Buy a negatively cash flowing property on purpose?

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Buy a negatively cash flowing property on purpose?

Cowan Bucks
Investor · Reading, PA · Member since 2014 · 14 posts · 3 votes


People of Bigger Pockets,

First off, I'd like to say thank you to Josh Dorkin and Brandon Turner for this fun and informative site. Also, if any of you have not listened to the podcasts they put out, I would urge you to do that immediately. I would also like to thank anyone in general who is involved in the BP community. The site is truly one of a kind with so many like minded people wanting to share their knowledge so we all can reach some form of success.

My names Cowan Bucks . I'm a 26 year old train operator from Pennsylvania. I love my job but my true passion is for Real Estate. Like many, I've been silently studying, waiting for the right time to make my presence known. Unfortunately, no matter how many books and blogs I read, podcasts I listen to, I always feel my real estate knowledge is just slightly inadequate. Today's a different day though. Today's the day I say SCREW IT ! I'm going for it!

I want to buy a duplex or triplex for my first owner occupied home. I've been wanting to this for years now but I can't seem to find the right property. (It seems like all I do is search the MLS and analyze deals). Unfortunately, my area might not be the best area for a multifamily property. I understand that and in fact within about 1 1/2 hours from me, I can find good cash flowing properties. All my contacts and resources are in my home town (where I live currently) so moving that distance isn't quite yet an option.

Ok, so here's my question... FINALLY!

Should I buy a duplex in my hometown, live there and learn about landlording even though I might be just breaking even, possible losing a little money every month?

Side Note: When i analyze deals, I've been using 20% down.

I know it doesn't sound like the smartest idea but i have to start somewhere and would feel the most comfortable with my support and resources close by. 

Any advice would be greatly appreciated!

Thanks in advance!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Cowan Bucks 

  If you can buy a multi unit live in one unit for free or only 100 a month Negative and the fair market rent value is 800 or 900... then your making 700 to 800 positive cash flow.

Unless you living at home with your parents for free.. You need to live somewhere and in your units is a perfect place to start at your age. Much MUCH MUCH safer than trying to buy some out of area cheapy rental.

and you can get in on FHA for 3.5% down if you want there by keeping your cash in reserve.. And you could rinse repeat this many times ( especially at your age) and end up owing many doors all with excellent 30 year fixed financing.. Gain experience etc etc.

So my vote is to go with your first thought buy live it in and learn to do with tenants.

Plus remember when you owner occupy your duplex to fourplex.. You are not subject to the fair housing laws.. You can discrimate for any reason.. So you can truly choose your tenant without any repercussions.

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  • Jeremy Tillotson
    Investor · Fort Wayne, IN · Member since 2014 · 1k+ posts · 515 votes
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    @Cowan Bucks you should search the term house hacking on here. Best of luck let me know if I can help in anyway.

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  • Jason Krick
    Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
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    @Cowan Bucks I am local to you and also looking for my first deal.  What neighborhoods in the Reading/Berks area are looking at?

    0Reply
  • Cowan Bucks
    OP
    Investor · Reading, PA · Member since 2014 · 14 posts · 3 votes
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    @Jason Krick I've been looking all around but mainly the Antietam/Exeter area. The inner city is not an option.

    0Reply
  • Cowan Bucks
    OP
    Investor · Reading, PA · Member since 2014 · 14 posts · 3 votes
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    @Jeremy Tillotson   Thanks for your quick response Jeremy!

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
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    @Cowan Bucks My opinion:  If your analysis shows the duplex would cash flow with both sides occupied then I see no problem w/ a plan where you purchase & occupy.  On the one hand you could look @ the cash flow you'd be loosing as a loss but in reality it's not.  You'll have a residence ( you need a home to live in), be able to write off 1/2 of all expenses on the property & a portion of your mortgage will be covered by the tenant.  While living there you can secretly learn to be the landlord.  I say secretly because your tenant should not know that your the landlord.  

    You can then look for your next property, put a new tenant in the property you just moved out of (for positive cash flow) & repeat the process.  If you live in an area where property is appreciating you may even think about selling the property.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    There is no reason to buy a property that has negative cash flow

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Cowan Bucks 

      If you can buy a multi unit live in one unit for free or only 100 a month Negative and the fair market rent value is 800 or 900... then your making 700 to 800 positive cash flow.

    Unless you living at home with your parents for free.. You need to live somewhere and in your units is a perfect place to start at your age. Much MUCH MUCH safer than trying to buy some out of area cheapy rental.

    and you can get in on FHA for 3.5% down if you want there by keeping your cash in reserve.. And you could rinse repeat this many times ( especially at your age) and end up owing many doors all with excellent 30 year fixed financing.. Gain experience etc etc.

    So my vote is to go with your first thought buy live it in and learn to do with tenants.

    Plus remember when you owner occupy your duplex to fourplex.. You are not subject to the fair housing laws.. You can discrimate for any reason.. So you can truly choose your tenant without any repercussions.

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  • Jason Krick
    Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
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    @Cowan Bucks I know Antietam has some of the highest property taxes around.  Maybe Millmont, Northmont, Temple, etc., all have the same property classes.  That might make your numbers more viable.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Joe Villeneuve 

      Although I agree with you statement as a basic concept. I don't think its a blanket statement.

    For instance this person would in the long run do better than buying something else. One his unit will never be vacant.. It will never get trashed,, it will not have any PM fee's.. And since he can pick and choose his tenant in the other units. he will mitigate those issues as well. So even if he is 100 or 200 negative he is still having someone payoff his mortgage and within a year he could move to another and just keep doing this until he has filled up his 4 or 10 mortgage slots. 

    And of course we have that West Coast appreciation Vs mid west cash flow debates as well :)

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  • Bryan N.
    Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
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    Never buy a negative cash flow property.  You would be better off buying a speculative stock, watching the price drop, and "hoping" one day it will go back up.  

    Or

    Buy it, rehab it, and raise the rent so it's positive cash flow.  Even if you could find this "dream" property where these numbers would work, it most likely wouldn't be worth it.  

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    @Jay Hinrichs 

    My rules for REI:

    1 - Never lose money on purpose

    2 - Never rationalize Rule #1

    4Reply
  • Bryan N.
    Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
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    Rationalizing a deal will most likely lead to you regretting the deal.  

    Wait that's.... 

    @Joe Villeneuve rule #2

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Joe Villeneuve 

      easier said than done... in many markets.... And of course one would just put a little more down to eliminate negative cash flow.

    I think of all the homes I owned in the SF Bay area and Portland ORegon over the last 40 years. Now you have to live someplace right.. and maybe one is not in RE business.. But those homes when sold and I received my tax free proceeds.. this number is right at  2.5 million in Cash TAX free...

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  • Jason Krick
    Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
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    @Joe Villeneuve @Jay Hinrichs 

    So, which of these options are preferable, as many others are faced with this:

    1). The OP buys a duplex, rented both sides out, and cash flows $300. (For the sake of argument). Now, he has to live somewhere and pay, let's say $900 mortgage on another property, or $1,000 rent.

    2)  He buys the duplex, rents one half and stays in the other.  His monthly payment is $300 to cover expenses, maintenance, vacancies, etc.

    Which is the more desirable scenario?

    2Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
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    Every time  someone asks this question there is always someone who says never buy a negative cash flow property.  Well if you own your primary residence unless you are renting it to someone else too- your primary residence is a negative cash flow property. 

    It is a question of how negative it is and what that housing is worth to you.   Figure in what you would be spending in rent.  If when you figure in your cost of housing the numbers look good then do it.  If you are out of pocket a few hundred a month as long as an apartment would cost more then that you are okay.  I even say do this if you can live in your parents house for free because you never know when that could change and /learning self sufficiency is worth something.  So when analyzing I would say put market rent in for yourself  and weigh the deal that way. This is one deal that money wise may not meet all  the standards you would set for a strictly investment property but it is a worthwhile starting point.

    5Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Jason Krick 

      the answer is it depends...  the OP is 26.. he can do this yearly and build a very nice portfolio over 4 or 5 years all with owner occ rates and terms..

    Your risk of something going wrong with the rental is far less when you live in it.. your not going to trash your own unit.. And there is no risk of you not getting rent from yourself. YOur not going to have to evict yourself.. your not going to pay a PM to collect your payment or up charge your routine maintenance.. And not sure in that state but there may be a home owner exemption were the tax's are much less than for rentals. I know in many states owner occ tax's are half of non owner occ. so at least for those years. 

    So just rinse repeat until you can't get any more mortgages.. plus I think its better to use your mortgage slot for as many doors as possible not just one door.. you use your 4 mortgage slots and have four doors.. instead of 8 to 16 if you buy plex's...

    So your not buying a negative cash flow investment your living in it and actually making positive cash flow as you state unless he lives for free he has to pay to live somewhere.

    Now when buying a stand alone investment then that's different.  Also many may not want to live in a Plex.. Like me I would never consider this for myself personally..

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Colleen F. 

      that was the point I was attempting to make... I look at my personal home I could rent it for 5 to 6k a month to some one else. But I choose to live in it.. But if I wanted to rent it ... it would be massively positive cash flow .. and like @Joe Villeneuve  likes to do I have NO cash in this home. But I did build it myself and I refied my construction loan.. Not to mention the tax free equity. These are things to consider.  But I could if I wanted to just rent it out and quit my day job :)

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  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
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    Just charge yourself rent and you will be cashflow positive......

    2Reply
  • Chris WoodPro Member
    Contractor · Greenwood, IN · Member since 2014 · 200 posts · 33 votes
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    @Cowan Bucks  After learning a lot on this site and reading the above comments. I agree with all of them. I guess I would encourage you to get involved with local investors, including taking them to lunch or whatever.  It seems that often the deals that don't often loose money are bought and sold to people with out ever touching the mls.  But even if they don't, if they something comes their way then they might call you. Good luck whatever you decide. 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    @Jay Hinrichs Putting a little more down doesn't negate negative cash flow...all it does it put your further behind from the start...and makes the negative cash return a higher mountain to climb out of.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
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    @Cowan Bucks , if you ADD the amount you are currently paying in rent to the amount that you would be getting in income from your multiplex (because you would be effectively SAVING that amount thereafter), then the numbers might just be positive after all. I agree with others who feel that Joe is not taking the rent that he foregoes by living in his own home into account when saying never go negative.  Joe, are you saying you never paid any rent in your life, but was able to jump into a 100% paid-off home from day one? Meanwhile, back in the real world...

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Brent Coombs:

    @Cowan Bucks , if you ADD the amount you are currently paying in rent to the amount that you would be getting in income from your multiplex (because you would be effectively SAVING that amount thereafter), then the numbers might just be positive after all. I agree with others who feel that Joe is not taking the rent that he foregoes by living in his own home into account when saying never go negative.  Joe, are you saying you never paid any rent in your life, but was able to jump into a 100% paid-off home from day one? Meanwhile, back in the real world...

     If you are paying rent, that is money going out.  Cash flow (rent after expenses) is coming in.  If you are saving rent by not having to pay it, that is a savings, but has nothing to do with cash flow on the rental.  That just means you have less to pay.  In the end, whether or not you are paying rent, if the money going out is greater than the money coming in...that's negative cash flow.  Buying a duplex, and living in half, only works as an investment if the rent pays for both sides.  In this case, it clearly doesn't.

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  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
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    @Jay Hinrichs    I thought that was what  you were saying.   @Joe Villeneuve 

    @Bryan N.  though seems to suggest that you should never negative cash flow on anything.  I think you are almost always going to on your primary residence.  A lot of beginners asking this question are given that same answer. It seems discouraging to them to take that direction. It does not distinguish this situation from a straight investment property.   I would go so far to be in favor of some negative cash flow in a duplex you live in over  a  remote cash flowing property.   This lets the beginner  enter the market with a higher class of property.  They can upgrade for their personal benefit as a  do it yourself project and they also get a much quicker start investing. Not to mention that there is a financing and other advantages for a personal residence as a starting point that have already been mentioned by Jay.  You also learn a lot from living next to a tenant although it is not for everyone.

    It is important to keep in mind when sharing rules that not everyone starts from the same place knowledge-wise.  I think It is about what the OP can turn this opportunity into,  not whether it meets  your rule today.   I would agree that if the property is never going to cash flow, for example  like a Single family that you rent with negative cash flow, it probably isn't a good idea.  However if  the OP  buys a duplex that he is going to live in, his occupancy has a value to him,  he adds value in improvements,  the area is appreciating,   and he moves out with some positive cash flow or sells at an appreciated value he is ahead.  It certainly is less risky then buying  an hour and a half away where he has no knowledge of the area,  no experience landlording and could easily take a couple of thousand dollars of a hit at the start.  

    4Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
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    @Joe Villeneuve , yes I know that stopped rent is not ACTUALLY counted as income; my point was that you still have to live somewhere, and Joe, if your own door costs you more each year than it generates by you charging yourself rent (which you can't even pretend to do according to your own argument), then by definition your home is NEGATIVELY GEARED! ie. every year you have to come up with dosh. Cheers...

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Brent Coombs:

    @Joe Villeneuve , yes I know that stopped rent is not ACTUALLY counted as income; my point was that you still have to live somewhere, and Joe, if your own door costs you more each year than it generates by you charging yourself rent (which you can't even pretend to do according to your own argument), then by definition your home is NEGATIVELY GEARED! ie. every year you have to come up with dosh. Cheers...

     You lost me.  Are you now bringing in someone's own home into the discussion?  I want to know because your own home isn't an investment...it's an expense, so you can't bring that into the picture here.  Although, it can be compared to the side of the duplex the landlord would be living in.

    The more I read into this discussion we are having, I'm realizing we are not that far off...just approaching it from different angles and priorities. 

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