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Cash Flow vs. Negative Cash Flow: Which is better? This may surprise you.

 

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If you have been an investor for more than 10 minutes, you have probably had the opportunity to buy properties with negative cash flow.

 

Here is a simple way to determine if you should ever touch deals that don’t bring you cash every single month. My opinion about this may come as a surprise when you hear it.

 

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Read Transcript for “Cash Flow vs. Negative Cash Flow – Which is better? This may surprise you.”

 
Negative cash flow on a property isn’t always a bad thing. I’m going to show you how to determine whether a property with negative cash flow is worth holding onto and how to make it work to your advantage if it is.
 
Joe: This video is about the types of properties you should have in your investment portfolio but this time, I’m going to talk about cash flow properties versus negative cash flow properties and try to help you determine and understand what the difference is between a property that’s bringing in money every month and a property that’s actually losing money and isn’t a good investment.
 
Joe: Simply because it’s a negative cash flow property doesn’t mean it’s a bad investment. I have properties that I purchased “Subject To”. The rents went down but the taxes went up so I have a negative going out every month against them. I may have $100 or $200 going out on properties every month, and when I look at it I think, ‘Oh, that’s bad. I don’t want that.’
 
Joe: But then I take a second look and I say, ‘$150 of that is actually going to buy down the principle on the loan.’ (These properties are in the $150,000 range). I’m getting another $150 in actual tax savings on the property. Next year, the values are going to go up and I’m going to pay that loan down faster because my rents and the value are going up (and I have some properties that I actually owe more on them than the real value is on the market today).
 
Joe: So, I’m not going to lose those properties – I didn’t get killed when that happened because of the fact that these properties are sustainable. These properties will pay for themselves with their rent, and I have enough cash coming in from other things to offset any losses or upfront cash flow issues that I might have.
 
Joe: Every once in a while, I’ll have to sell a property in order to get some more cash flow in to help support the whole portfolio/database of properties that I own. But ultimately, what that’s going to mean, assuming that I can hold onto them for that period of time and the values come back up, is that I’m going to have a huge portfolio worth millions of dollars, and it’s just going to keep continuing to add to my wealth and legacy that I may want to pass onto my kids.
 
Joe: Being able to look at this negative cash flow and know for sure that it’s negative, and whether it’s actually going to make you money or not in the long run, is a very important point. You have to decide at what point you’re going to be uncomfortable with taking a property that has negative cash flow. If you have a property that has $500 a month negative cash flow, and you’re making $60,000 a year, a $500 a month negative cash flow could eat you alive, so you don’t want that situation.
 
Joe: On the other hand, if it’s $100 a month in negative cash flow, you’re going to make that up just in your tax savings that you’re going to get on that property, plus it’s a forced savings plan because you’re buying down on that note every month and hopefully that value is going to come back up and you’re going to see more values on the properties. I hope that helps.

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2 Comments

  1. December 8, 2010 at 8:10 am · Reply

    Hi James, If you get involved in my mentor program, I’ll send you by some of the houses we are working on so you can see what we are doing and what we are not doing when we fix up a property. We are spending more than a few hundred, but way, way less than $20k like you are. Most of our rehabs run around $7k average. I know you’ve seen pictures of them, so you know they look good when we are done. We aren’t making these houses “like new” we are just making them nice places to live so we get good tenants. Don’t over improve your properties. And just a note for everyone else who is reading this. The way I’m doing rehabs is VERY specific and the market that I’m doing them in is also been chosen with care. This market doesn’t exist everywhere. This is NOT what I teach as the first way to get your business going as a real estate investor. You want to start by making money NOT spending it. Eventually, you will have money you need to invest – that is what the rehab I’m doing is all about. Good luck. Joe

  2. December 7, 2010 at 1:17 pm · Reply

    Joe,
    I hear you talk alot about your “professional property manager” and how this person finds properties for you to look at, finds the tenant, collects the rents, and does needed repairs. I assumed that your mentor program does all these things instead of “subbing them out” to a third party. What about the buyers and sellers list building? At my current job I do these things and it costs the owner alot of money. I assumed that the mentor course taught many of these things. Also, what do you think is a reasonable amount of money needed to put all of your websites and service providers together to set up my site after I join you? I am trying to get an complete idea of my business set up cost(s). I intend to go at this as a full time business from the start.
    This is a property we manage and the cost to owner- Example: I am about to repair/remodel a house in the 65th and Keystone (Indianapolis-Broad Ripple) area for his daughter. The cost:$20,000 dollars. The house will comp at 125,000 to 150,000 in a good market. This dentist will not tell me what he paid for his daughters house, but his body language says too much. I just finished a complete tear out and remodel of two full bathrooms in his personal house in Deer Woods. Cost:$35,000. I wonder how this “property manager” can do all these things for you at a few hundred dollars? Yes, you have multiple properties but you can’t get something done for nothing. Most contractors I use charge at least $125/hour plus materials. As far as myself, I will use my company to handle all these things.
    I am trying to put the total picture together in my mind. I just finished watching videos 12 thru 18. A lot of the things you talk about I have done-like paying cash and getting a price 50% below market. Just a few of my thoughts on this.

    Best Regards,
    James Gilliam

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