Buying a SFH with negative cash flow

16 Replies

Hey All,

After analyzing a deal for a SFH rental mortgaged over 15 years I have a negative cash flow for the first six years. Is that an absolute no-no? I prefer the buy and hold strategy so I don't mind having negative cash flow if it will yield more down the road and I have enough reserves to weather the first few years. Any feedback would be appreciated.

My monthly P & I payment would be lower with a 20 or 30 year mortgage.  It isn't a large number, but I was just wondering before I explore more of these type deals. 

Are you over-estimating insurance or maintenance?  Under-estimated affects of depreciation on cash-flow?

If not, I'd suggest keep searching.  The current market is high but there are still rentals priced better than negative cash-flow.  What if... we're at a peak, market prices drop 20% and rental market gets soft like it did in the late 2000s?  You could be weathering negative returns for a decade.

If you can't find a decent deal in real estate, put your down payment in a stock index fund. In 10 years that should at least double (8% return).

Look further. There is lower-hanging fruit.

What numbers are you using for appreciation and rent increases?   That is usually the reward for being able to buy for profit over immediate cash flow.

I will be buying in an area where appreciation is below the national average, and I am using a 1% appreciation rate with no rent increase. In a sense I guess the numbers are very conservative. I used deteriorating repair number over time to get to the six year positive cash flow.

15 year loan or not, never buy a property with negative cash flow.  There are plenty of other properties that will cash flow positive.  If there isn't then you need to look in another area.  

Originally posted by @Bradford Myatt :

I will be buying in an area where appreciation is below the national average, and I am using a 1% appreciation rate with no rent increase. In a sense I guess the numbers are very conservative. I used deteriorating repair number over time to get to the six year positive cash flow.

 Nothing wrong with negative cash flow but if you're saying appreciation and rent growth is nil then I'm wondering why this is a deal to you.

I sold many of my OREO to investor that had big negative cash flow but I sold them with ZERO interest and 60 month notes  they paid them off and owned them free and clear in 60 months... its a little tough for those years but the amount of money they save over a long period of time came back to them very quickly once they had them paid off.

I have one more that I am going to sell ZERO interest... and I know I have to pay Imputed interest but I like not having to worry about getting paid.. never had a default on a zero interest deal.

Everyone has their own strategy. Be careful with 15 year loans because it will make it hard to purchase the next house. We bought 1-15 year loan. Our goal was to do all 15 year loan until we realized that we wouldn't be able to requalfiy. Therefore we started putting them all on 3o year loans although we put as little into them as possible now. 

We buy class A properties that appreciate above inflation. Since you are betting on cash flow with this plan. Make sure it works :)

Welcome to BP. 

As buy and hold investor, you want to make sure you don't run into negative cash flow. This is NOT a good strategy to bank on appreciation only. You must need positive cash flow from day one till you sell your property. 

I understand in some markets, appreciation is so high that you will make a profit, however you must have a very strong financial back up to survive all the negative cash flow and keep putting money into it until you sell it. 

Hope it helps.

@Elizabeth Colegrove

What do you mean with not be able to requalify with a 15 year mortgage? Just curious.

If I ever buy a house to hold with negative cash flow...please shoot me.

@Andreas W.  

You have to requalify for new mortgages with your debt. So the more houses you have the more debt you have to requalify with. Unfortunately they look at your monthly payment not equity. So the higher payment was more that you had to requalify with making it harder to buy the next house. So we did everything on 30 year loans!

Originally posted by @Joe Villeneuve :

If I ever buy a house to hold with negative cash flow...please shoot me.

While Joe's answer is a little bit harsh, he has a great point, don't do it, keep looking and find a better deal. Negative cash flow sucks money from your wallet each month, and most new investors underestimate expenses (approximately 50% of rents). Based on the Kiyosaki definition something that takes money from your pocket each month it is a liability not an asset. About the only time I would do a negative cash flow is if it was a duplex or fourplex and you were living it at a negative cash flow well below market rents since you have to live somewhere.

@Bradford Myatt  It seems like the consensus votes against purchasing a property that projects negative cash flow. I believe most investors on Bigger Pockets are investing with a heavy focus on cash-flow. Appreciation is nice, but it is a lot like gambling.

But you also really need to consider how you are analyzing the property. Your "projection" of negative cash flow depends a lot on what percentage you are plugging in for maintenance, vacancy, capital expenditures and management. When I am running numbers, I put 10%, 10%, 5% and 10% respectively for those four categories. Lower those percentages and the monthly cash flow can work great. Raise them and you might not have any cash flow.

Mike

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