Negitative Cash flow, Off set by appreciation - Posted by Mikw

Posted by Hank FL on April 11, 2004 at 23:09:06:

The last piece of the economic puzzle looks to be turning around.

Rates may very well be going higher, which may p_ss on your speculative parade.

Be carefull.

Negitative Cash flow, Off set by appreciation - Posted by Mikw

Posted by Mikw on April 11, 2004 at 23:03:03:


I have been pondering this idea for a while and wanted see what other people thought. I know this is not a creative real estate deal and more speculation than anything else.

I live in Los Angeles, the real estate market is through the roof. Prices are rising at a rate of 15% + a year some areas 20% + a year. Does it make sense to purchase a SFR in a high appreciation area using an ARM loan (3/1 or 5/1) putting very little down 5% renting out the house, taking a negative cash flow of $300 - $400 a month in hopes of making it back on the appreciation. Sell the house in 3-5 years for a profit.

Any input will be appreciated.


Re: Negitative Cash flow, Off set by appreciation - Posted by Pat

Posted by Pat on April 13, 2004 at 09:34:23:

I suppose if you have an accurate crystal ball and are able to know what the market will be like in 3 to 5 years, that would be OK. Personally the idea of negative dash flow runs counter to what business is supposed to be all about (profit). Frankly, this house of cards we call the economy would not inspire me to speculate on that type of deal. I deal with lenders, and investors, and investment bankers. The consensus among them concerning the economy is: Nobody is telling us the truth. Your fate is in your own hands so have something coming into them rather than going out.

Re: Negitative Cash flow, Off set by appreciation - Posted by Gaymond Lee

Posted by Gaymond Lee on April 13, 2004 at 02:41:00:

I did this about a year ago (higher neg flow due to taking out a 30yr fixed rate vs a monthly adjustable). After factoring tax savings from passive losses and principal reduction (can’t really consider this a loss) I’m way ahead due to substantial appreciation (Bought $510k in 90266, can sell for ~ $700k). In my situation I could have bought a more expensive primary residence to live (in a better area) in but decided to stay put and use the extra $ to offset the neg cash flow. For me the extra $ didn’t make a difference as it would have gone to higher pmts for another place. Starter homes in some areas can jump 10% in 1 month as there is a shortage of homes for sale in So Cal. I’m a RE and Mortgage Broker so I see this buyer/bidding frenzy every day. A house I am currently in escrow at $340k was a $103k house in '99. I sold a house 2 months ago for $659k that was bought 12 months prior at $505k, etc, etc. It can become a CRE deal if you can get into a place with little or no net cash outlay working with an agent : )

Re: Negitative Cash flow, Off set by appreciation - Posted by dave

Posted by dave on April 12, 2004 at 16:28:11:

imo this is a sure way to bankruptcy. you have no control over further appreciation and are counting on an unknown for your profit. not only that, you’ll have the neg cash flow for years waiting for an unknown.

get into foreclosures. the money is certain

Re: Negitative Cash flow, Off set by appreciation - Posted by ryan

Posted by ryan on April 12, 2004 at 11:05:22:

Doesn’t sound like a good idea to me. Just because an area had as had 10-15% raises in RE prices for a couple years in the past, does not mean it will in the future. Any significant upward move in interest rates could not only stop upward gains, they could devalue many properties. Its silly to me to try and count on huge gains in future, in a market where interest rates are near historic lows and borrowers are streched. I usually project 1.5-2% per year long term increase after inflation on SFHs (lower for duplexes and appartment buildings) when I evaluate properties. Buyers are shopping for payments, not home prices in todays market. A 30yr fixed increase back to level it was in 2000 when I was shopping that loan (8.25% from todays 5.45%) would decrease the amount of house someone could afford by ~25%, not supprising my house has appreaciated approximatly 30% over this period.

Re: Negitative Cash flow, Off set by appreciation - Posted by Frank Chin

Posted by Frank Chin on April 12, 2004 at 08:04:45:


Most folks on this board are oriented towards “creative” REI. The usual issues are bad credit, unemployed to name a few.

On the other hand, I know investors who are high paid professionals, doctors, lawyers, who are into “appreciation investing”.

As an example, my brother in law has medical practice earning over 250K a year in San Francisco. His wife then went back to work as a banker.

He owned a “free a clear” 3 family netting him 30K after expenses. But between Federal, State, local taxes, 50% of it is gone. He traded it in for two pretty SFH, taking on a mortgage, for the specific purpose of erasing the net rental income. The two homes he bought in the mid 90’s had since doubled in value.

had he kept the 3 family, he would’ve pocketed 15K times 7 years plus a little appreciation on the 400K property. He’ll have 100K cash that he’ll have to figure out what to do with.

The two SFH’s on the other hand doubled from around 1MM total to 2MM total as values doubled, but slacked off as of late. Did he do better than netting 30k a year and paying 15K of it in taxes?? I think so!!

Does he need 30K on top of his 250K medical practice and his wife’s 100K income?? No!! The 1MM capital gain is taxed at favorable rates besides, and only paid when he sells.

As others mentioned below, it depends on your finances. My brother in law can put in a new furnace, new roof, and survive months if the tenant doesn’t pay the rent. The question is “Can you??”

Frank Chin

Re: Negitative Cash flow, Off set by appreciation - Posted by john

Posted by john on April 12, 2004 at 04:01:21:

I wouldn’t do it, too risky for my own personal tastes. I will always prefer making money when I buy as opposed to trying to bank on future appreciation. Goodluck to you, if you do act on this idea though.