No positive Cash Flow. Smart or stupid?

[mochilero]

Not only could the appreciation be lower than 8%, but the transaction costs when you sell it can eat close to 10% of the purchase price easily (comission and closing costs). You might have to lose money for more than two years before you'll have a good return selling it.

[karlakr]

This is just a shot in the dark, but rather than just flat out walking away yet, have you tried making a revised offer?  Tell them that after doing all of your due diligence (inspections, appraisals, etc.) that you cannot go through with the sale at your ORIGINAL OFFERING PRICE - but that if they're still interested in selling you could give them $XXXXX.  Chances are, if we're all sitting here telling you this isn't a good deal, it's not going to be a good deal for someone else at that price either.

I agree with the others who said don't buy rental property unless there's positive cash folw.  It's just not necessary to do so.  Did you consider that if the property is appreciating the taxes are also going to be on the rise?  

Good luck!
Karla in Amarillo

[TamiSpartan]

This is just a shot in the dark, but rather than just flat out walking away yet, have you tried making a revised offer?  Tell them that after doing all of your due diligence (inspections, appraisals, etc.) that you cannot go through with the sale at your ORIGINAL OFFERING PRICE - but that if they're still interested in selling you could give them $XXXXX.  Chances are, if we're all sitting here telling you this isn't a good deal, it's not going to be a good deal for someone else at that price either.

WTG Karla! It is a shot in the dark, but a great way to go -- wish I thought of it  :D. I don't know the tax rules where this property is located, here they raise the property values at their whim and taxes adjust accordingly (they do this annually). California it's 1% of the purchase price, end of the story.  I have a friend who just purchased a dump in the Bay Area (California) -- the last time the property was purchased it was for $49k, they bought it for $300k and dumped $50k into rehab, their taxes are $3,000/year and will stay there. She really blew it though in her due diligence and thought the taxes would hover around the $490/year. Her property value has already gone over the $435k mark though -- in less than a year. Mindblowing -- it's a 3/1, 1,000 sf house on a very busy street in what was a dangerous neighborhood.

Great ideas come from this site!

[eastsideguy1124]

Thanks to all of those who gave thoughtful insight. I really wish I had done my homework a little bit more. I will take this as a lesson learned, with draw my offer and move on. Thanks again for the help!

[eastsideguy1124]

I have another question concerning this topic. I know had I put down 10-20% on this property I would of had positive cash flow each month. Should I have looked for a deals were no money down would earn me positive cash flow. Or is it hard to find positive cash flow deals when putting no money down?

[karlakr]

We've bought property for as little as 3% down, and had a bit of positive cash flow (about $100 a month) on a property that had a VERY low risk of needing repairs (literally EVERYTHING had been updated in the year preceeding our purchase).  

I think what you're asking about really relates more to what your goals of property investment are, what kind of money you have to put down, etc.

The way we look at buying property is that the money we put down on a place is buying us a monthy cash flow, appreciation, a lower interest rate on the loan, and we've never found another type of investment that could earn us a better return on the money.  All I know to advise you is play with different scenarios - putting different amounts down - and see what you come up with and decide which scenario is the most beneficial to your needs.

Of course the more you put down on an individual property the BETTER the cash flow is.  I think it's very regional as to how easy it is to find properties that cash flow in relation to the amount of down payment.  Also, are you looking at fixer-uppers, or do you want stuff that's new or already rehabbed?

If you're like us you may just need to try a bunch of different stuff before you decide what you like the best and what meets your needs the best.

Are you still interested in this property?  Have you tried to get them to lower the price to where it would cash flow?

K in A

[eastsideguy1124]

I will try to get him to take a reduced offer in the morning. If he declines then yes i will walk away. I agree i just need to see what investment strategy works better for me and play with the numbers more.

[telarsen]

Sorry to jump in this late but can you lease option it to one of the tenants for $200 more per month?
"Hey listen, if I credited you $200 per month toward the purchase price of $xxx,xxxx (YOU set the price) the rent will be $1,500 per month with $200 going as the down payment.

If you could set the end price high enough, give them $400 credit for $200 extra paid!

[Dan732]

Sorry to jump in this late but can you lease option it to one of the tenants for $200 more per month?
"Hey listen, if I credited you $200 per month toward the purchase price of $xxx,xxxx (YOU set the price) the rent will be $1,500 per month with $200 going as the down payment.

If you could set the end price high enough, give them $400 credit for $200 extra paid!

I think he has it rented for $650 a month each side. It's twin and he is buying both sides. So I don't think you can get a tenant to 1,500 per month, when it's current rent is $650

[telarsen]

So  sell it to one of the tenants for $200 per month ... the numbers still worK!

[eastsideguy1124]

Actually the rent in Minnesota is high. Each unit will be rented for $1300 a month

[p3vinny]

Am I missing something here?  If each side is rented for 1300/mo and your mortgage is 1540 then it seems like you are in a much better position than your original  post.

Also, while I agree with other posters that you shouldn't purchase a rental property with neg cash flow, there are 3 reasons to buy real estate for investment imo...

1. Cash flow

2. Appreciation

3. Tax benefits

Any of those or a combination of is a viable reason to invest, depending upon your situation and your goals.  Like you initially alluded to, you were willing to accept a neg cash flow because you were planning on apprecaition.  I also agree that you can't count on appreciation, but in some cases it does make sense to invest based on that.  

Anyway, if you are grossing 2600/mo. (1300/side) you should have positive cash flow, unless I am missing something....

Just my .02....Best of Luck!

Phil

[Dan732]

Eastsideguy--

Why do you keep changing the numbers? Why not just be upfront about this? It seems like you are confused. Are you going to live in one and rent the other? Or are you going to rent them both?

[eastsideguy1124]

Sorry for the confusion. In my first post I stated that the mortgage was $1540. I didn’t mean $1540 combined but $1540 each. I didn’t notice that the way I had stated would lead people to think I was paying $1540 for both units until I read Dans last post. I hope this clears any confusion. I am renting both sides.

[Jaffe]

How about this scenario....????  I too have a mortgage payment that is greater than my monthly rental income.   My mortgage has a six month prepayment penalty.   What I hope to do is re-finance after six months so that my mortgage payment is less than my rental income and I will have positive cash flow.... Could someone please tell me if this scenario is based on reality????

Thanks,

Adam