Should I purchase a non cash flowing duplex?
Most Popular Reply
Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Antuan C. I love house hacking. That's how I started out my investing career and I probably couldn't be where I am today without doing it. I would suggest to keep 3 things in mind when thinking of house hacking:
1. Cash Flow - Keep in mind that house hacking REDUCES my cost of home ownership. You will NOT cash flow on any property that you purchase. I'm not sure if anybody has said anything different to you but I need this to be your expectation. Remember, you are occupying one of the units...it would be impossible to cashflow in that scenario. Ok, maybe if you rented out each room and maybe did everything Short Term or something like that. But if it's long term renting, then you won't cashflow. But it will still allow you to afford a SIGNIFICANTLY higher price point than if you did not house hack.
Appreciation - So, if real estate appreciates 5% per year, then a $500,000 property will have $138,000 in additional value after 5 years. A $1million home will have $276,000 in value increase after 5 years (using that same 5% appreciation per year). The higher our value, the higher the equity gain is - even if the % of gain is equal between the properties...the dollar amount is higher on the higher valued home because the property is worth more. That's how house hacking helps us gain wealth. We certainly aren't gaining $276,000 with $200 of cashflow. So, don't sweat the "no cashflow" thing. If you were to give me $50 per month, and after 5 years I would give you $50,000...would you be ok with that? Of course you would! That's a great deal! And that means you would even be ok with having negative cashflow too. Appreciation and principle buydown provide us WAY more income than cash flow does.
Buying your primary home - when I buy my primary home it has to fit my PERSONAL needs. Maybe I personally need a good commute time. Maybe I personally need a certain school zone. Maybe I want this home because of how safe I feel in the neighborhood. So I'm addressing a primary home with a different perspective. Just focus on purchasing a good home that you feel comfortable with living in. Your commitment is to live in it for 12 months...and then you can do it again and again!
Hope all of that makes sense. Thanks!
43 Replies
- New to Real Estate · Member since 2019 · 48 posts · 43 votes1y
If the property is priced 100k less, does it come with a ton of deferred maintenance and issues? I could see how this could be a bad deal if it already costs you a few thousand per year without even accounting for maintenance, capex, vacancies etc
On the other hand, it could be priced aggressively and if rates do drop, you could have a real winner.
- Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).
the property completed stabilization 3 months ago. Today the rents are $7.5k above piti (or $4k above my sustained expense projection). I am also up about $1m above purchase and rehab costs.
i use total return to determine the quality of an RE purchase. I can handle sustained negative cash flow. Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment? Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did). The accelerated depreciation returned nearly 40% of my investment in year 1. Would it be a bad investment if it was still negative $6k/month?
note this works best if you can do this minimizing the risk. This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).
cash flow gets taxed annually. Other sources of re return are tax free or tax deferred. This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form. We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).
just some things to ponder.@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.
Good luck
- Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
Quote from @Dan H.:
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).
the property completed stabilization 3 months ago. Today the rents are $7.5k above piti (or $4k above my sustained expense projection). I am also up about $1m above purchase and rehab costs.
i use total return to determine the quality of an RE purchase. I can handle sustained negative cash flow. Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment? Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did). The accelerated depreciation returned nearly 40% of my investment in year 1. Would it be a bad investment if it was still negative $6k/month?
note this works best if you can do this minimizing the risk. This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).
cash flow gets taxed annually. Other sources of re return are tax free or tax deferred. This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form. We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).
just some things to ponder.@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.
Good luck
I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.
It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes>It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents.
Quote from @Mike D.:
Quote from @Dan H.:
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).
the property completed stabilization 3 months ago. Today the rents are $7.5k above piti (or $4k above my sustained expense projection). I am also up about $1m above purchase and rehab costs.
i use total return to determine the quality of an RE purchase. I can handle sustained negative cash flow. Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment? Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did). The accelerated depreciation returned nearly 40% of my investment in year 1. Would it be a bad investment if it was still negative $6k/month?
note this works best if you can do this minimizing the risk. This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).
cash flow gets taxed annually. Other sources of re return are tax free or tax deferred. This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form. We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).
just some things to ponder.@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.
Good luck
I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.
It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.
there are many forms of appreciation.
Forced appreciation with proper underwriting, I believe is way more certain than cash flow. At the great GFC there were many markets that cash flow changed significantly in the negative direction. Detroit, Las Vegas, much of Florida and Arizona. Granted there were many markets that the cash flow did not change significantly. In my market values fell significantly, but rents held (there were a lot of markets that GFC did not noticeably affect cash flow). The issue is without knowing what causes the next event like a GFC, you cannot determine which markets will be most negatively affected. It could be my market or your market. The cash flow is not certain.
market appreciation with proper research is not random. There are indicators that make it significantly likely that appreciation will exceed inflation over the long term. Similar there are markets (mostly the highest initial cash flow markets) that the indicators indicate market rent is unlikely to keep up with inflation.
smart investing weighs the risk versus reward. Research can provide some insight into what can occur and the associated risks.
i strongly advise anyone from being overly leveraged such that a GFC event or Covid event places their investment in jeopardy. However, I do not think cash flow is required to meet this condition. My cash flow is pathetic (by design) for my valuation and what I owe (and I have the highest debt to income of anyone I have ever heard of, currently I owe ~$550 to every dollar earned in 2024), but I suspect no one would think I am at high risk of not being able to absorb a GFC like event. This ability to absorb extreme events is due to things other than my cash flow (diversification).
if I offered $10 for rolling a 6 on a 6 sided die, but you had to pay me $1 per roll, you likely would be willing to do this as long as I was willing to do it even though your chance of winning on any one roll is one out of 6. This is because the reward more than justifies the risk.
In RE it is reward (total return) versus risk and effort that determines a good investment.
good luck - Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
Quote from @Dan H.:
>It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents.Quote from @Mike D.:
Quote from @Dan H.:
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).
the property completed stabilization 3 months ago. Today the rents are $7.5k above piti (or $4k above my sustained expense projection). I am also up about $1m above purchase and rehab costs.
i use total return to determine the quality of an RE purchase. I can handle sustained negative cash flow. Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment? Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did). The accelerated depreciation returned nearly 40% of my investment in year 1. Would it be a bad investment if it was still negative $6k/month?
note this works best if you can do this minimizing the risk. This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).
cash flow gets taxed annually. Other sources of re return are tax free or tax deferred. This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form. We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).
just some things to ponder.@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.
Good luck
I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.
It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.
there are many forms of appreciation.
Forced appreciation with proper underwriting, I believe is way more certain than cash flow. At the great GFC there were many markets that cash flow changed significantly in the negative direction. Detroit, Las Vegas, much of Florida and Arizona. Granted there were many markets that the cash flow did not change significantly. In my market values fell significantly, but rents held (there were a lot of markets that GFC did not noticeably affect cash flow). The issue is without knowing what causes the next event like a GFC, you cannot determine which markets will be most negatively affected. It could be my market or your market. The cash flow is not certain.
market appreciation with proper research is not random. There are indicators that make it significantly likely that appreciation will exceed inflation over the long term. Similar there are markets (mostly the highest initial cash flow markets) that the indicators indicate market rent is unlikely to keep up with inflation.
smart investing weighs the risk versus reward. Research can provide some insight into what can occur and the associated risks.
i strongly advise anyone from being overly leveraged such that a GFC event or Covid event places their investment in jeopardy. However, I do not think cash flow is required to meet this condition. My cash flow is pathetic (by design) for my valuation and what I owe (and I have the highest debt to income of anyone I have ever heard of, currently I owe ~$550 to every dollar earned in 2024), but I suspect no one would think I am at high risk of not being able to absorb a GFC like event. This ability to absorb extreme events is due to things other than my cash flow (diversification).
if I offered $10 for rolling a 6 on a 6 sided die, but you had to pay me $1 per roll, you likely would be willing to do this as long as I was willing to do it even though your chance of winning on any one roll is one out of 6. This is because the reward more than justifies the risk.
In RE it is reward (total return) versus risk and effort that determines a good investment.
good luckI wasn't talking about forced appreciation. If there's a clear path to increasing profitability, and you have a vision and the skills to pull it off, that's different. But it actually sounds like this guy just wants a passive investment and he's relying on interest rates coming down to cashflow. Hopefully it happens, but if rates stay where they are and this is his second property and it wipes out the profits from the first, then what?
Also, I will defend my statement that cashflow is more stable than appreciation, talking now about market appreciation. To have a 15% drop in cashflow from vacancies increasing and rents decreasing would be incredibly rare. You said it yourself, even in the great financial crisis they barely went down. Any greater is not even really worth planning for because you're going to be looking for guns and food, not fiddling with your investments. However, we have all seen greater drops than that in our lifetime in property values.
I am mainly a passive investor and I believe the poster was using that approach as well so that's the framework of my feedback. Passive cashflow is more reliable than passive appreciation.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Mike D.:
Quote from @Dan H.:
>It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents.Quote from @Mike D.:
Quote from @Dan H.:
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).
the property completed stabilization 3 months ago. Today the rents are $7.5k above piti (or $4k above my sustained expense projection). I am also up about $1m above purchase and rehab costs.
i use total return to determine the quality of an RE purchase. I can handle sustained negative cash flow. Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment? Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did). The accelerated depreciation returned nearly 40% of my investment in year 1. Would it be a bad investment if it was still negative $6k/month?
note this works best if you can do this minimizing the risk. This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).
cash flow gets taxed annually. Other sources of re return are tax free or tax deferred. This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form. We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).
just some things to ponder.@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.
Good luck
I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.
It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.
there are many forms of appreciation.
Forced appreciation with proper underwriting, I believe is way more certain than cash flow. At the great GFC there were many markets that cash flow changed significantly in the negative direction. Detroit, Las Vegas, much of Florida and Arizona. Granted there were many markets that the cash flow did not change significantly. In my market values fell significantly, but rents held (there were a lot of markets that GFC did not noticeably affect cash flow). The issue is without knowing what causes the next event like a GFC, you cannot determine which markets will be most negatively affected. It could be my market or your market. The cash flow is not certain.
market appreciation with proper research is not random. There are indicators that make it significantly likely that appreciation will exceed inflation over the long term. Similar there are markets (mostly the highest initial cash flow markets) that the indicators indicate market rent is unlikely to keep up with inflation.
smart investing weighs the risk versus reward. Research can provide some insight into what can occur and the associated risks.
i strongly advise anyone from being overly leveraged such that a GFC event or Covid event places their investment in jeopardy. However, I do not think cash flow is required to meet this condition. My cash flow is pathetic (by design) for my valuation and what I owe (and I have the highest debt to income of anyone I have ever heard of, currently I owe ~$550 to every dollar earned in 2024), but I suspect no one would think I am at high risk of not being able to absorb a GFC like event. This ability to absorb extreme events is due to things other than my cash flow (diversification).
if I offered $10 for rolling a 6 on a 6 sided die, but you had to pay me $1 per roll, you likely would be willing to do this as long as I was willing to do it even though your chance of winning on any one roll is one out of 6. This is because the reward more than justifies the risk.
In RE it is reward (total return) versus risk and effort that determines a good investment.
good luckI wasn't talking about forced appreciation. If there's a clear path to increasing profitability, and you have a vision and the skills to pull it off, that's different. But it actually sounds like this guy just wants a passive investment and he's relying on interest rates coming down to cashflow. Hopefully it happens, but if rates stay where they are and this is his second property and it wipes out the profits from the first, then what?
Also, I will defend my statement that cashflow is more stable than appreciation, talking now about market appreciation. To have a 15% drop in cashflow from vacancies increasing and rents decreasing would be incredibly rare. You said it yourself, even in the great financial crisis they barely went down. Any greater is not even really worth planning for because you're going to be looking for guns and food, not fiddling with your investments. However, we have all seen greater drops than that in our lifetime in property values.
I am mainly a passive investor and I believe the poster was using that approach as well so that's the framework of my feedback. Passive cashflow is more reliable than passive appreciation.
>To have a 15% drop in cashflow from vacancies increasing and rents decreasing would be incredibly rare. You said it yourself, even in the great financial crisis they barely went down. Any greater is not even really worth planning for because you're going to be looking for guns and food, not fiddling with your investments.
What I stated was many markets did not have much cash flow decline (including my market), but there were markets that had huge cash flow declines. Detroit was perhaps the worst, but I know an investor who had what appeared to be a decent diversification of rentals that somehow was only in markets that cash flow took a beating (Detroit, Arizona, Florida, and one apartment building in Illinois). She had to liquidate at a huge loss. You do not know which markets will get hit. You do not even know that the hit will not be all markets.
My market going back to the start of the records, has never experienced any RE value decline over any 10 year period. I would not rely on past performance to dictate future performance, but the same items that resulted in that appreciation exist today including large supply constraints, diverse economy, outstanding climate, etc. I think it’s appreciation outlook for 10 years I would rate as higher than Cleveland’s market rent keeping up with inflation (resulting in reduced cash flow). We know going backwards my statement would be true seeing 100% of the time my market has appreciated over a 10 year period.
So here is a question for you, would you rather invest in Cleveland units at positive $300/month cash or San Diego units at negative $300/month per unit? I know what I would choose. I have given $600/month rent increases in the past as that is what the market was showing as average rent increase. Tenant was expecting a large increase as market rents had increased similarly.
As indicated, I strive to minimize my cash flow as I desire to minimize what I pay in taxes. I rather have my return from the other REI sources (none of which get taxed annually).
Good luck
- Real Estate Agent · Salt Lake City, UT · Member since 2020 · 490 posts · 205 votes1y
Quote from @Mike D.:
Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.
Agreed. its too much stress with a negative going out each month.. who knows how long that will last. You can't bank on rent increases, appreciation etc when running numbers. Make it make sense from the start or move on. Always another deal
- 1yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Most people who have rentals put 20% down, so you are right that the lack of cash flow is partly down to putting 5% down. Also if you are going to live in one unit, I'm assuming you ran the numbers pretending both sides were rented.
I'd find out why it is priced $100K less-is it priced to get multiple offers? also how quickly do rents go up in your area? If it is worth $100K more than what it is listed for and you can get it for that price, I'd go for it as you will recoup that when you sell it and 5 years down the road, rents should be higher.
With interest rates at what is more of a normal level, and house prices up; finding cash flowing properties is not as easy, and especially so in more expensive areas.
- 1yClaudia BucheggerPro MemberReal Estate Agent · Columbus, OH · Member since 2023 · 17 posts · 33 votes
There are a lot of variables to consider when making this decision. If you are not cash flowing with long-term rental numbers, you can consider doing mid-term rentals. Generally, you get 2-2.5x more in rental income doing MTR than doing LTR. However, you'd need to furnish the unit and post it on airbnb/furnished finder and traveling professionals rent it for 3-9 months at a time. Switching rental strategies is one way of increasing cash flow.
If you're able to buy the property for significantly less than all the properties nearby, that is great; however, it probably does have some type of issue or needs a cosmetic renovation and that is why it is likely discounted. I would get a thorough inspection and look at the inspection report to see if the property has any issues because that may be why it is discounted. But it is amazing if you're able to gain instant equity in a property. Good luck!!
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes1y
As people already said, if the numbers work at 5% down, why wouldn't an investor putting 25% down just buy it.
With house hacking you don't typically cash flow upfront, it is more about long term and you are still benefiting since it is better than renting.
You are saying you are losing $300-$400/month in cash flow, there are a few ways to look at this:
1. Is this factoring in repairs, vacancy etc.? If not, then you are likely losing more.
2. Did you factor in loan buy down and tax benefits? If not, then you might actually be cash flow positive, just not realized.
3. Another way to look at it is by splitting it into two. So really you are losing $150-$200/side. Are you in a market with decent appreciation potential? You may be cash flowing in a few years, in which case you are on the right track.
Real Estate is a long term play and can be very forgiving. When I bought my second house hack, we would have lost money if we were to rent it out completely. After some refinances and appreciation, we would cash flow almost $2,000/month excluding our HELOC and just on our PITI.
- 1yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Antuan C. I love house hacking. That's how I started out my investing career and I probably couldn't be where I am today without doing it. I would suggest to keep 3 things in mind when thinking of house hacking:
1. Cash Flow - Keep in mind that house hacking REDUCES my cost of home ownership. You will NOT cash flow on any property that you purchase. I'm not sure if anybody has said anything different to you but I need this to be your expectation. Remember, you are occupying one of the units...it would be impossible to cashflow in that scenario. Ok, maybe if you rented out each room and maybe did everything Short Term or something like that. But if it's long term renting, then you won't cashflow. But it will still allow you to afford a SIGNIFICANTLY higher price point than if you did not house hack.
Appreciation - So, if real estate appreciates 5% per year, then a $500,000 property will have $138,000 in additional value after 5 years. A $1million home will have $276,000 in value increase after 5 years (using that same 5% appreciation per year). The higher our value, the higher the equity gain is - even if the % of gain is equal between the properties...the dollar amount is higher on the higher valued home because the property is worth more. That's how house hacking helps us gain wealth. We certainly aren't gaining $276,000 with $200 of cashflow. So, don't sweat the "no cashflow" thing. If you were to give me $50 per month, and after 5 years I would give you $50,000...would you be ok with that? Of course you would! That's a great deal! And that means you would even be ok with having negative cashflow too. Appreciation and principle buydown provide us WAY more income than cash flow does.
Buying your primary home - when I buy my primary home it has to fit my PERSONAL needs. Maybe I personally need a good commute time. Maybe I personally need a certain school zone. Maybe I want this home because of how safe I feel in the neighborhood. So I'm addressing a primary home with a different perspective. Just focus on purchasing a good home that you feel comfortable with living in. Your commitment is to live in it for 12 months...and then you can do it again and again!
Hope all of that makes sense. Thanks!
- Member since 2019 · 15 posts · 10 votes1y
@Andrew Postell
Thank you so much for your insights.
In my case, I will only be spending a brief time in the other unit “I should be occupying”, I have to come a few times a year (its in a different state where I currently live). I have relatives that will stay there, and pay fair market rent.
Only counting mortgage payments, insurance and property taxes, I’ll be negative $300/month, probably more due to repairs and vacancy. However I’m only putting 5% down. If I were to put 20%, it would cashflow nicely, but in this environment with such high interest rate is hard to find a cash flowing multiplex with only 5%.
Roof is two years old, one unit is occupied already and the other unit ready to move in. I’ll just probably change the floor to vinyl and change a few blinds and do a bathtub resurface. That will cost me less than 8k.
What do you think?
- Member since 2019 · 15 posts · 10 votes1y
@Rick Albert
I’m only factoring mortgage payment, insurance and taxes. I’m likely losing more as you said.
I’m not counting for tax benefits. That can definitely help me offset my w2.
Appreciation is strong. For example, I bought a duplex back in 2019 right before covid that has appreciated around $170,000 conservatively.
Thank you for your input 🙏
- Member since 2019 · 15 posts · 10 votes1y
@Kevin Lee
It doesn’t. I have the inspection coming up this week, but roof is 2 years old. One unit is rented at market price and the other is vacant. It’s livable, but I plan to change to floor to vinyl. That plus a few broken blinds, a light painting coat and maybe some bathtub resurface. I estimate less than 8k.
Thanks for your input 🙏
- Member since 2019 · 15 posts · 10 votes1y
@Dan H.
Thank you Dan, very insightful.
If I were to put 20% down, it would cashflow nicely, but it doesn’t with 5%.
I could put 25% down (which is what the lender requires as an investment property), but it’s a lot of money. I rather minimize my down payment and leave the rest in VTI until I can buy another one.
What do you think?
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Antuan C.:
@Dan H.
Thank you Dan, very insightful.
If I were to put 20% down, it would cashflow nicely, but it doesn’t with 5%.
I could put 25% down (which is what the lender requires as an investment property), but it’s a lot of money. I rather minimize my down payment and leave the rest in VTI until I can buy another one.
What do you think?
Buying cash flow by placing a larger amount down in most markets is a poor idea as it greatly reduces the overall return, hinders scaling, and increases amount of time to recover the initial Investment (short term refi of a good value add being an exception). That extra down could be used to absorb negative cash flow for a long time if necessary. $100k down (7%, 30 year) results in $665/month savings. The savings would take 150 months (12.5 years) to recover. In the worse case, I expect full recovery to be less than half that duration. Does anyone invest in RE for an expected 7% return? If they do, I suspect they are unaware of one or more of the following: other investment options, the risks and effort of residential RE. Why would they accept that level of return on any part of the RE investment? S&P lifetime is over 9% and much more passive.
This is all Predicated on you being able to endure the negative cash flow and worse case scenarios. What if a Covid like event happens and rents are frozen for a couple/few years? What if GFC type recession happens and you are located in one of the markets that suffered huge rent declines? These are rare, but they do happen.
Good luck
- Member since 2019 · 15 posts · 10 votes1y
@Rick Albert
Thank you Rick, very insightful. I agree with you.
This would be my third duplex, the first one cashflows really well and the second just a few hundred bucks. I have noticed as time passes cashflow improves.
I also like to renovate immediately what’s is necessary so that it doesn’t give me headaches down the line.
- Member since 2019 · 15 posts · 10 votes1y
@Mike Day
Thank you Mike, I agree with you cashflow is king. I don’t like to play the appreciation game.
However, in this environment is so hard to find a cash flowing property with 5% down. So I have been thinking on using the cashflow from the other properties to cover the negative cashflow until cashflow improve or until I can refi.
The property doesn’t require much work <8k. Roof and water heaters are brand new, property is about 15years old from the same owner.
Most duplexes in the area are running over 100k more
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Antuan C.:
@Mike Day
Thank you Mike, I agree with you cashflow is king. I don’t like to play the appreciation game.
However, in this environment is so hard to find a cash flowing property with 5% down. So I have been thinking on using the cashflow from the other properties to cover the negative cashflow until cashflow improve or until I can refi.
The property doesn’t require much work <8k. Roof and water heaters are brand new, property is about 15years old from the same owner.
Most duplexes in the area are running over 100k more
>I agree with you cashflow is king.
When I started on BP, this was the common sentiment. I advocated that appreciation is king and cash flow (due to it having no tax advantages) should be minimized. The BP sentiment on cash flow being king has changed significantly more to my perspective with time. Mostly it is the less experienced investors that are still under the belief that cash flow is king.
Here is something to consider, when was the last time you saw an experienced syndicator offering that did not include a significant appreciation play?
Cash flow can help pay the bills, but appreciation is where the wealth creation can occur.
My worse appreciating property has appreciated $2700/month over its hold. I have properties that have appreciated much more than $2700/month. $2700 is more than many markets average rent. The initial rent on this unit was less than $1k/month.
Some things to ponder.
- Investor · Hendersonville, NC · Member since 2016 · 498 posts · 285 votes1y
Quote from @Antuan C.:
Hello,
I have been thinking on buying a duplex in putting 5% down, it will be cash flowing -$300-$400/month (negative)
Right now prices are thru the roof and I found a nice duplex for significantly lower than the rest of the market and even so it doesn’t cashflow with the amount of downpayment im giving.
I have been thinking on using the cashflow from the other one to cover it while I wait for interests to come down and refinance.
Even if I didn’t have the other duplex, I could cover the cost out of pocket.
For context, all the other duplexes in the area are going for at least $100k more.
I appreciate your input.
If you’re buying a place that’s well below market and you’re comfortable covering the negative cash flow for a while, either through another property or out of pocket, it could actually be a solid long-term play. Especially if you believe interest rates will come down and you can refinance later to improve your position.
The key thing is having a strong exit or stabilization plan. Make sure you’re not stretching too thin and that you’ve got a decent cash cushion. If you can weather the short-term dip for a good long-term equity play, it might be worth it. Just don’t bank on refinancing alone to save the deal, always good to have backup options too.
One of the most profitable deals I ever took was negative cash flowing for a couple months but I had a solid plan and it all worked it. The thing is, it’s riskier, so I wouldn’t make it a habit to do this very often.
- 1ySebastian MarroquinPro MemberReal Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
In the past I would have advice against it… now, the market has changed and depending on what route you take, it may still be a good investment.
It all depends on your resources and the property itself (also the state you are in).
Now, you can put 1 to 2 ADUs in many duplexes and that will fix your cash flow problem.
Now how do you finance them. Many people use cash out of pocket. But let’s say you don’t have it. You can look into construction loans (as you are buying it as a primary residence). It sounds like it is a fixer and you may increase the value by renovating it and since you are buying it about 100k less than the market : we can assume that the value will be much higher, then you can refinance it if there is enough equity and then build the adu or multiple. You have to find out if ADUs are allowed where you live, your financial power or financing power? Work with a realtor that knows this space and a lender that also knows the space. You could make a cash offer on the property and get it for even less. (Even if you do not have cash :) - I know a guy ;) )
Seriously, i do, by being a cash investor you will have more leverage.
You could assess the market there and find out if it would be better (less expensive) to buy a single family home and convert it to 2 units (ADU) again , you have to find out if possible.
If you can, I would always do 5% down if you can, stabilize the home, then rent it out and then move on to the next property. Use the excess cash to improve the home. Have questions? Reach out
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes1y
What makes you think interest rates are coming down? It seems to me they are at pretty close to historical norms.
We have had a run up in prices for well over a decade. You are possibly buying at or near a peak with negative cash flow. A lot of things have to go right for this to work out.
- Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
I think you’re kinda cherry picking certain areas to prove your point, but no big deal, we can disagree.
Yeah, I seem to remember us debating investments in various areas of the country in another thread. This is a topic that’s very relevant to me as I own a small amount of property in California and invest mainly in the Midwest. The reason is that cashflow in California is awful and even though appreciation was great in the past, and would have beat out many other areas of the country as long as you could tolerate the negative cashflow, I personally don’t think that’s going to continue to be the case so I keep my mostly passive investments mostly in the Midwest. Why should a passive investor turn to California now? Honestly, if you’ve got a good reason, I might change my view.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Mike D.:
I think you’re kinda cherry picking certain areas to prove your point, but no big deal, we can disagree.
Yeah, I seem to remember us debating investments in various areas of the country in another thread. This is a topic that’s very relevant to me as I own a small amount of property in California and invest mainly in the Midwest. The reason is that cashflow in California is awful and even though appreciation was great in the past, and would have beat out many other areas of the country as long as you could tolerate the negative cashflow, I personally don’t think that’s going to continue to be the case so I keep my mostly passive investments mostly in the Midwest. Why should a passive investor turn to California now? Honestly, if you’ve got a good reason, I might change my view.
>Why should a passive investor turn to California now? Honestly, if you’ve got a good reason, I might change my view.
Historically there is a horrendous relationship between initial cash flow and the actual cash flow over the hold.Case Shiller used to publish an overall residential return for large cities for this century. It has been quite a flew years since I have seen it published so I suspect it is something they are no longer doing. What is showed was the best cash flow markets over the long hold aligned closely with the best appreciating markets. The top 3 overall return was San Francisco, Los Angeles, and San Diego. These cities were also very high on the top cash flow markets for a purchase in the year 2000.
A handful of years ago BP did a similar study but only going back I believe it was a little less than 10 years (I think it might have been 8 years). In that span, the large coastal CA cities had risen from near the bottom in cash flow at purchase to typically a little above the middle (not great, but less than 10 years). This was with the numbers having a significant error as related to property tax (they kept the at sold property tax percentage (a little over 1%) as the property appreciated when they should have used a 2% increase. This made the actual cash flow in the CA markets significantly higher than depicted in the BP data. Maybe with this corrected, the cash flow would have been near the top quarter (I did the fix for San Diego, but do not remember exactly how much it helped).
You may be able to find one or both of these studies.
What has been shown going back many years is the good initial cash flow markets historically have poor rent growth. Math tells you that the higher rent growth will eventually have the higher cash flow over the hold. I invite you to look at Cleveland's rent growth and compare it to San Diego's. Then look at the market appreciation rate. You will see a relationship. You will also understand why San Diego had the better cash flow over long holds.
I believe RE is a long investment unless you have a real active role (flips, development, etc). Initial high cash flow markets do not produce good cash flow over long holds because their rent appreciation is typically poor (worse than inflation).
What do you think of these thoughts? Something to ponder.
BTW I feel most RE markets are currently challenging. It was easy prior to Q2 2022 in my market. I could have purchased virtually any RE and made money in the near term. Now requires more effort to make money in the near term or more patience than I have for my investments to produce a good return.
Good luck
- Member since 2018 · 113 posts · 135 votes1y
If it cash flows nicely at 25% down, and negatively at 5% down, I would go with the 5% down, and keep the extra cash liquid for expenses that are coming your way.
I’m only willing to buy at a 20% discount off a property’s actual value in this market. Like @Dan H. is saying, look at the overall return.
- Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
I appreciate that, but let me explain why I don't do it.
Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.
I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.
Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.
I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Mike D.:
I appreciate that, but let me explain why I don't do it.
Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.
I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.
Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.
I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.
In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.
Is your house you ex-home? The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices A small MF would produce better cash flow.
I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow. Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13. Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.
Prices in southern CA has always been high. From 2012 to 2021 was a lower point in affordability, but some people could not see it. The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles). I do expect a near term slow down that seems to have already started. The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year. I suspect the mid point is perhaps most accurate. Regardless it has been fairly flat. I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards. I believe San Diego will continue to have long term appreciation above inflation. In the short term, I make no claims and am expecting somewhat flat.
I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house, $500k/15 years is $2777/month. I was expecting it to be higher, but that is still huge. It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold. The reality is you have made a lot more than that.
Stuff to ponder.
Good luck
- Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
Quote from @Dan H.:
Quote from @Mike D.:
I appreciate that, but let me explain why I don't do it.
Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.
I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.
Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.
I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.
In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.
Is your house you ex-home? The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices A small MF would produce better cash flow.
I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow. Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13. Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.
Prices in southern CA has always been high. From 2012 to 2021 was a lower point in affordability, but some people could not see it. The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles). I do expect a near term slow down that seems to have already started. The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year. I suspect the mid point is perhaps most accurate. Regardless it has been fairly flat. I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards. I believe San Diego will continue to have long term appreciation above inflation. In the short term, I make no claims and am expecting somewhat flat.
I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house, $500k/15 years is $2777/month. I was expecting it to be higher, but that is still huge. It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold. The reality is you have made a lot more than that.
Stuff to ponder.
Good luck
Appreciate you sharing that info. Just saying, most people expect appreciation to be above that in the Midwest over the next few years, and as we know cashflow is a lot better there too, so would that not be the stronger investment overall? It sounds like you might see more rent growth upside in SoCal, but I think the homebuyers are maxed out and the renters are too. Unless SoCal over the very long term becomes a playground for the wealthy and the working class is completely driven out—then rents may rise.
Yeah, the appreciation gain on that house would have been incredible. I could have hung onto it and used the growing equity to finance cash flowing investments elsewhere, but of course, hindsight is 20-20. I did hang onto it for a few years, cashed out and put my money in cash flowing investments. If I were willing to acquire property in someplace like Fresno (I’m really not), that would be a good place to repeat that strategy now.
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesI thought you had continued to hold the property. You would have had outstanding cash flow over the hold if you had not extracted value and outstanding appreciation. Note I regularly extract value (but have not since q2 2022), so my cash flow is modest (for the holdings - my cash flow is enough to live a comfortable life).
Quote from @Mike D.:
Quote from @Dan H.:
Quote from @Mike D.:
I appreciate that, but let me explain why I don't do it.
Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.
I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.
Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.
I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.
In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.
Is your house you ex-home? The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices A small MF would produce better cash flow.
I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow. Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13. Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.
Prices in southern CA has always been high. From 2012 to 2021 was a lower point in affordability, but some people could not see it. The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles). I do expect a near term slow down that seems to have already started. The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year. I suspect the mid point is perhaps most accurate. Regardless it has been fairly flat. I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards. I believe San Diego will continue to have long term appreciation above inflation. In the short term, I make no claims and am expecting somewhat flat.
I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house, $500k/15 years is $2777/month. I was expecting it to be higher, but that is still huge. It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold. The reality is you have made a lot more than that.
Stuff to ponder.
Good luck
Appreciate you sharing that info. Just saying, most people expect appreciation to be above that in the Midwest over the next few years, and as we know cashflow is a lot better there too, so would that not be the stronger investment overall? It sounds like you might see more rent growth upside in SoCal, but I think the homebuyers are maxed out and the renters are too. Unless SoCal over the very long term becomes a playground for the wealthy and the working class is completely driven out—then rents may rise.
Yeah, the appreciation gain on that house would have been incredible. I could have hung onto it and used the growing equity to finance cash flowing investments elsewhere, but of course, hindsight is 20-20. I did hang onto it for a few years, cashed out and put my money in cash flowing investments. If I were willing to acquire property in someplace like Fresno (I’m really not), that would be a good place to repeat that strategy now.
as indicated, Coastal CA has always been expensive. I was hearing the same issue about affordability for decades including 2012 to 2021 when statistically the affordability was near the lowest for the previous 50 years. Today the affordability is not good (worst since the 1980s in San Diego), but still not all time bad. We know prices have risen significantly since the horrendous affordability of the 1980s. I suspect some near flat years appreciation wise (I am underwriting 5 years flat) to bring the affordability down some, and then the appreciation to again beat inflation (underwriting with a long term appreciation at 3% (San Diego is near 6% appreciation for this century)). Note I expect my underwriting to be on the conservative side in every facet.
If you are going non local CA, look at Sacramento. Also look at Merced over Fresno. A few years ago, Merced had the fastest growing income in the country. I suspect the income is still growing great. It is by far the cheapest area with a UC campus. UC campus injects a lot of money into the area and being the newest UC campus, it is still in more in a growing phase than the long established campuses.
good luck - Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes1y
Quote from @Dan H.:
I thought you had continued to hold the property. You would have had outstanding cash flow over the hold if you had not extracted value and outstanding appreciation. Note I regularly extract value (but have not since q2 2022), so my cash flow is modest (for the holdings - my cash flow is enough to live a comfortable life).Quote from @Mike D.:
Quote from @Dan H.:
Quote from @Mike D.:
I appreciate that, but let me explain why I don't do it.
Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.
I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.
Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.
I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.
In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.
Is your house you ex-home? The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices A small MF would produce better cash flow.
I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow. Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13. Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.
Prices in southern CA has always been high. From 2012 to 2021 was a lower point in affordability, but some people could not see it. The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles). I do expect a near term slow down that seems to have already started. The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year. I suspect the mid point is perhaps most accurate. Regardless it has been fairly flat. I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards. I believe San Diego will continue to have long term appreciation above inflation. In the short term, I make no claims and am expecting somewhat flat.
I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house, $500k/15 years is $2777/month. I was expecting it to be higher, but that is still huge. It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold. The reality is you have made a lot more than that.
Stuff to ponder.
Good luck
Appreciate you sharing that info. Just saying, most people expect appreciation to be above that in the Midwest over the next few years, and as we know cashflow is a lot better there too, so would that not be the stronger investment overall? It sounds like you might see more rent growth upside in SoCal, but I think the homebuyers are maxed out and the renters are too. Unless SoCal over the very long term becomes a playground for the wealthy and the working class is completely driven out—then rents may rise.
Yeah, the appreciation gain on that house would have been incredible. I could have hung onto it and used the growing equity to finance cash flowing investments elsewhere, but of course, hindsight is 20-20. I did hang onto it for a few years, cashed out and put my money in cash flowing investments. If I were willing to acquire property in someplace like Fresno (I’m really not), that would be a good place to repeat that strategy now.
as indicated, Coastal CA has always been expensive. I was hearing the same issue about affordability for decades including 2012 to 2021 when statistically the affordability was near the lowest for the previous 50 years. Today the affordability is not good (worst since the 1980s in San Diego), but still not all time bad. We know prices have risen significantly since the horrendous affordability of the 1980s. I suspect some near flat years appreciation wise (I am underwriting 5 years flat) to bring the affordability down some, and then the appreciation to again beat inflation (underwriting with a long term appreciation at 3% (San Diego is near 6% appreciation for this century)). Note I expect my underwriting to be on the conservative side in every facet.
If you are going non local CA, look at Sacramento. Also look at Merced over Fresno. A few years ago, Merced had the fastest growing income in the country. I suspect the income is still growing great. It is by far the cheapest area with a UC campus. UC campus injects a lot of money into the area and being the newest UC campus, it is still in more in a growing phase than the long established campuses.
good luckAbout that house as a buy and hold investment--I could have done that, and it would have worked out okay. Today, if I never extracted any equity, it might be cashflowing around $10k a year. But if I were in that situation, I would sell it today, take my $500+k equity, and put it in the Midwest. I could buy two duplexes with it in cash and have probably nearly $30k cashflow. As well as equivalent or better gains from appreciation, since I expect California to be slower over the next few years.
Nice talking shop!
- 1yJoey BanasihanPro MemberInvestor · Boise, ID · Member since 2019 · 233 posts · 188 votes
Hey @Antuan C.-
Totally here you with this one — especially in this interest rate environment where 5% down can make almost any duplex run negative. The key thing I’d ask is: how strong is the appreciation in your market, and what are vacancy rates like?
I'm actually helping a client right now work through a nearly identical scenario: they're picking up an older duplex priced well below market, and while it'll run about –$100/month in year one, they'll break even once one of the units gets a light rehab and rent increases. Our market historically appreciates around 7% annually, which means their return on equity far outpaces the short-term cash flow loss. That equity can later be leveraged through a HELOC or refinance — giving them more options than if they waited for the perfect cash-flowing deal.
So much of this comes down to your market, your long-term goals, and whether the property has value-add potential that allows you to reposition it over time. Sometimes the long game gives better returns than short-term cash flow, especially when you’re planting the seeds now to own more later.
- 1yJulie KnutsonBusiness MemberReal Estate Broker · Watertown, SD · Member since 2024 · 24 posts · 7 votes
As is, unless you have a game plan to cash flow, you may be biting off more that you can chew. Reach out to a trusted local real estate expert. You need a RE Agent that can give you a realistic market assesment, and can perform a financial investment analysis to determine ROI timelines. Depending on your market and location, it could be made into a short term rental.
Get a contractor to assess the cost of what it is going to take to make it livable & worth more rent.
The best case scenario is, the seller may not know the market and be afraid to raise rent.
Do diligence with experienced professionals first. - Member since 2025 · 244 posts · 98 votes1y
@Antuan C If the deal’s below market and you can carry the loss, it might be worth it long-term. Have you run scenarios for different refi rates or rent bumps?
- 1yKerlous TadresBusiness MemberRealtor · Columbus, OH · Member since 2023 · 1k+ posts · 1k+ votes
If you're able to cover the negative cash flow from other sources and can hold onto the property while waiting for interest rates to drop, buying the duplex below market value could be a smart move. You’ll be building equity as you pay down the mortgage, and once rates go down, refinancing could improve your cash flow. Plus, buying below market gives you the chance for future appreciation as prices rise. If rents increase over time, you could also boost cash flow. Overall, if you can handle the initial negative cash flow, this investment has good long-term potential.
Kerlous Tadres | Reafco Real Estate540 Reviews - 1yJordan RayBusiness MemberReal Estate Agent · Memphis, TN · Member since 2023 · 630 posts · 328 votes
Quote from @Antuan C.:
Hello,
I have been thinking on buying a duplex in putting 5% down, it will be cash flowing -$300-$400/month (negative)
Right now prices are thru the roof and I found a nice duplex for significantly lower than the rest of the market and even so it doesn’t cashflow with the amount of downpayment im giving.
I have been thinking on using the cashflow from the other one to cover it while I wait for interests to come down and refinance.
Even if I didn’t have the other duplex, I could cover the cost out of pocket.
For context, all the other duplexes in the area are going for at least $100k more.
I appreciate your input.
You’re clearly thinking long-term, and I respect that. Negative cash flow isn't always a dealbreaker if you’ve got reserves, strong upside, and a plan to refi—but it’s still a risk, especially with rates staying sticky. One thing I’d suggest: if you’re open to putting your money to better use, look at markets like Memphis. You can still find duplexes and small multis here that actually cash flow, and rents stay strong because of our steady working-class tenant base. I’ve helped out-of-state investors pick up cash-flowing deals in neighborhoods where appreciation is modest but rent demand is consistent. Might be worth comparing real cash-on-cash returns instead of buying negative equity just because it’s "below market." Sometimes a cheaper market with cleaner numbers beats gambling on rate drops.
Jordan Ray - eXp Realty5112 Reviews - Member since 2019 · 15 posts · 10 votes1y
Thanks everyone for your input.
I wanted to provide an update:
Appraisal from the bank came in 80k above asking price.
Inspection came back fine, the only major issue is exhaust fans not connected to the roof, left open in the attic
Roof is brand new 2 years old.
One unit is being rented the other one is not. I plan to update it, cost me less than 10k.
This is Pacific NW, that has strong appreciation. I bought a duplex 5 years ago for 360k and it’s now valued at $550k conservatively.
I think I’m going to move forward with the offer even though it’s not going to cashflow for a while.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.