Hi Folks,I am new to buying real estate for investment purposes, but have held a rental in which I used to live since 2014. With equity I've extracted from the first house I am looking at a 2-bed town house which has the following numbers: Monthly Income: $1095 Monthly Cash Flow (income minus expenses): $-310.25 Monthly Expenses... Cash on Cash Return... Principal & Interest $800.00 Down payment $51,125.00 Tax $80.00 Closing costs $3,000.00 Insurance $56.00 Washer dryer $560.00 HOA $205.00 Paint $1,000.00 Utilities $0.00 Vacancy $54.75 Repairs $50.00 Capital Expenditures $50.00 Total investment $55,685.00 Prop Mgmt $109.50 Annual cash flow -$3,723.00 Total Expenses $1,405.25 % ROI -6.69% However if I factor in the equity that will be built because the mortgage is slowly being paid off then the ROI becomes positive. Should I not touch this deal with a barge pole? Or are there any of you who have gone ahead with such a purchase based solely on the equity gains?I should add that I'm in the process of building a local network of acquaintances and contacts through this website and also face-to-face meetup groups. I know that this is a great way to become exposed to more ideas and options.Advice / criticism / comments most appreciated!Danielp.s. the formatting of the table above was not preserved when pasting into this forum. Hopefully it still somewhat makes sense.

Account Closed What happens when the market crashes or there is a correction. That "equity" becomes nothing. its just dead imaginary money in the property that you "hope" will turn out high if you end up appraising/selling it.

Account Closed I suspect that investors will be all over this one. My question is why would you go into a deal knowing that you will lose money every month? The only way you break even is through loan amortization and you are betting the farm on appreciation. This is not a deal that I would consider as a way to build wealth for me. In the front range, at least here in the city of Denver, I try to find properties that will cash flow at least $1,000 or more over the financing costs for SFRs, duplexes, triplexes, and quads. Edit: $1,000 or more PER MONTH over the financing costs.

We saw a lot of this kind of rationalization in 2006/2007. Those properties eventually went negative cash flow AND negative equity. If you're not cash flowing, you're speculating. At this point in the cycle, I'd rather have that $55k in the bank. Better deals are coming!

I deal with thi same tought process all the time at my REIC. Most of it stems from the way we are taught (or not taught) about how money works. Money isactually a verb, not a noun. When it becomes a noun...you lose.

ok, at that, yes I would say it's still a bad deal. Numbers are always worse than you think with repairs and such so it's a good bet that it's probably negatively cash flowing when it's all said and done. I just honestly believe if you're numbers spit out 1%, find something else. There are ways to better the deal (like better loan terms, reduced purchase price, put more down, etc) but if you're at break even, you have a long way to go. If I was analyzing the property and I got 1% return, that's just where I'd stop. Normally "creativity" gets you a few % at best, so making a deal go from 12% - 15% would be great, but 1%-4% isn't so hot. There is something to be said for experience, so I understand what you want to do, I just can't get behind basically no return and all you have to look forward to is potentially equity. You will pay down the mortgage over time, so that helps, but obviously doesn't put money in your pocket for a long time. Up front, it's 80% interest anyway so even over 5 years, you might pay down 10% of the loan. Any deal can look good if you go out enough years. A $500k property that you buy and lose $1k/year on looks pretty good in 30 years when you sell it for $1M, but that's 30 years from now and along the way it just takes money out of your pocket. The short answer is to look for a better deal.

Hard Pass. If it doesn't CF, it's a bad purchase. And...it's a purchase, not an investment.

Account Closed the numbers are the numbers. You have the answer to your question in front of you my friend. If it's not a deal on day 1 then it won't be a deal on day 2. If your willing to wait 15-20 year when your lender loosens up the interest portion of the note and you start really paying down principle then have at it but I wouldn't touch this property. Best of luck to you.

I'd take a look at an amortization schedule to see how little of your payment goes towards principle for the first 1/3 to 1/2 of the term of your loan. This will probably change your thought process.

I was about to reply when I read @Scott Trench reply and I couldn't agree more. I diversify my investing in appreciation and cash flow markets-Colorado and Tennessee, however, even though cash flow is better in TN, my rental in CO still cash flows. Even when you have conservative estimations for cash flow, unexpected costs can eat into that cash flow so I can't imagine going in knowing CF would already be negative. I know it isn't easy to find a deal in CO but I still think you can find a better investment!

Real Estate Deal Analysis & Advice

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Advice appreciated! - Negative cashflow but positive equity?

Account Closed

Rental Property Investor · Fort Collins, CO · Member since 2017 · 41 posts · 10 votes

Hi Folks,

I am new to buying real estate for investment purposes, but have held a rental in which I used to live since 2014. With equity I've extracted from the first house I am looking at a 2-bed town house which has the following numbers:

Monthly Income: $1095	Monthly Cash Flow (income minus expenses): $-310.25
Monthly Expenses...	Cash on Cash Return...
Principal & Interest	$800.00	Down payment	$51,125.00
Tax	$80.00	Closing costs	$3,000.00
Insurance	$56.00	Washer dryer	$560.00
HOA	$205.00	Paint	$1,000.00
Utilities	$0.00
Vacancy	$54.75
Repairs	$50.00
Capital Expenditures	$50.00	Total investment	$55,685.00
Prop Mgmt	$109.50	Annual cash flow	-$3,723.00
Total Expenses	$1,405.25	% ROI	-6.69%

However if I factor in the equity that will be built because the mortgage is slowly being paid off then the ROI becomes positive. Should I not touch this deal with a barge pole? Or are there any of you who have gone ahead with such a purchase based solely on the equity gains?

I should add that I'm in the process of building a local network of acquaintances and contacts through this website and also face-to-face meetup groups. I know that this is a great way to become exposed to more ideas and options.

Advice / criticism / comments most appreciated!

Daniel

p.s. the formatting of the table above was not preserved when pasting into this forum. Hopefully it still somewhat makes sense.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Originally posted by @Account Closed:

> My question is why would you go into a deal knowing that you will lose money every month?

@Scott Trench Thanks for the reply! Yes, that is basically my question. The only possible reason I can see is: that the renter is buying the house for you. So the cash flow lost each month would have to be weighed against the equity gained. Let's assume for argument's sake that there is an equity gain of $800/month, then subtracting the negative cash flow of $-310.25 still leaves a positive $489.75 every month ($5877 per year).

Do investors simply not include the equity gains when calculating ROI?

You have just fallen victim to the Investor's Most expensive word..."rationalization".

First, the tenant isn't buying the house for you if you have negative cash flow...you are...and, you're paying your tenant to live in your house at the same time.

What are (were) your plans for the cash coming out of your pocket to cover that negative cash flow...that is if you didn't have to give it to your tenant to cover their "under payment"? See, that negative cash flow money you are spending (and losing), probably had a different use in mind. Now if you still have to have cash to use for that "other" use of those funds, you have to use alternative cash for that too. That means your actual cost here is 2 times that negative cash flow. Once, for the tenant, and the 2nd time to cover your expenses that those "tenant" funds were supposed to be covering.

Now the big one...no that wasn't it. What are you going to do with all that equity you are building up? It's pretty useless until you tap into it...and you can't tap into it by refinancing, or you get more negative cash flow. By the way, ask anyone banking on equity how they did in 2008. Also, where did you come up with $800/month in gained equity? I hope it doesn't include your contributions to it. That's not equity. All you are doing is putting money under a mattress in the rental house. That "equity" represents your cash...not profit, so you can't count it. Now, if your tenant was paying for it, (i.e.Positive cash flow...), that would be different....and would be profit.

There's more...not good. What are your plans for your next property? How are you going to pay for it? How many more of these "gems" can you handle?

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