Why We’d Buy a Rental Property That LOSES Money Every Month…

Episode #949
Would you buy a rental property that loses money every month? What if, in a few years, that one property could make you hundreds of thousands of dollars? Would the negative cash flow be worth the massive appreciation upside? Today, we’re answering that exact question from an investor who could be sitting on a wealth-building opportunity but doesn’t know what decision to make. Should he buy the "bleeding" property at a steep discount or give up this needle in the housing market haystack to avoid a cash flow trap? Let’s find out!
We’re back on Seeing Greene as David and Rob, your go-to real estate investing experts, answer questions directly from "BiggerPockets Real Estate" listeners like you! First, an investor has a rare opportunity to buy “Grandma’s house” with over $200K+ in potential equity upside. The problem? It will LOSE $800/month! Next, a new property manager wants to know how to raise rents on a twenty-year tenant. Do you pay capital gains on the profit of your home sale or the entire amount? We’ll show you how to know how much you owe. Then, an investor debates selling his C-class cash-flowing properties in exchange for appreciating assets, and we explain the “sneaky rental” tactic that’ll take you to ten rental properties in no time!
Want to ask David a question? If so, submit your question here (www.biggerpockets.com/david?u...) so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can jump on a live Q&A and get your question answered on the spot!
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Raising Rent Episodes with Dion Mcneeley:
Real Estate Podcast 448: www.biggerpockets.com/blog/bi...
Real Estate Rookie 369: www.biggerpockets.com/blog/ro...
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Other Podcast Episodes Mentioned in Today’s Show:
Real Estate Podcast 169 (w/David Greene!): www.biggerpockets.com/blog/20...
Real Estate Podcast 941 (Seeing Greene): www.biggerpockets.com/blog/re...
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Show notes at: link.chtbl.com/BPRE
00:00 Intro
01:23 Losing $800/Month to Make $200K?
11:38 Raising Rents On 20-Year Tenant
21:06 Comment Section & Capital Gains 101
25:02 Trade Cash Flow Portfolio for Appreciation?
32:20 The "Sneaky Rental" Tactic
37:36 Ask Us Your Question!

[@davidstephens9594]

Good idea, Rob! In the past, I have shown tenants the zillow and rentometer market rates for the property thay are renting but never thought of showing them other properties that are renting at the current rate they are paying.

[@erikg666]

Rob brought up a great point about approaching diplomatically to avoid a squatter situation, David said to treat them like a new tenant and raise to fair market rate, not really acknowledging the leverage the tenant has.

[@fromthebasin]

Buy it. Do the reno. Live in it for two years. Sell it as a tax free primary, or do a 1031. If you dont have anything else planned for your money in that two years, it is def worth it.

[@joshrweb]

Unless there's a major recession and the property loses value.

[@fromthebasin]

@@joshrweb a life lived in fear is not a life worth living.

[@DionTalkFinancialFreedom]

Purchasing a property far below area average rents is why the binder strategy was created. Love it.

[@Aculus1]

@DionTalkFinancialFreedom when you created the Binder Strategy, curious if you thought about it from what worked in business negotiation or were you working from psychological principles like baselining. Recommend your free course to anyone viewing comments by the way.

[@bunnusm2657]

For primary residence is best

[@tonyalaw8197]

Great video!!! Thank you!

[@locoedieify]

Love the hair puns lol. Dion is awesome

[@DionTalkFinancialFreedom]

Hahaha. David has the best hair style. 😀

[@TJ-th9hw]

Great show as always Gents! Thanks for sharing your experiences!

[@3TRIALSBBQ]

I will be sending you an update on my purchase David, with more information on that prop 19 and how it has kept the taxes lower

[@shaunrowan2327]

I dislike how David sometimes misrepresented the new primary each year strategy. Rob even tried to get him to clarify the DTI issue with it and David glossed it over because he’s likely thinking of all the different refinancing steps of the previous houses that are needed. Simple example, someone makes $120,000 a year. Thats $10,000 a month, meaning at 43% DTI they can have $4,300 a month in debt. Let’s assume they get a house with a conventional mortgage all in at $2,000/month. Great they are under the DTI ratio. After a year, they buy another for $2,000/month. Can’t count the income from the first yet but they are still under the cap ($4,000 total debt/month). Year 3 they want to buy another. Now they can count the $2,000/month as income, so their income is $12,000/month. At 43% DTI their debt cap is now up to $5,160/month. They already have $4,000/month debt from the first two houses, so the their house can be under $1,160/month. Not $2,000. The income and debt from the first house do NOT cancel out. Unless you refinance in to a different loan product, you only can assume 43% of the additional income as new debt. Please don’t incorrectly portray things, especially when your cohost points it out.

[@sunnybhatti9567]

How to do goog property inspection or find a good property inspector, and how to do your own due dilligence?

[@Siystemattic]

Regarding the SNEAKY Rental Strategy, its awesome to pay low down payments, but PLEASE especially for newbies that may not fully understand give the caveat that if you are in a location with non optimal price rent ratios, or HCOL (high cost of living) areas where it will take LOT more than an LTV of 95% to cashflow, (or even 80% or 75%). Also, sometimes the only way to get that to cashflow is to fix it up and refinance it and even that, is difficult to do. Do you have any special considerations or strategies to navigate this?

[@Matt-qj6cr]

I've been a long-time fan and avid watcher of your content. As a blue-collar worker myself, I wanted to offer a word of advice. Many of us, who likely make up a large portion of your audience, are blue-collar workers who love what we do and are committed to our careers due to pensions, medical coverage, and the need to support our families. Unlike those who might have started investing when interest rates were low, or are single and don’t have mouth to feeds. For many of us, buying a "cheap home" is the only option to enter the investing world, even if it means working extra hours and spending time away from our families just to save enough for the down payment. Instead of constantly pointing out the drawbacks of these investments, could you use your experience to help us make the most of them? We appreciate your continued information and hope it can be tailored to help us succeed with the resources we have. Thank you.

[@EnVec0]

If he can come up with the money down for the property, the Reno and was very realistic about the Reno cost, then that’s an easy decision because it’s a small carry. I know this channel often discussed cash flowing properties right off the bat, but that’s not possible in Canada B.C, every property I’ve bought starts negative and you work on rent increases over time and through Reno’s.

[@Anonyme67]

That’s a lot of speculations. I won’t do this as others things can happen such as a major repair….

[@bannertraveller5879]

He already says he plans to fix it up and has factored that in so your point is moot

[@JoseFernandez-sl2ek]

Buying a home that bleeds $800/mo.....Know your break even point (how long will you bleed the cash for?) and focus on the fact that the bleeding will stop. The questions is....What are the opportunity costs? Is there another investment that would produce better returns if the down payment, $800/mo. of bleeding cash, mortgage, maintenance costs, etc. were invested elsewhere?

[@x6da9crain]

34:20 isn't this just fha. And if the home goes up in vaule. To refinance to conventional. You'll be losing that sweet "cash out refinance" bc all that $ would go towards the refinance. I bought a house $150k and refinanced $200k but didn't get to see any of it bc refinance out of fha too so the $

[@mitchellblodget239]

Hey I’m KZbin famous now! Thanks for the answer! You guys are awesome.

[@ultrarelativistic]

How is Google a palodrome??

[@valsomeone2180]

For second advice that doesn't fly in NY. That person becomes a squatter after 30 days and Goodluck getting rid of him/her.

[@monkmysterio]

The People's Republic of California lol

[@gregorylewis9442]

This is why people burn their property when they are upside down to collect insurance money 💰?🤔😲

[@YoPhocFays]

I did the same as this caller. Negative $700 cause I went with a 15ryr loan. Took 5yrs to break even, but the property has almost doubled now. I just had to grind through the negative cash flow temporarily

[@christobar]

Future landlords watching: not raising rent consistently and fairly is a huge mistake. Don't fall in that trap. You are not doing anyone a long term favor if you do that.

[@bloodphantom81]

why isn’t it doing the tenant a favor?

[@christobar]

@@bloodphantom81 You'll quickly run out of an income buffer to pay for repairs and upgrades as well as creating a hardship for the tenant in the future when they need to move out (for any reason). Everyone's expenses go up over time, unfortunately.

[@Anonyme67]

I fixed all my properties and never raised the rent. Only have minor repairs and my tenants love me. My properties are all paid off

[@Omoloya1]

Lucky 7! Good morning, All!

[@reneeREMichigan]

He could do coliving and possibly make more money.

[@richardmerced1833]

Sound like bad advice to me The house is only worth a million $50,000 He's going to buy it for $860 plus put 190 That's a million $40,000 He's going to have $10,000 of equity if the economy goes down 10%. He's going to lose money with the highest markets ever been in history is going to be a correction bad advice

[@christobar]

The most I would do is buy a property that would break even, but that would be a lot of capital to put down that wouldn't be making a return for a couple years and you're at best speculating that rents and property values will go up. So far I have been too risk averse to do that.

[@evgenyonishkevich8494]

As usual, great show, but had to scroll through the comments, they make no value

[@ryankelly5308]

Unless he has a money tree growing in the backyard, this is a terrible idea. This is how people go bankrupt and then ask, “what happened?”

[@user-ps8jg5po1d]

Did you even listen to the podcast? They said if you can afford it. Appreciation, debt paydown, and tax benefits are the cherry on top.

[@SubGuyD]

Terrible if you assume someone can’t afford to take the monthly loss. But if what if you have an extra $2k discretionary funds a month, how would you go bankrupt?? You’d still be paying all your bills just fine, the only thing that changes is your potential for saving / investing.

[@ryankelly5308]

@@user-ps8jg5po1d I did, and I think it's a huge risk to assume appreciation on a $1M property in an already hot market as justification for negative cash flow on the property. It's a big risk for limited reward in my opinion. I just don't see the ROI, but huge opportunity for major loss.

[@ryankelly5308]

@@SubGuyD I have seen a lot of investors that invest at the top of the market when they "just" have enough to get by. The fact that this person asked the question in the way that he did tells me all that I need to know. He knows it's a stretch, and he's trying to justify it based on an assumption of increased value. Here's my red flag: he is calling it a "rent" for the house, but he is using it as his primary residence to start. So he is calling "rent" his mortgage, then I don't understand how he has a "loss" each month...it just ends up being more expensive than he plans on it being. Perhaps he is pairing his mortgage in relation to relative rent, which is silly anyway because those are apples to oranges. But if you are aiming for the 1% rule, then he has to rent this home for $10,000 per month to make these make sense. And I can tell you right now that I would much rather park $1M in an investment fund or even a CD than I would in real estate in a hot market that may slow down. That's a lot of money invested in a single asset, not to mention a single asset class, in a volatile market. But hey, if he wants to roll the dice and see if it works, I hope the best for him. For me, I'll stick with my cheaper rental properties and sleep better at night.