All Forum Posts by: Mary Jay

Never,...ever.

@Mary Jay

You didn't mention how much DP is involved.  I don't know what market you are in but where I am at, a DP of 30-35% is not uncommon to cash flow.  To answer your question any property can cash flow if you increase the DP.  Question is when does it not make sense anymore.  I would like to hear from other BP members.

I’ve made to use a scientific/financial term, I’ve made a “boatload” of money on a property with negative $80-/mo cash flow. And not even the easy way where you buy for way under market. (Who wouldn’t buy a negative cash flow property for $100m off?)

I go by actual profit. The principle portion was $1500+ the first month. So I was $700/mo to the good and only getting better. Add a couple hundred a month in rent increases every year and 10 years later I have a paid off $700k property. I put $100k down, an average of say $400/mo or $5k/yr. For 10 years.  So another $50k. For $150k I have a paid off $700k property.

All of this was beyond tax free. I paid negative taxes after depreciation until the 7th or 8th year. Your wealth will not come from cash flow. Until  a home is paid off all the real wealth will come from appreciation. (Especially when calculated not against it’s value but your cash in the deal.) I’ve said if before and I’ll say it again. If you NEED a property to cash flow $200 to afford it, you’re not ready for real estate. You just aren’t. One major repair, one long vacancy and all your “needed” cash flow is gone. 

Treat these rental properties as investments like your retirement accounts. They don’t cash flow ever. But you’re still told by financial experts/advisors to stick hundreds of thousand in to them and pray for appreciation. 

Cash flow is only one TINY way rentals make you money. I don’t know why there are only cash flow fanatics. No depreciation, loan pay down, tax advantage fanatics. 

Good luck whatever you do but assume most people telling you not to do something haven’t done it themselves. It’s like when your friend says “Ferraris break down all the time…”. When you ask how many they’ve owned, how many their friends own, and how many they’ve repaired, or even seen broken down. You hear a sad little “zero”. 

You deducted $2500 out of the purchase price to keep against the $200 net negative or of the sort? Way to miss the forest for the trees. And investing in really any form is a degree of speculation, let's not act like some real estate investments are a given.

If you don't think rent is going up, or you think it will stand still that's an equal level of speculation. It has a 33.3% chance of doing any of the three; go down, stay flat, go up. It's not linear growth, that's why you invest on a long-term horizon. It likely will go up over the long time, or net deflation happened in a macro sense or you bought a **** location. The former coming with a huge array of other issues and the latter being exactly why you don't focus on a spreadsheet for this.

What happens when rent goes down and your PITI was measured against it? Or your rent stayed the same and your I&T went up? The latter is a reality of today. Investing to mitigate cash flow concerns is a priority today, but the catch is buying great & high quality locations for the long-term horizon on fixed rate debt. Let's not chase pennies and cost ourselves dollars.

To answer the underlying question, you don't want to buy something that's severely OTM. You want to, at worst, buy something that's on a 3-5 year horizon of being ITM assuming a smaller-ish growth scale yet a robust growth area, and that's a sliding scale with the quality of the house & location. If it's a stellar location with an excellent build, but it'll take 3-5 years to catch up on rents to break even. For some, and depending on your means, that's a great investment. For most that's not a legitimate investment, and they define it as speculation. Right now that's the difference in criteria for REI; it's no longer 2012-2022 where a monkey could buy a house and it's intrinsic. You take that risk. Physical assets being intrinsic was a small period of time, that's a rarity in the real sense when you look everywhere else.