflation value in the long term.  And with as strong a rental market as Killeen has, I think you would do alright renting.

As I mentioned, I have a home on Sulfur Spring Dr. next door in White Rock, bought in 2009 with VA loan that I now rent. I think in that time it has just appreciated/paid off enough that I could sell without bringing money to the table. It's been renting at $1150. I bought it retail and have been losing approximately $100/month cash flow after budgeting for vacancy, maintenance etc. But I am optimistic, because it is one of the cheaper homes in one of the best neighborhoods.

One nice thing about renting in a military community is that there is a large population of responsible, well paid renters.  Someone making a Colonel's salary would normally own a home, but even high ranking officers and NCOs tend to be renters in the Army because off the transient nature of the job.  So I often recommend that landlords can get away with higher tier rentals than are recommended in other markets (where I understand it is recommended to target rental investments center-mass of the rental market).

While there are some Fort Hood units deactivating, it is more about the Army reorganizing. I think Fort Hood is supposed to lose a total of fewer than 4000 Soldiers from a local population of approximately 200,000. And many of those Soldiers who leave the Army at Fort Hood remain in the area. And also, Fort Hood is still the #1 training destination for reserve and national guard troops. But what has us Realtors really excited is the nearly finished and giant VA Hospital, highly visible from Hwy 190 there on Fort Hood, and the new Texas A&M Central Texas campus on the South-west side of town (also very sleek and visible from Hwy 195). These both promise to be major new job and student makers and help the local economy diversify away from a purely "military town".

I am excited about the Hwy 195 improvements as well, though I don't see anyone working on it at the moment.  They seem to be taking there time there.  I wish I could buy up along 195 on the south side of town, because Killeen can only grow south, and also that is where TAMCU is being built.

Let me know what you think!

My husband is active duty navy. We try to buy a house at as many duty stations as possible. We don't follow BP "rules" our house in virginia beach was $240j and rents for 1775. Our house in lemoore was 168k  and rents for 1400. We have no negative cash flow has my vacency rates are non-existent. For us these houses are a win because we out nothing in them (slit a va) and they have enough cash flow to cover the oh Shits. Plus the principle is paying down our loan. We also get some nice tax advantages. Whe I would never recommend you cash flowing negative. You don't have to cash flow ialt to Mae a profit. On the other hand you have to make this a business or you wi have problems.

You can take out the management costs since you don't need a manager if you already have a tenant and you only own a single property. You only need a property manager if you oversee 75+ rent-able properties or units.

now your only at 15k negative which can easily be factored out by increasing the rent 2-3% to keep up with inflation. your taking the biggest lost because you are renting to a friend but honestly I think its a good thing to do a favor when your tenant is already paying 75% of your mortgage and upkeep expenses which is much better then paying that out of pocket especially if you plan to one day move into the house.

That Stagecoach Road improvement will be a great improvement, and will likely see an ever-growing traffic rate. I was first stationed at Fort Hood in 2003, and that road was pretty rural.

I think one of the biggest problems with the Hood/Killeen/Harker Heights/Copperas Cove area is that 190 is the only feasible East-West corridor and gets totally bogged down during commute times for everyone working on post.

I think that @Brian Adams  , @Bob Bowling , and @Colleen F. all make great points. You can justify an exception to the traditional investing rules (to an extent) on a VA property, as long as you are comfortable with the cash outflow ($100 per month + expenses)...after taxes, you'll probably come very close to breaking even or come out ahead. In the long run, you'll be better prepared to manage more and more properties, or anything else you'd like to do in real estate.

Forrest Baumhover

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