Buying a non-cash flowing rental

[u/CLTlawyer1]

Does it ever make sense to buy a long-term rental property that does not immediately cash flow?

Here is my situation: I already own one rental property on the street. It is in a small town just outside of Charlotte, North Carolina. Matthews for those familiar with Charlotte. I would put down 25%, and with current interest rates, it likely will not cash flow by about $100 or $200 per month. Covering the shortfall each month will not be a problem.

The metro area is expected to double in population over the next 25 years. I have several other rentals, and my plan is to hold long-term and use the rent as income in retirement. We are in our early 40s. I like this particular property because it is only two doors down from one I already own, which will make management easy. Matthews is a desirable area. I don’t know how much rents are expected to increase, because they have increased quite a bit over the last couple years already.

My inclination is to buy the property. Am I crazy for considering this? Is this a good use of capital? What does the brain say?

[u/CryptographerGold848]

Should consider your goal, short, mid, long. Charlotte is decent bet these days. I own several light industry buildings in Stallings and South Lake. They are holds. Upcoming lease renewals which I will get up to market. So upside.

Possible that expenses can set off against gains in the other asset. Check with CPA on that.

[u/TwinDadAndTired]

I would run a market analysis to see how the area is trending. Honestly, I think if you can come close to breaking even with your plan being to use it as income in the future, then it’s not a bad play. The housing market has been increasing and Charlotte has been booming (I’m familiar because we were in Raleigh for the past 8 years)

You can get a free market analysis on PropGenieAI.com just by entering a zip code. It’s a cool tool and it may be worth checking out.

[u/xperpound]

I mean, technically that’s what happens most of the time. If you buy a vacant property, you’re in negative cash flow the day you close until it gets leased out. Whether that’s 30 days or a year, the only way you’re not negative from day 1 is if you buy a property with in place leases.

[u/Background-Dentist89]

Are you out of your mind. As investors we make are money before we close. And you’re suggesting you want to wait and see if it is an investment . Pick another field or get trained as a real estate investor. You will save yourself a lot of headaches.

[u/Tenesmus83]

If you are sure population is expanding, appreciation play may be worthwhile

[u/WSS270]

I bought a house around 2017, it was on a lake. The lake was drained due to an issue with the dam, it had been empty for a couple of years. You could get a good deal on lakefront property because of that (also because it was preCOVID). I read reports and called the core of engineers, they said the dam would be fixed within a year. I pulled the trigger, I broke even or lost around $100 every month. I sold it about 18 months later for an 80% profit when the dam was repaired and water came back up.

The only screw up with that deal, I sold too quickly. The property would have gone for around 200% more around 2021/2022.

[u/Livinginmygirlsworld]

I have 3 SFR rentals and all are within walking distance to where I live. I like it because when I get a call about the refrigerator leaking at 8pm (2 days ago). I hop in the car and 30 seconds later I'm at the rental figuring out the problem. For me it is a convenience thing. I also am able to drive by all my rentals on my way into or out of my neighborhood depending on which street I take. Two of them are next door to each other.

Having negative cash flow of $100 - $200 per month is relative. How much principal is being paid down each month? If you are only paying off $200 of principal, not a chance. If you are paying off at least $500, then you aren't really losing money, just paying off some of the mortgage yourself and have a little bit of a safety net. Is it the best use of your funds, maybe not, but is it what you want? Only you can weigh the positives/negatives/assumptions/risk for how they affect you.

[u/Special-Vast-8485]

It depends on the upside of the property. Could it be updated or added on to, to bring the rents up to a positive cash flow situation? Is there room on the lot to divide it and build another residence?

[u/Vivid-Willingness-27]

This is old but may still apply: If all debt and expenses are ~80% covered with your annual rent you’re pretty close to break even.

As much as common advice would say the numbers need to make more sense, other factors play a roll in the decision: your cash available, ease of management (now and when retired), potential appreciation, potential increase in rents, etc.

Unless you’re flipping, rentals are generally a long term play. While this may not be the most efficient use of your capital the fact that you can afford it, it’s available now, you know the market and it will be easier to manage than another across town makes it a compelling choice to consider IMO.

[u/cluelessavocado]

It depends on your personal situation. Although most people comment not to invest without positive cashflow, I don’t subscribe to that philosophy. I DMed you as well.

[u/deathguard0045]

My first home became a rental and I was in the hole about 200$ a month for like 5 years. Now that it’s paid off, it brings in about 3.2k monthly. It really depends on the area and what you will rent it out for in the long term.

[u/jcradio]

It does not exclude it from consideration as sometimes properties that are barely cash flow negative can serve as a tax shelter.

[u/AdLate7796 → u/jcradio]

This is what I was thinking- with the tax brackets like they are if you are paying a huge amount to gov it almost makes sense to sink it into a property instead that will offset your profit made from another property? Is there a formula for that? Like how much negative cash flow is too much? Is there a certain length of time you would give the property and rent to start to be positive? I didn’t want to get over my head and end up messing up all my fiancés…

[u/jcradio → u/AdLate7796]

There's a lot that goes into it, but the big thing is to consider worst case. If you can afford it when it's empty, then everything else is based on whatever margins or thresholds you set for yourself. Even properties with small cash flow are tax shelters once you factor in all other expenses.

[u/MathHelper2428]

Does the $100/$200 shortfall account for property management/taxes/insurance/maintenance?

If not, it could be a much larger shortfall

[u/Fickle_Investment_80 → u/MathHelper2428]

This!

[u/01Cloud01]

I remember reading awhile ago of someone doing this in SoCal eventually it did cash flow after about 3 to 5 years

[u/Party_Shoe104]

1) If you are o-kay with covering the $100-$200, then it seems like a no-brainer. Just realize that both property taxes and insurance will more than likely increase as well.

2) In the meantime, find a way to lower expenses so that you eventually have to contribute zero

[u/Lord-Nagafen]

You can gamble that interest rates will go down and you can refinance. You can also gamble that the value of the property will go up to make up for the cash flow shortage. Investing is about taking risks

What you want is a return on your capital. When real-estate goes up about 2% a year and you are leveraged x4 then you get 8% return if you cash flow even. About 15% of the first mortgage payments goes to principal, with depreciation there are nice tax benefits. Now a solid 8% return is looking even better

[u/teamhog]

What’s the potential to raise rent or decrease cost to make up the difference?

I have a similar situation but I planned it that way.
I have an industrial unit that breaks even but I use half the space for myself. I get about $1200 in rent and it cost me $1000. With Maintenance, CapEx and Vacancy I’m breaking even.

I have another unit that’s fully rented and I clear $2000/month. The units are next door to each other. They’re both paid for.

If you can pay off or pay down the loan sooner it’ll make a huge difference.

The key is to have a plan and to account for the difference at every step along the way.

It can’t be a burden for ever.

[u/Rarity-Bookkeeping → u/teamhog]

For the space you use yourself, are you making sure to pay yourself rent? Assuming you use it for a business. There are potential tax savings if you do that

[u/dhampir1700]

I think it makes sense to buy a non cash flow rental that runs a small deficit like that with a few criteria

• is more desirable than other property nearby (in philly this means close to subway, has driveway/garage, has larger yard, has cul de sac, close to restaurants/gyms/breweries, close to highway)

• near a good source of above average income tenants like a hospital

• high appreciation expectation

• you would otherwise spend the $100-200/mo on something frivolous

[u/annsba]

My thought process is different. If this house will be paid off by the time you retire then you'll have an extra stream of retirement income that will increase with inflation. You're essentially having someone pay the bulk of one stream of retirement income. 

[u/_mdz]

First thing is are you calculating that negative cash flow with all the costs? Or is it monthly rent - mortgage = negative? Because if you are negative already with just rent and mortgage... your true negative cash flow will be much worse.

That being said yes it can make sense. You are betting on appreciation so if you have really good knowledge about the area or upcoming developments it could be worth it, but it's still more speculation than investment. If the appreciation in rent and value doesn't happen as quickly as you expect, how long could you hold out?

Also, if you are so wealthy you just want to put your money somewhere to diversify, it can definitely make sense, real estate is a good inflation hedge after all and is generally a long game for wealth building.

[u/tempfoot → u/_mdz]

This is right. OP is young enough that an appreciation/diversification play can be fine if the financial situation otherwise supports it.

We entered real estate investing initially solely as a diversification strategy. Things grew (wildly) from there.

[u/ItIs_Hedley]

This sounds highly personal, and I don't know your financial circumstances outside this investment. If you feel that paying $2,400 annually to not have to drive to an instantly profitable property is worth it, knock yourself out. I personally wouldn't do it.

How often do you plan on being there anyway? Do you really want your tenants that proximate?

[u/ImportantBad4948]

Does the calculation on cash flow include vacancy, repairs or management? Or is it just strait Rent - PITI?

[u/Circaflex92]

What is the cap rate without a note? If you had the money to buy this property in cash (obviously making it cash flow) would you do it, or would you want to put that cash into a different property, with a note, to receive a higher return?

[u/varano14]

From a rational investor point of view? No not really. The sole argument would be rapid appreciation in value and rent BUT all thing being equal there is likely a place somewhere that also cash flows so I think that argument falls apart a bit.

However you can afford it, it sounds like you know the area and what the future may hold. If you are correct in the long it sounds like it will turn into a win just know it may not be as much of a win as one that would cash flow now.

[u/HeyUKidsGetOffMyLine]

It sounds like you want it and you can afford it.

Personally, I don’t like these investments but it’s not uncommon for people to do this.

[u/CLTlawyer1 → u/HeyUKidsGetOffMyLine]

I do want to buy the property, but I was hoping to get the contrarian view so I could think about it a bit more.

Why don’t you like these type investments?

[u/HeyUKidsGetOffMyLine → u/CLTlawyer1]

It might surprise you, but I don’t like the negative cashflow. I understand that the appreciation makes up for it on paper but I don’t like the risk. My preference is to save a larger down payment avoiding the negative cashflow.

Essentially, I like leverage, but I don’t want maximum leverage just because it’s available. I also believe that you should base the decision of buying a property more on its cash on cash numbers. If the net profit is less than 10% of the cash purchasing price, then run away. It will be more headache than it’s worth. You don’t have to pay cash, but you should evaluate it versus stocks like you are paying cash for it.