Postive or Negative Cash Flow?
Most real estate investment gurus say “only buy with a positive cash flow”.
Ideally we all want positive cash-flow. But is it always feasible? Can you get a positive cash-flow on an $850,000 property rented for $3000/month with a 10% down-payment? I don’t think so. If you put a larger down-payment, let’s say 30%, you may end up with a positive, but the means about $250,000 – a hefty amount. Does it worth it?
On the other hand starting with a negative cash-flow can really help you get going. Smaller down-payment means less cash out of pocket, better ROI, and possibly the power to buy more properties. But you will need to put in the missing funds every month. Now, if let’s say you buy a $150,000 property with 10% down and after expenses you generate a negative $150/month. Is that so bad? Probably not. Not to mention that it may easily be a positive or break-even after taxes. What happens if you have 10 of those, which means $1500/month negative? Well if your job pays you enough, then you can easily supplement the missing funds.
If you job doesn’t pay you enough to pay for your basic living needs and to use the left funds to cover your negative, then you should probably avoid this situation in the first place.
But what happens if your job does pay you enough to cover it, and then one day you lost your job or your income had dropped (sound unlikely?) what happens to your negative cash-flow “powered” portfolio now? You will most likely lose your entire portfolio or part of it.
In retrospect you’d wish you bought 5 properties and not 10 and put a larger down-payment on each making it a positive cash-flow.
For me positive cash-flow means an independent of you property. It can self-sustain itself regardless if you are working or not.