Gain Equity in Negative Cash Flow Rental or Keep Renting?

Question

I am currently renting but looking to buy in the Minneapolis market. I am a first time home buyer looking to purchase a condo, however I only want to live in the home for 2 years and then turn it into a rental property. What is holding me back from purchasing is I am having trouble finding properties that will cash flow (~$200/month gap at current rent prices in the market).

I can afford to buy now and hate to continue throwing money at rent, but I fear it is a bad investment down the line to have a negative cash flow rental property. Am I better off renting for another 2 years and not purchasing a condo at all? I am assuming it will cost me $40k+ to continue renting in my market, cumulative over the next 2 years. OR will the losses from negative cash flow be offset by 1) potential appreciation of the property, 2) tax deductions, 3) potential rent increases and 4) 2 years worth of equity gained vs. spent on renting.

Any advice or opinions are appreciated.

Thanks!

Adam Tafel · Answer

Have you considered buying a 2-4 unit property? That's the route most of us took.

Jeff Schemmel · Answer

hey Grace!

you're likely better off buying, especially if you want that for yourself; an asset that appreciates is infinitely better than no asset and paying someone else. Aside from that question, cash flow is harder in this market and a bit more difficult to achieve without a little effort. I had to do some rehab to my duplex to increase the rents and get it to a point where it'll cash flow. Standards for cash flow are all over the map, and it really depends how you want to buy.

A good compromise for you might be house hacking. living in one room/unit and renting another while you live in the property you buy. Have you considered this scenario?

Happy to chat anytime, Grace!

Henry Lazerow · Answer

Try to find something that atleast would break even if you left. I never would buy something that negative cashflowed but math wise it is far better then renting so if that's only option go for it but I bet you can find a multi that atleast pays for itself.

J Zev J. · Answer

@Grace Modl - If you're set on buying you should research househacking. There are probably some agents in your area that are on biggerpockets that can help you run some of the numbers to see if it will work for your criteria.

Gene Livingston · Answer

The hard thing about a response to this question is that condos in one location are really different from condos in other places. For instance, in Florida resort areas (I assume) condos would perform well, I'm not in the Florida market. In my area (Dallas/Ft Worth/Waco/Austin) I dont generally like condos. The association fees are too high, and the appreciation is non-existent. With condos you REALLY have to understand how they behave in your area.

The cash flow game: In some places, investors own properties and intentionally have negative cash flow (california)..they are playing for the appreciation. In other areas, they play for cash flow and expect little to no appreciation.

Starting out tho, and in general, I'd still say go for it...that's how I got started; I bought a condo package and lived in 1 unit for awhile. It's not a bad way to start, just don't expect great performance.

James Alderman · Answer

If you can get out of renting and into ownership, I say go for it. Two years down the line, you may have multiple exit strategies depending on appreciation of the property and rent increase. If it won't cash flow in two years, but your equity has grown from appreciation, you can sell and put that money into your next home or a rental. In my market, I've seen rent "catch-up" to the price of homes over the past 18 months.

Keep in mind that you are mostly paying interest for the first few years of your mortgage. If we see housing prices drop, you may not have much gains to realize if you sell. If you can handle the negative cashflow (or just continue living there) until the market rebounds, then you'll be fine if you have a solid source of other income.

I wouldn't lock yourself into one mindset that you MUST rent it in two years. Keep your options open and make the right decision for your situation.

Michael Helman · Answer

Lots of good advice here. When I was looking, what always made or broke the deal was the HOA - some of the units in MPLS have some hefty HOA fees. If a condo is a must and the math lines up, I think you could make a good case for buying over renting. If you could look at a duplex as others have stated, you may find yourself in a better cash-flow situation (i.e. house hack). Is MPLS a must-have? You may find better success in first ring suburbs. Good luck to you!

Conner Olsen · Answer

@Grace Modl When you move out leave it furnished and rent it monthly to traveling nurses, etc. I'm seeing an increase in cash on cash by 15%+ by using this strategy.

Mike Swenson · Answer

I agree with a lot of what was posted - large HOA fees can eat up a lot of potential cashflow, so I'd probably look to see if I could pull off a SFH instead, or perhaps a duplex as others have said. Look for additional ways to have a positive exit strategy. You could increase your odds down the road by picking a property where you can add value, either by fixing it up (doesn't have to be a dramatic fix-up) or adding some additional square footage to it....perhaps an unfinished attic or basement. Townhouses and condos tend to tighten up more quickly in a shifting market vs. single family homes, so depending on what interest rates do between now and when you're looking to sell down the road, you may put yourself in a better position looking looking at a SFH or small multi-family market if you can make the numbers work.

Aaron Gordy · Answer

Do you think that the rents will go up by $200 in that submarket over a 2 year period of time? If so it seems that you will be breaking even. Its really a math game. I think that you are much better off buying. Buy for the long haul. There are so many more benefits of owning vs renting.

Gain Equity in Negative Cash Flow Rental or Keep Renting?

Gain Equity in Negative Cash Flow Rental or Keep Renting?

Most Popular Reply

13 Replies