Is Your Time Worth Investing In A Low Cash Flow Property?
By Paul Esajian on December 23, 2015
There are many reasons for investing in real estate, but it’s up to you to pick the one that best suits you. For as popular as flipping and rehabbing are, there are other ways to get started. One of the most tried and true ways to build a portfolio is through buy and hold investment properties. In a perfect world, every property you entertain will offer a surplus of cash flow for years to come. While this is the ideal scenario, however, it may not always be the case. From time to time, you may run into a property that you see value in, but doesn’t yield the monthly cash flow you desire. Low cash flow is not ideal, but it may not necessarily be a deal breaker either. Let’s take a look at a few reasons why you would pursue a deal with less than ideal cash flow.
1. Tax benefits: You may not be aware of all the tax benefits in owning a rental property. This should never be your main reason for making a purchase, but it could push a so-so deal over the top. You don’t need to be an accountant to know the basics of income taxes. You are taxed on the bottom line taxable income you have every year. With a rental property, you can write off the mortgage interest, repairs, utilities, travel expenses and many other items. This eats away at a large chunk of your taxable income, and reduces the bottom line that you have to pay or can end up giving you a refund. This bottom line tax number has to be accounted for when you look at the overall cash flow of a property. What you don’t feel every month will definitely be felt come tax time. This can be difficult to quantify if you have multiple properties, or multiple income streams. Tax benefits should never be the main reason you make a rental property purchase, but it could be a very attractive hidden benefit.
2. Long term appreciation: The real estate market works in cycles. Anyone who has been in the business for a significant period of time knows it. While you may think that a property value will go up, it is risky to make any purchase solely based on this premise. That being said, if you buy in the right market, long-term upside is a distinct possibility. If you are buying for the appreciation, you need to know that it may not happen for several years. The market may turn in five years or sooner, but the odds are you will need to wait longer than ten years. You may be buying at the high end of the current market, but if you are in the right area and the market is growing there will be upside in the future. Scraping out minimal cash flow for several months is worth it if there is larger pot of gold at the end of the rainbow.
3. Diversity: One of the reasons that flips are so popular is because they offer the quickest way to see a return. As great as flips are, there are other ways to build a real estate business. Adding a rental property to your portfolio offers other avenues to generate income. Poor cash flow is not always about the property. In most cases, there are ways to either lower your expense or increase your revenue. By doing one of these two, you can turn an average looking rental into one that becomes a real asset to your portfolio. Having different ways of generating income decreases the chances that your business will suffer through dips. What may not be a strong property now can change in the future.
4. Growing market: Is your rental property located in a growing market? Are there plans for expansion on the horizon? If this is the case on either front, you can justify living with an average rental property until the market takes off. Buying near a major college or university may seem like a bad purchase, but it could pay huge dividends in a few years. You never know if and when the school may change their policy in regards to renters. This can be an instant boom to your property. The same is the case if you own a property near a major business expansion or growing downtown area. The idea of a good rental property doesn’t have to be to earn significant monthly cash flow. By placing yourself in good areas and growing markets, you can reap the benefits years from now.
5. Reputation building: The final reason to purchase a property without significant cash flow is to develop a local reputation. Obviously, the numbers need to make sense on every deal before you do anything. If the numbers are just OK, but if you like the property, you should consider who the source of the deal is. You may not hit a home run with it, but there may be a better one on the horizon. By building a reputation as someone, you may see more deals come your way in the future.
Never move forward on a deal where you aren’t completely sold. If you like a rental property but the monthly cash flow numbers are average, look at the big picture. Cash flow is always important, but there are other factors to consider when evaluating a deal.