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.