I am in the process of purchasing a home that will be a rental property. The mortgage on the home will be $1540. The property is currently rented out for $1300 and I wont be able to rent it out for much more. Because I put no money down to purchase this property my mortgage payment is higher and I will not have any positive cash flow at this time. I will actually be paying $200 a month of the mortgage. The area the home is in is going up on an average of 8% a year so I am looking at the long term on this. Even though I am not getting positive cash flow on this property right now is ok to take an initial loss in order to grow my net worth and hold this property for 2-3 years. By doing that the value should have risen at least 15-20% by the time I want to sell. That should off set the $200 I will be losing now. Or should I never purchases a property were I have negative cash flow? Any input or suggestions would be really appreciated.
Never go negative, expecially on Single Family Homes. Some on here get pissed at me for saying this, but do yo want to run a private welfare office? You are basically subsidizing someone’s living expenses. You are betting on appreciation. That is never wise in any transaction. I always look at appreciation as icing on the cake. You should buy something that is positive, if it goes up, great, if not oh well you still getting a rent check. You also have to figure in vacancy, taxes, repairs (things break!) and evictions. This stuff adds up and can make this from being 200 buck a month to 600 a month negative easy.
I wouldn’t do it.
That was my fear too. I should have done my homework a lot better. I am into this property for about $1500 with inspections and appraisals. Should I just cut my losses? Is there anyway to get out of this property with out letting my inexperience really show?
A 1500 dollar loss now is better than a 25K loss later. I wouldn’t worry about you inexperience showing, it already has. All your out is appraisals and inspections? 1500? Sounds kinda high to me. What market are you in? I am just curious.
I am in Minneapolis-Saint Paul. Reason it was $1500 was due to it being a twinhome. I am buying both units. It was $300 x 2 for the inspections $400 x 2 for the appraisals and $100 for loan application fee. So is there anyway out of this with out looking like a jerk?
Can you cancel and walk away with just being out the above figures? Are you living in one and renting out the other? Or are you renting both?
you don’t mention insurance, taxes, etc in your figures; plus if you rent, you have repairs, maybe some utilities to pay. It all adds up. I would guess you be more like $300 to $500 per mn neagtive when all expenses figured in. That’s not a great situation for a property only grossing $1300/mn.
Plus you need to figure in some vacancy rate. Its real easy to have 0.5-1 month per year of vacancy unless you have a property mgmt co that is real agressive about placing tenants (of course that cost money too).
So , the point is the mortgage payment is just the beginning of the story…
I am sure I can walk away, just was unsure if I should. I know negative cash flow isn’t good, but I thought that because I was coming in no money down and building my net worth it was a ok deal.
I think the answer to your question is best determined by what geographical region you invest in and how you perceive where appreciation is headed and at what rate. For example, both of my properties that I just sold, I made just over 100K on each in 1 year on one and 2 years on the other. One property that rented I cleared $40 per month after all expenses (managed it myself) and the other I lost $300 per month on. All told I’ve been negative on the order of $2,500 for the past two years, but it was well worth the risk because the payout has been so great.
Positive cash flow is great and it the difference between investing and speculating, but had a I shyed away from buying just because I would be a little negative each month, I would have lost out on a tremendous opportunity.
That’s was my thought going into the property at first. I knew I would have a negative cash flow initially of a few hundred dollars on each side. There were several pluses about buying these 2 homes. First both are properties are fully rented out for another year, that lease is already signed. Second I was banking on the potential upside of equity that I could build. The area were the properties are located is the fastest growing area/county in my state with a minimum of 8% growth per year for the last 3 years with no sign of slowing. I don’t see it going up as fast as your property did Shasta but the growth is there. Lastly, other then the $3000 closing costs, I am putting no money down to buy these 2 properties. The thing that started getting me concerned was when my negative cash flow projection went from about $200 a month to around $400 per property. My other big concern is this. I know I am a newbie investor, so do the people I am working with. If I decided to walk away from the deal I don’t want to look like a jerk for not doing my homework properly and losing possible business connections and/or partners in the future. Thanks for the great insight so far too all!
So you are going through with it because you don’t want to look like a jerk? If you think it isn’t a good deal, run away! Who cares what the seller thinks, you know what he is thinking right now? He has an offer to unload his property to an inexperience newb. He don’t care if you do well, just as long as he get’s his. Also Realtors are a dime a dozen, who cares if you offend a Realtor or two. Infact it is my favorite hobby (just kidding guys). Banks don’t care either, they process paper all the time. Don’t buy for the sake of buying, there will always be Real Estate to buy. I would personally look for a better deal.
Also do you have a cash reserve for repairs? Could you afford a new heater if one fails?
What ever you do you need to re-calculate your expenses taxes insurance costs. You can always make new contacts you might get lucky and find someone who will look out for you instead. just my 2cents
I would rather look like a Jerk than act like a Chump.
There are two kinds of people in this world. Those that have and those that work to appear like they have to others.
Be concerned about yourself and your life more than what other people might think about it.
Or you can try to save face, lose more money and then go watch the E! channel so they can tell you what to wear tomorrow.
Be your own person. You made a mistake, who the heck hasn’t? Can you name one person? No you can’t. The difference between the real winners and losers is the winners admit they messed up and move on. The losers act like they are in High School still and try to save face with the in-crowd.
Do two mistakes make a right?
I can not believe I agree with Dan732
I’m with Dan and evergreen here – the seller isn’t responsibile for your financial situation :-* Only you can look out for yourself. Move past with others think of you, in this business that way of thinking can cost you a lot of money. Be polite and put yourself first.
So, they put it back on the market. They won’t be the first to do it. Just add this to your pool of knowledge to draw from in the future. BTW your appraiser has a racket going – $400 per unit? WOW It’s definitely less expensive down here in the south, and I would have negotiated with the appraiser before letting them walk into that situation. It’s always OK to ask, they can only say, “No.”
I, personally, will not do a negative cash flow house. But, Shasta has done very well. Each area is different and you have to decide what is right for you. No one has a crystal ball – speculation is too risky for me, which is why I don’t enter into negative cash flow situations. My business plan is causing me a few problems right now (as many of you have read). But, with some more patience I’ll be working on a house again very soon.
Good luck to you!
make sure you figure in your property taxes, insurance, vacancy and colllection loss, repairs, etc. etc. you’re gonna have much more than a $240 per month negative, but you’ll probably (depending on your income level) be able to write off some on your taxes and you’ll be able to depreciate the improvement value (not the land value).
also, don’t count on an 8% per year appreciation rate. it may be higher than that but then again it may be lower or it may even depreciate. you never know.
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.
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?
Karla in Amarillo
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!
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!
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?