How bad is it to be negative?

To the seasoned pros here;
Are there ever any situations where it’s OK to be a bit negative each month on a rental, say in a market where appreciation is almost a certainty? If so, by how much? I’m trying to look at it as an investment and comparing it to say, mutual funds.
If we have say $50K in a mutual fund and add $500/month, would one expect to do better taking that $50K and buying a house that rents out but which is short $500/month. In other words, wouldn’t the “gain”, though unrealized, be greater on the house in terms of appreciation than on the $50K fund account? Is this dangerous thinking? The fund could be any recent fund, but let’s assume that stocks return 10% annually (that’s what all the books say) and the real estate market is a strong one like Vegas (near the top in appreciation but cooling a bit). Like many first time investors I have plenty of mutual funds and have known for years that real estate is a solid and possibly one of the only ways a small time guy can attain wealth (Rich Dad, Poor Dad…)–it’s like eating vegetables–I know it’s good for me but haven’t done it. Thinking of Vegas as a first play but wanted to see if my thinking is naive. Targeting decent homes that would rent to decent families in areas with good schools. KNow that will pay more but I believe in long haul this should favor better tenants and higher rents. Not in it for flipping. Just wondering how bad it is to be negative, as this is most likely scenario at least for now, or should I walk away and wait for a depressed market (tough to with interest rates so low…)
Any thoughts welcome–thanks ahead of time.

How much is a “bit negative” in your mind? Where are you?

Keith

Why run a privitized welfare office? Do you enjoy giving people your hard earned money just to occupy your unit? If so, you sir are a moron. Please place all your hard earned money into an envelope and send to me. Money should not be in the hands of fools…

Keith,
I’m in LA but feel that everything is out of reach to being even close to break even, so am doing some fact-finding in Vegas. No, Dan, I’m not a moron–I haven’t reached the situation yet. Just wanted to know if anyone else has been negative and turned it around, but thanks for the flame. This forum has been very informative so was just throwing out a scenario.
Now back to the topic at hand. Is it then the way to go to put as much down as to not be negative? As much as I’d like to set a particular rent, it seems rent in Vegas is pretty cheap–the sobering thing is trying to match features of existing rentals offered with some I’m considering–they must have been purchased a while ago when prices were much lower or had a lot down. Then there’s trying to gauge long-term at what rate rent will go up.

Yes, let’s call people morons to show how brilliant and helpful we are.

Running a WELFARE office? That comment makes no logical sense if you know what welfare is. Running a welfare office would be charging under market rent when you can get market rent or higher, not owning a property where the market rent is less than you pay on the property, but that is neither here nor there.

The questions are:

  1. Are you looking to speculate? That is what this play is.
  2. How much would the possible loss impact your profits?

If you made $100,000 this year and the above property will cost you $3000 extra to hold, this is 3% of your earnings. If you are willing to speculate 3% of your earnings, then this is something to do. If not, move on.

If someone does not know the market you are referencing very well, IE Vegas in this case, then they will just give a blanket answer. It would be like you asking me if you should buy a property of type X in Flint, MI. I could say no based on my experience in Vegas, but how is that relevant?

The question should be:

Would you buy a property in VEGAS. If I lived in say Kentucky, I would not buy anything negative. If I lived in say Texas, I would not buy anything negative.

Really you are the only one that can answer this. To some people having to pay $300 (your loss each month) would kill them. Perhaps they don’t make much or are just leveraged to the bone. For others, $300 might be 1 hour of work and the risk has enough upside to be worth it.

No matter what you are doing, investments are investments. Real Estate, stocks, whatever. It comes down to what you want to do, if you are comfortable doing it, and if you have the means to do it.

Also it is your money. So we can all sit here and say don’t do it or jump in but you are the one who will lose or gain.

Good Luck!

If you are in LA and looking to invest elsewhere, I would not do it in Las Vegas. I would pick a more stable market such as somewhere in Arizona or even Utah and wait for the California and Las Vegas markets to correct themselves over the next few years, and THEN buy and rent.

My wife and I are planning to move to Southern California (my wife is resuming her position with the Disney Company) this spring. I got some very sage advice from a VERY experienced SoCal investor. Buy and sell properties for the next few years while the market corrects itself. Use all that cash you made to buy and hold properties after the market has corrected itself. This is of course referring to southern California.

Honestly, if you are looking for “keeper” properties, I would look somewhere other than Las Vegas and LA. They are both turning into “bubble” situations and breaking even is rare.

Just my 2 cents. Take it for what it is.

Good luck!

Evergreen as always you have something helpful to say. Fortunately, a $300 hit per month would not hurt me very much, and I would be tempted to say any property that I pick out I would make sure it’s worth hanging on to. I realize ultimately it is my decision–but thanks for the support.
Alaska–can you clarify what your “sage” told you. “Buy and sell” while the market corrects itself–in other words flip (?) properties until when–the first report of declining or stagnating prices? Also, how profitable can you be if during these markets run the prices are so expensive? Do you ante up and eat the rent for several months and then sell? This would only seem to work in a sure hot market, which both LA and Vegas show signs of cooling off. I have a feeling Vegas is like LA 10 years ago (we had a condo in the early 90’s in LA that was going for around $200k–now they’re worth $350K. Many of the condos in Vegas are now at $200k. Not quite the same climate, not quite the same people. But history would seem to be on our side.
Thanks,

I agree with most said here (except for the moron comment) and will ad my 2 cents. I deal with several investors from SoCal, NoCal, and LV… and they are buying property in SE Texas. Yes, there are areas where the property tax’s are high, at least in my opinion but this is off set by the fact that there is no personal income tax leaving renters with a few more $$ in their pockets. In all reality the gov’t gonna get their bight, it’s just where they get it. There is a LOT of political pressure here in Tx to lower property tax by 1/3rd, I don’t think we will get it this term, but look out next term because the politicos that worked to fight tax relief will be looking for new jobs. Once we get the tax’s cut property values will climb.
Justa thought
Mark

i’m not a big fan of Texas. i do however like Utah a lot. i currently have all my properties in California in escrow and i’m moving all my investing energy to utah. email me if you want me info.

and for every property you buy that you’re negative, your chances of going bust increases. if you can’t stay solvent before you make your profit, you WILL go bankrupt.

suppose you have a job that pays 4k/mo. you use 3.5k per month and have 500 to spare. you also have 5 houses that are only 100/mo negative each. if by bad luck you lose your job and it takes 4 months to find a new one, you’ll probably lose your “investments” too.
if on the other hand you’re making 20k/mo from your job or have
200k in savings for a rainy day, $500 negative probably won’t kill you. but the idea is make money, not subsidize your tenants.

I sure get the meaning behind the coment on “welfare”

The first rental house we bought had a negative of $400 per month. We purchased that house in 1988 for $117,500. Today it is worth more than $350,000 and the cash flow, yes we now make a cash flow, is $895 per month.

for us it really paid off. Buy the way we bought this property with no money of our own - Great deal ;D

I think it depends where you live. Here in So Calif. real estate is very high. I wouldn’t invest in it now. We bought a few apartments in 95-96 when no one wanted them. Now they are worth 4 times what we paid! Read my blog below for all details.

I would ask a couple questions because I would love to know more.

  1. What city in Utah is more stable than Las Vegas and why?

  2. Las Vegas is one of the cities least likely to be in a bubble and won’t be “correcting” any time soon. Indicators show that we are underpriced. How much remains to be seen. What makes you think RE in Vegas is risky, in a bubble, and correcting?

If you make 4,000 per month and have $500 left for investments, you should only take at most $50 for speculation. Really, at this income level, you should not speculate at all. You should work on getting a good job and solid returns on what little money you have.

It is all Geographical though. If your household made $4,000 a month and you lived in say Texas, you are living quite well. If you lived on the most parts in the West Coast, you might be just getting by or be in real trouble.

Too much talk here in this thread is about the tenants. If you are charging market rent, you are not giving your tenants any break. What should be the focus is property ownership.

20/20-With interest rates on the rise, foreclosure will go up. The guy who gave me some advice specializes in foreclosures and short sales. The banks will be taking quite a hit, and will be more willing to short sale than they are now, since the market will not demand the HIGH prices as of now. Therefore he recommends to buy and sell (yes, flip) for the next 4-5 years, and then begin to buy and hold for appreciation. I’m not sure if that answers your question or not…? Keep this in mind when thinking about taking a negative cashflow-$500/month is $6000/per year. I dont know about you, but I could very easily invest that $6000 and make double that, instead of paying for someone else’s housing.

Evergreen-Please keep in mind, my view on the Vegas market is based on articles, hearsay, and other things-not personal experience. I believe the market in Las Vegas is going to be a lot like the LA market, just not quite as big (IMO). I already know of a lot of people who cannot break even on their monthly rents and are having trouble selling their homes for what they paid for them. They bought them as speculatory purchases-NOT investments. That is not even to mention the huge amount of condos that are being built and the evergrowing number of condos that are getting cancelled because they can’t presell enough. Too much inventory and the demand is going down-as prices will. Again, not based on MY experiences, just some of those that I know. The same goes for Utah. I only think it is a stable environment for buying rental properties, not for buying and selling. From what I see, they haven’t had any huge increases or decreases over the past few years, and homes are still fairly affordable, making it easier to cashflow on a rental. Again, I could be wrong about buying and selling, and please correct me if I am.

Please take this for what it is worth. :slight_smile:

Alaskainvestor,

I figured that. This is why I am trying to get across the point that if you do not live here in Vegas, and have for some time, you probably don’t know much of what is going on and could have wrong info. Just like any place really. If you are not on the battlefield, you are missing out. I think that applies more to Vegas because of the flurry of activity that engulfs daily operation here.

I am not aware of one condo development that canceled because of selling issues. The most recent cancellation was 80% sold out, yep 80% already and it was not even built yet. There have been a couple of canceled projects thus far and tons still going on. All those that were canceled were pre-selling fine. There is an undercurrent of deals going on here that is not making the news. For example, one development was canceled even though it was pre-selling well. I forgot what reason they gave, but that was just cosmetic. Next to them was an existing development. Those developers bought the land and unveiled their plans for another high-rise condo in its place.

Our demand is well documented and has been around these levels for many years. The demand is not going down, it is going up, or staying the same if you rather. Supply is currently outpacing demand because of the glut of homes that hit the market as a result of the spike last year. At some point, supply will be cut because of land issues. When that happens, look out.

Look at it this way. Let’s say we used to sell 3000 resale homes a month every month. Then the spike came over the past 18 months and we rose to 4000. Now, we are back to normal at 3000. To most people who never looked into Vegas until the spike, it looks like our demand is down, when in fact we are status quo–strong.

Homes are harder to sell right now because of the oversupply, which was seen a mile away. That is the way this town works. A demand happens, and everyone rushes to fill it. The result is an oversupply. Because of our land issues and costs, people are trying to move further out now and are moving to the rim of the city (N and SE). Las Vegas itself is nearing a stopping point land wise. Within 3-5 years we should reach the cease point and new development will have to be done over existing developments.

I agree that this is a speculative market. If you buy now, what you pay monthly will be higher than your monthly rent collected. The nice thing is our homes are not $50k, so a 10% increase, which is status quo in many prime areas, will yield $30,000 on up. So if you have speculative cash, this is a good place to utilize it. While there are many ways to double $6,000. How many ways do you know of that will multiply it 5-6 fold or higher?

I believe the median home price cap will be about $500,000. That is probably 3-4 years away given current local factors.

I hope we get some good media play in 2007 when we become the first non-NBA city to host the NBA game. Our tourism is one of the things that drive our migration numbers. People come to play and come back to stay.

As far as speculation goes, this is one market I would do it in, but that is me. When I invest in Houston, I will only buy cash positive there.

When homes go up, it is normally the land and demand that raise the prices. What are specific factors that make land go up? Location and supply. When land runs out in an area, it goes up constantly as well as anything on it.

Take Houston for example, there is land everywhere. Home values are low and not going up much. Take Manhattan, land has run out and thus it is limited. You could spend $600+ per sq ft easy.

In Las Vegas, we are running out of land. This event should take place within the next 5 years. When it does, what you have is what you get. New developments will have to be built over old ones. This is one reason why all the high-rise condos are coming in. It is getting to where you can’t build a big development horizontally any more. Most of the land that you see empty is already spoken for and about to be built on.

Think about this. There is a new development in the SW that spans 300 acres. They bought the land about 2 years ago. This development is expected to house 30,000 residents (based on avg family size). That equates to about 5 months of new residents only. We are estimated to hit the 2 million mark in 2007.

Look anywhere where prices go up annually consistently and you will no doubt find one common link—land is at a premium.

I agree. If you are going to speculate, Vegas is the place to do it. (Personally, I don’t speculate, I invest) SoCal is pretty much topped out (as far as I can see) and Las Vegas has some room to grow. However, when it comes to cashflow (like you said) I wouldnt invest there, but rather elsewhere such as Utah, some parts of Arizona, or Texas. I believe Las Vegas to be a buy and sell market, not a buy and hold market. I am glad to hear that things look fairly positive for you guys. Like I said, all I know is mainly from hearsay, so maybe I got some schotty info. Who knows? :slight_smile: Nonetheless, I am glad to hear fellow investors are able to keep afloat. Personally I enjoy investing up here! No bubbles to worry about (yet) and we are able to buy and sell OR buy and hold. :slight_smile:

Good luck with future endeavors,

Ryan

Yea, cash flow wise, I am liking the numbers in Houston.

As to speculation, I take a small portion of my money (10% or less) and reserve it for speculation if something really looks solid. Normally I just invest this portion because I have strong criteria for speculating.

For example, people here started buying land/homes in the next town by here (45 min away). To me this is a dangerous speculation because you are now trying to predict which way people will flow after Vegas is full. Also the problem is when you concede and go out there, plenty of land awaits (and I mean plenty). I think the plays there would be commercially zoned land if you absolutely had to speculate because there is plenty of R-zoned land.

I don’t know much about Utah, excepts lots of Mormons live there :smiley:

My neighbor is from there and he does not care for it much. I look to invest in markets where people have a reason to go IE entertainment, jobs, etc. Take Houston. You have jobs, you have all the major sports teams, you have proximity to water, you have other entertainment spots like six flags. You also have good homes in the 100k range, good rent, large population, and high number of renters.

Would love to hear more on a city in Utah that is good.

The only cities I know of and have heard of being decent areas to invest are Salt Lake City, Provo, and Ogden. I have yet to look into any of these places for myself though.

I likes your last paragraph, buy when everyone is selling and sell when everyone is buying. True Investor indeed.

evergreen, i just looked at the 3/2 houses available on realtor.com for the city of las vegas and there are over 10,000 houses listed.

where do you get your statistics that las vegas isn’t overvalued?
according to analysis by city national, it was over-valued by 24% last year. http://phx.corporate-ir.net/phoenix.zhtml?c=64242&p=irol-newsArticle&ID=672770&highlight=

i hate to break the news to you, but i feel you are in denial.
just like i was about the stock market in early 2000. now is definitely
not the time to be buying in las vegas. i fear you will learn a very
expensive lesson in the next 2-3 years.

Niravmd (Dr. Nirav?)-
Interesting observation. Could you pass that link to City National again–I couldn’t connect to it. Having just got back from looking at a few 3/2 homes in Vegas this week, I can concur with some of your assertion. There are a lot of homes available, disturbingly (?) many brand new and unoccupied (bought by investors?). Now I’m just one sample (n=1), but some of the houses I saw had a lot of business cards left by agents, indicating thev’ve been seen by a lot of people and nobody’s biting. I also have a gut feeling that some of the sellers are possibly overpricing their homes, in their minds wanting to “cash in” on the run-up in prices last year. One place reduced their price after the first week. I don’t claim to be an expert on Vegas, and I do concur with Evergreen to be bullish because I did see the development going up and signs of growth. So what we may have here is a brief return to normalcy, maybe even a buyer’s market. But it appears the signs are there for another runup–maybe not soon, but a definite runup. I just couldn’t find anything that would let me break even–rents are so low! I was further deterred when I saw some rental listings offering two weeks free rent–a bad sign that rent is not going up anytime soon. Just reporting from the front. Out.

http://phx.corporate-ir.net/phoenix.zhtml?c=64242&p=irol-newsArticle&ID=672770&highlight

if it doesn’t work when you click on it, try cutting and pasting it.

& no, i’m not a doctor, that was my dad!