Negative cash flow...please review

Real Estate Deal Analysis & Advice

Negative cash flow...please review

Real Estate Investor · Member since 2008 · 11 posts · 0 votes

I am new to the forum and would appreciate some outside insight.

My wife and I are in the process of buying a 4 plex apartment building. We have been landlords before (although single family) and my question is basically a financial one. The four plex is an easy decision for us...5 minutes from our home and well maintained with 2 long term tenants. Even considering vacancy rates and maintenance/repairs the property should cash flow enough to pay off itself in about 12 to 14 years. We do not need the cash flow for income now. That is putting 10% down.

So here is the caveat, behind the four plex is a duplex offered by the same seller. Maintaining both next to each other would be ideal. However the duplex has a negative cash flow. Both properties together would still cash flow positively but not enough to facilitate much of an early pay off. The duplex is also well maintained and has even longer term tenants.

Of course the question is do you buy negative cash flow property? I like the idea of the property paying itself off early. I would rather not put any other income towards the early pay off of the real estate.

I have done some market research in the surrounding area and it seems the rents are on par with other properties.

Will a duplex appreciate more than a 4 plex?

I plan to hold my properties long term and would like them to be paid off when I retire in approximately 13 or so years. I will be managing the properties and can handle all but major mechanical repairs.

Thank you for your opinions and advice.

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Steven Grabowski
Developer · Hermitage, PA · Member since 2008 · 28 posts · 0 votes
18y
Originally posted by "FDCaptain":
I am new to the forum and would appreciate some outside insight.
My wife and I are in the process of buying a 4 plex apartment building. We have been landlords before (although single family) and my question is basically a financial one. The four plex is an easy decision for us...5 minutes from our home and well maintained with 2 long term tenants. Even considering vacancy rates and maintenance/repairs the property should cash flow enough to pay off itself in about 12 to 14 years. We do not need the cash flow for income now. That is putting 10% down.

So here is the caveat, behind the four plex is a duplex offered by the same seller. Maintaining both next to each other would be ideal. However the duplex has a negative cash flow. Both properties together would still cash flow positively but not enough to facilitate much of an early pay off. The duplex is also well maintained and has even longer term tenants.

Of course the question is do you buy negative cash flow property? I like the idea of the property paying itself off early. I would rather not put any other income towards the early pay off of the real estate.

I have done some market research in the surrounding area and it seems the rents are on par with other properties.

Will a duplex appreciate more than a 4 plex?

I plan to hold my properties long term and would like them to be paid off when I retire in approximately 13 or so years. I will be managing the properties and can handle all but major mechanical repairs.

Thank you for your opinions and advice.

If it is an income property - and sold as an income property, it should cashflow. If it doesn't, they are asking too much.
0 Reply
Kyle Gregory
Real Estate Investor · liberty township, OH · Member since 2008 · 149 posts · 6 votes
18y
how about giving us some more to go on.. like numbers?
0 Reply
Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
Buying for appreciation is a dangerous game unless you have some specific local factors that you believe will drive appreciation. Historically, appreciation has matched inflation over the long term, with short term fluctuations. With this bubble over the last 8 years, and lending undergoing radical changes as we speak, who knows how this will sort out. I'm pretty confident we have several years of falling, or at best flat, prices.

Buy properties with current cash flow, after considering all expenses.
0 Reply
Kathy Potter
Real Estate Investor · AZ · Member since 2008 · 58 posts · 1 vote
18y
Offer them less for the duplex. If you buy both they may go for it. If it doesn't cashflow chances are good no one else will buy it for what they are asking.
Income property values are based on the revenue they produce. So there is no rule than duplexes appreciate better than 4-plexes or any other over another. Properties with higher Net Operating Income are worth more than those with lower NOI.

Can you put more down and it make money then? If it doesn't work out, just buy the 4-plex. Good luck!
0 Reply
George Ramsay
Investor · Marietta, GA · Member since 2008 · 54 posts · 7 votes
18y
What are the chances of raising the rent on the duplex tenets and making it a cashflowing property?

Are there Repairs or improvements that would be worth making?

Also have you analyzed the negative cashflow as a tax consideration?

is there additional land on the property that could be utilized?

many other variables that could be considered here

But as the other posters have said buying a negative cashflowing proeprty usually isnt a good deal
0 Reply
Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
Pretend for a moment that the duplex was located a few blocks away instead of next to the 4-plex. Would you consider buying it with a negative cash flow? Would you buy the 4-plex with a negative cash flow?

The answer to me is simply NO! I would not buy a property that loses money!

Mike
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Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Thank you for your replies. Here is some more information.

The duplex property has a low return rate. At current rents the property would have a 5.8% Cap. Rate w/ 8% vacancy and moderate repair/maintenance expenses. It would take 30% down ($37,500) for the property to break even w/ the above stated variables and a 30 year loan.
A little market research on my part shows the rents to be on par with other units in the surrounding units.

The four plex on the other hand w/ 10% down ($15,000) has a Cap. Rate of 9.55% and cash flows $4,600 per year with a 30 year loan. This is also with 8% vacancy and moderate repair/maintenance expenses.

Once again thanks for all replies.
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Originally posted by "MikeOH":
Pretend for a moment that the duplex was located a few blocks away instead of next to the 4-plex. Would you consider buying it with a negative cash flow? Would you buy the 4-plex with a negative cash flow?
The answer to me is simply NO! I would not buy a property that loses money!

Mike

Good perspective....dont believe I would.
0 Reply
Kathy Potter
Real Estate Investor · AZ · Member since 2008 · 58 posts · 1 vote
18y
Four plex sounds great! Make an offer on the duplex at a price that makes you money and see if they take it. So many buyer's markets now and chances are good they have a financial need or wouldn't try to sell in this market. Make an offer with an attached financial explanation to back it up.

What do they owe on the duplex? Maybe the price they are trying to get has something to do with that and it might not work for them otherwise (but not your problem) or they would need to do a short sale.

If it doesn't work out just buy the four plex.
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Originally posted by "azlandlord":
Four plex sounds great! Make an offer on the duplex at a price that makes you money and see if they take it. So many buyer's markets now and chances are good they have a financial need or wouldn't try to sell in this market. Make an offer with an attached financial explanation to back it up.
What do they owe on the duplex? Maybe the price they are trying to get has something to do with that and it might not work for them otherwise (but not your problem) or they would need to do a short sale.

If it doesn't work out just buy the four plex.

The seller was widowed several years ago and no longer wants to be a landlord by herself. I have discussed the "numbers" of the duplex with her and there is a possibility of a price reduction. The sellers does not owe anything on the properties and she did not understand that with my debt service the duplex is not a deal for me....she just knows that paid for it makes her money.

Thanks again.
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
What about holding rentals in an LLC? Will an umbrella policy adequately cover me if not?

Also what is the opinion on using cash flow to pay off the property early. Should I use the cash flow for more investments?

There seems to be alot of varying opinions.

Thanks.
0 Reply
Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y

I'm a firm believer in a multi-layered asset protection strategy. Therefore, I would suggest holding your properties in LLC's and of course, having insurance.

If you look at most insurance policies, you'll discover that they don't cover many of the things that tenants like to sue for. For example, insurance doesn't usually cover lead paint, mold, asbestos, and other environmental factors.

That depends on your goal. Start with your goal and work backwards to determine how many rentals you need.

Good Luck,

Mike
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Originally posted by "MikeOH":

I'm a firm believer in a multi-layered asset protection strategy. Therefore, I would suggest holding your properties in LLC's and of course, having insurance.

If you look at most insurance policies, you'll discover that they don't cover many of the things that tenants like to sue for. For example, insurance doesn't usually cover lead paint, mold, asbestos, and other environmental factors.

That depends on your goal. Start with your goal and work backwards to determine how many rentals you need.

Good Luck,

Mike

Do you put each property in a separate LLC?
0 Reply
Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
18y
No, I have my rentals divided into separate LLCs by risk, each having about 10 -12 rentals. It is extremely cumbersome to have a separate LLC for each property if you're going to own a bunch of them.

Mike
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Originally posted by "MikeOH":
No, I have my rentals divided into separate LLCs by risk, each having about 10 -12 rentals. It is extremely cumbersome to have a separate LLC for each property if you're going to own a bunch of them.
Mike

I understand that. Thanks.
0 Reply
Jeff TumbarelloPro Member
Real Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
18y
Originally posted by "FDCaptain":
I am new to the forum and would appreciate some outside insight.
My wife and I are in the process of buying a 4 plex apartment building. We have been landlords before (although single family) and my question is basically a financial one. The four plex is an easy decision for us...5 minutes from our home and well maintained with 2 long term tenants. Even considering vacancy rates and maintenance/repairs the property should cash flow enough to pay off itself in about 12 to 14 years. We do not need the cash flow for income now. That is putting 10% down.

So here is the caveat, behind the four plex is a duplex offered by the same seller. Maintaining both next to each other would be ideal. However the duplex has a negative cash flow. Both properties together would still cash flow positively but not enough to facilitate much of an early pay off. The duplex is also well maintained and has even longer term tenants.

Of course the question is do you buy negative cash flow property? I like the idea of the property paying itself off early. I would rather not put any other income towards the early pay off of the real estate.

I have done some market research in the surrounding area and it seems the rents are on par with other properties.

Will a duplex appreciate more than a 4 plex?

I plan to hold my properties long term and would like them to be paid off when I retire in approximately 13 or so years. I will be managing the properties and can handle all but major mechanical repairs.

Thank you for your opinions and advice.

divide your reserves by the neg. cash throw off, you will know the day you go broke. :shock:
How much is business worth that does not make money? :protest:
Where are you located at? If its a peak and valley type market, you had better have a PHD in market timing. If you are in a midwest type market, you should NEVER do this.
Please feel free to use this to get a firmer grip on your deal. With the twists and spins of the current world, I would not buy an alligator right now. Leave that for the upswinging markets :idea:
0 Reply
Jason Golladay
OP
Real Estate Investor · Member since 2008 · 11 posts · 0 votes
18y
Originally posted by "Jeff_Tumbarello":
Originally posted by "FDCaptain":
I am new to the forum and would appreciate some outside insight.
My wife and I are in the process of buying a 4 plex apartment building. We have been landlords before (although single family) and my question is basically a financial one. The four plex is an easy decision for us...5 minutes from our home and well maintained with 2 long term tenants. Even considering vacancy rates and maintenance/repairs the property should cash flow enough to pay off itself in about 12 to 14 years. We do not need the cash flow for income now. That is putting 10% down.

So here is the caveat, behind the four plex is a duplex offered by the same seller. Maintaining both next to each other would be ideal. However the duplex has a negative cash flow. Both properties together would still cash flow positively but not enough to facilitate much of an early pay off. The duplex is also well maintained and has even longer term tenants.

Of course the question is do you buy negative cash flow property? I like the idea of the property paying itself off early. I would rather not put any other income towards the early pay off of the real estate.

I have done some market research in the surrounding area and it seems the rents are on par with other properties.

Will a duplex appreciate more than a 4 plex?

I plan to hold my properties long term and would like them to be paid off when I retire in approximately 13 or so years. I will be managing the properties and can handle all but major mechanical repairs.

Thank you for your opinions and advice.

divide your reserves by the neg. cash throw off, you will know the day you go broke. :shock:
How much is business worth that does not make money? :protest:
Where are you located at? If its a peak and valley type market, you had better have a PHD in market timing. If you are in a midwest type market, you should NEVER do this.
Please feel free to use this to get a firmer grip on your deal. With the twists and spins of the current world, I would not buy an alligator right now. Leave that for the upswinging markets :idea:

Thank you very much.
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