Negative cash flow "investment" property

12 Replies

My wife and I are considering purchasing a 4-plex, renting out 3 of the units, and then owner-occupying the last. Purchase price is $325k. Rents are currently $575/piece, but we'd be raising them to $700/piece (which other similar units are going for on Craigslist). Additionally, we'd rent out the garage units behind the complex for $40/piece, bringing in an additional $200/month. Total income would be $2300 from the property, PITI is $2100. No property management, as we would take care of that ourselves. Property was built in 2004, so there appears to be no crazy repair expenses up front. By the time we account for vacancies and repairs/maintenance each month, we're about -$300 cash flow on the unit.

Our primary residence is a 5 bed/3 bath single-family that we own. Mortgage is $900/month. It was built in 2016, so repairs/maintenance *should* be minimal in the near future. We live in a college town, which would allow us to rent out individual bedrooms to students. Renting out our current home would net us an additional $600/month beyond the mortgage, expenses, repairs, vacancies, etc.

($600/month SFR income) + ($900 mortgage payment we would no longer be paying/paid by tenants) + (-$300 cash flow on 4-plex) = $1200. Let's call it an even $1000/month, just in case I haven't accounted for something.

So yes, most people would say, "Never ever ever buy anything that doesn't cash flow." I agree with this for the most part, but in our situation, we actually come out ahead. Not to mention, once we move out of the 4th unit, we'd gain an additional $700 in cash flow.

Is this a good deal? Or am I trying to rationalize a bad deal into a good one?

Thanks in advance.

That's not coming out ahead.  That's rationalizing a bad deal by stealing money from another property and saying "we're ahead".  You're behind.  If you didn't do the 4-plex...how far ahead would you be?

If we didn't do the 4-plex, we're not ahead at all, because we're living in our current home and paying the mortgage out of pocket each month. Moving out of this home, and into another, allows for someone else to pay our current mortgage, make an additional $600/month, and live for free. Or is my thinking/math incorrect?

 You will be living in the property.  You are essentially leaving 25% of the property vacant as a choice.  You get to live for FREE.  That is a home run, not a single or double, but a home run.

Here are my thoughts. you have few options here:

Option 1: you stay at your current property - cashflow = -900/month.

Option 2: you stay at your current property and just rent out the duplex - cashflow = $400 (from 4plex) - $900 = -500/month

Option 3: you move to 4plex, rent your current resident: Cashflow = 600 - 300 = $300 (+ principal repayment on mortgage of your primary)

Option 4: you move to 4plex, sell your current resident and invest that cash: ????

Relevant options here that you are talking about are options 1 and 3.  The difference in monthly cashflow is $1200 a month.  that means, buying 4plex is at least generating a positive return (assuming that your cashflow calcs are correct AND you are ok with sharing houses with 3 other families and going through the headache of dealing with them).

Now, here are the things we should consider:

1. How much is your upfront payment on the 4plex (are you financing or cash purchase?)

2. Your ACTUAL change in cashflow without considering your primary resident is $600 (-900/month - -300/month).

3. What is your return on $7200 ($600 x 12 months) a year? is that an acceptable return.

Then, I want you to consider the difference between option 3 and 4. Your primary resident will rent for $1500 a month.  How much is it worth? how much is your equity? can you invest that in a different property and yield more returns than $1500? 

Hope this was helpful!

Originally posted by @Michinori Kaneko :

Here are my thoughts. you have few options here:

Option 1: you stay at your current property - cashflow = -900/month.

Option 2: you stay at your current property and just rent out the duplex - cashflow = $400 (from 4plex) - $900 = -500/month

Option 3: you move to 4plex, rent your current resident: Cashflow = 600 - 300 = $300 (+ principal repayment on mortgage of your primary)

Option 4: you move to 4plex, sell your current resident and invest that cash: ????

Relevant options here that you are talking about are options 1 and 3.  The difference in monthly cashflow is $1200 a month.  that means, buying 4plex is at least generating a positive return (assuming that your cashflow calcs are correct AND you are ok with sharing houses with 3 other families and going through the headache of dealing with them).

Now, here are the things we should consider:

1. How much is your upfront payment on the 4plex (are you financing or cash purchase?)

2. Your ACTUAL change in cashflow without considering your primary resident is $600 (-900/month - -300/month).

3. What is your return on $7200 ($600 x 12 months) a year? is that an acceptable return.

Then, I want you to consider the difference between option 3 and 4. Your primary resident will rent for $1500 a month.  How much is it worth? how much is your equity? can you invest that in a different property and yield more returns than $1500? 

Hope this was helpful!

Thank you very much for your post. I love how you've laid out all our options. You're correct, we're leaning towards Option 1 or Option 3, but particularly Option 3 since it yields us the most cash flow (and we can deal with the headache of having neighbors again for a year or two until we make our next move).

1. Up front cash on the deal would be about $50k. $25k we have in cash reserves, the other $25k would be pulled from a HELOC on our home. HELOC re-payment (About $300/month) has already been calculated into the $2100 estimate on the 4-plex.

3. $7,200 return/$50,000 initial investment returns us 14.4% after year 1, if I'm correct? Seems better to me than the 7% average in the stock market.

Originally posted by @Bryce Matheson :

My wife and I are considering purchasing a 4-plex, renting out 3 of the units, and then owner-occupying the last. Purchase price is $325k. Rents are currently $575/piece, but we'd be raising them to $700/piece (which other similar units are going for on Craigslist). Additionally, we'd rent out the garage units behind the complex for $40/piece, bringing in an additional $200/month. Total income would be $2300 from the property, PITI is $2100. No property management, as we would take care of that ourselves. Property was built in 2004, so there appears to be no crazy repair expenses up front. By the time we account for vacancies and repairs/maintenance each month, we're about -$300 cash flow on the unit.

Our primary residence is a 5 bed/3 bath single-family that we own. Mortgage is $900/month. It was built in 2016, so repairs/maintenance *should* be minimal in the near future. We live in a college town, which would allow us to rent out individual bedrooms to students. Renting out our current home would net us an additional $600/month beyond the mortgage, expenses, repairs, vacancies, etc.

($600/month SFR income) + ($900 mortgage payment we would no longer be paying/paid by tenants) + (-$300 cash flow on 4-plex) = $1200. Let's call it an even $1000/month, just in case I haven't accounted for something.

So yes, most people would say, "Never ever ever buy anything that doesn't cash flow." I agree with this for the most part, but in our situation, we actually come out ahead. Not to mention, once we move out of the 4th unit, we'd gain an additional $700 in cash flow.

Is this a good deal? Or am I trying to rationalize a bad deal into a good one?

Thanks in advance.

 When calculating return on a multi family that you will owner occupy, you run the numbers as though you aren't living there. That's because whatever rent you would be paying somewhere is now free for you. In addition, you probably don't want to live there forever.

@Bryce Matheson

You're only putting down $50K on a $325K property? does the $7200 (or rather your estimate of -$300 per month cashflow) already incorporate the interest on your $25K HELOC, PMI, and interest on remaining $270K mortgage (also for shared housing I assume you would have to pay for maintenance of common areas)? Other things I would consider is principal repayment ( + on return). If so, congratulations on a whopping 14% return!

I would consider option 4 too if you have significant equity on the primary resident unless you have plans to move back into it.  you can find a property under $200K that pays rent of $1500 a month, so if you put 25% down thats only $50K equity you need for the same rent income! you also get more tax deduction from higher interest payment (you've paid off lots of principal on your original mortgage so you won't get as much deduction on income from interest expense). 

Hope that helps!

Originally posted by @Michinori Kaneko :

@Bryce Matheson

You're only putting down $50K on a $325K property? does the $7200 (or rather your estimate of -$300 per month cashflow) already incorporate the interest on your $25K HELOC, PMI, and interest on remaining $270K mortgage (also for shared housing I assume you would have to pay for maintenance of common areas)? Other things I would consider is principal repayment ( + on return). If so, congratulations on a whopping 14% return!

I would consider option 4 too if you have significant equity on the primary resident unless you have plans to move back into it.  you can find a property under $200K that pays rent of $1500 a month, so if you put 25% down thats only $50K equity you need for the same rent income! you also get more tax deduction from higher interest payment (you've paid off lots of principal on your original mortgage so you won't get as much deduction on income from interest expense). 

Hope that helps!

Yep. That's correct. 15% down on a $325k property comes out to $50k. The local credit union I would go through has investment property terms that don't require PMI, and relatively low interest rates. My cash flow estimate does incorporate the HELOC repayment.

Forget about his current home for a second....the 4 plex is a great house hack. He would be living for free while his tenants paid his entire mortgage.  Ok, now that he is living for free, let's look at his current house. He will make money from renting that out, while his tenants pay his entire mortgage. I don't see how this is a bad deal at all. It sounds like a great deal. 

@Bryce Matheson

That's great. Congrats! Even if you took Andrew's approach you will be at $4800 cashflow on annual basis + principal repayment so your overall return on cash is easily over 10%!

@Bryce Matheson this doesn't really add up. How is it that units are renting for $575 when market is $700? On top of that you are saying the garages can get $40 additional? Are the garages currently included as part of that $575 rent people are paying? My concern here is the huge jump in rent. I would run the numbers based on current rents and any upside should be bonus.

Of course the other thing here is you should run your numbers based on the fourth unit being occupied. So it would be $575X4=$2300 + $200 for garages, so the total income is $2500. It looks like you are still -$100 in cash flow. If you can't even break even with all the units rented, that is a problem. I know you are saying market rents are $700 per unit, but if that is the case then why hasn't the current owner raised rents? (Maybe tenants pay huge electric bills or something else you are not considering).

I would offer a little bit lower price and use the properties current income as justification. Share the numbers with them to show them that rents don't even cover expenses. If they tell you "rents are below market" my response would be, "then why don't you raise all the rents". Sellers think buyers are dumb and believe they are just "old and tired so they didn't raise rents". The real reason landlords don't raise rents is fear that tenants will not pay it. Maybe they know something you don't?