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Investing in Properties with Negative Cash Flow? Why?

Portrait Andrew Schulhof

#303-1338 West Broadway
Vancouver
British Columbia
V6H 1H2

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Does an investment property have to cash flow to be successful? With the right strategy in place and knowing what skills and circumstances are specific to you, you can find the right market and real estate to make positive investments.

Like after the financial crisis, disruption and change provide opportunity for the prepared. Negative cash flow properties may be that very opportunity to consider if you are a value investor. Are the underlying fundamentals strong and in alignment with your goals? This is what we explore here.

 Real Estate Investing is a Serious Business

People are quickly realizing that real estate investing is and should be treated as a serious business. It involves large sums of money, healthy rewards when done correctly, and high levels of risk when done poorly.

For so many, real estate investing was the thing to do while interest rates were low. Many used their home equity gains through Home Equity Lines of Credit (HELOC) to get into the real estate investing market. For a large percentage of the real estate investing population, volatile interest rates and mortgage interest rates above 4% were not normal and hardly considered for almost two decades.

Suddenly things changed in 2022, with massive inflation and mortgage interest rates quickly climbing. This caught many off guard and now is an increasing concern for those that didn’t anticipate the actual financial impact of these rapidly increasing interest rates on funds borrowed through HELOCs and variable or adjustable rate mortgages.

Opportunity Knocks In the Real Estate Market

Within the current real estate environment, many prepared real estate investors are trying to find properties that make investing sense. Does that include negative cash flow properties?  Why is the person investing in real estate? The success of the investment has more to do with the investor than the investment because of the investors’ expectations. That expectation lens is how the investor defines the investment success.

About You

Capacity to Act

In order to be successful you need to be able to take appropriate action. This requires gaining clarity of your vision, desires, and goals. Through this self –investigative process, you better understand how and what property investment strategies will work best to create your real estate portfolio. Conduct a gut check versus just rationalizing your why. What is your ultimate desired outcome?

Stress Test Your Real Estate Portfolios

Firstly, consider what you already have, especially if you are employing a buy and hold strategy and STRESS TEST your real estate portfolio to understand your limits. Then, if you are ready to take action and capitalize on the opportunity that comes with such changes, then you MUST understand how much financing that you ACTUALLY qualify for, and what it would look like if the rates increase more. It’s imperative to be clear about what is the maximum that you contribute on a monthly basis and for how long can you carry on financially supporting the existing portfolio and new potential property.

Live for Today and Plan for Tomorrow: ROI and ROL

Most investors look at the return on investment (ROI). There is also an equal return that should be considered and that is the Return on Life (ROL). After all that is why you are investing in any investment. You are typically taking such actions to improve the quality for you and your loved ones. ROL needs to be a top priority as we are only guaranteed today, tomorrow is a possibility. I am a firm believer in live for today AND plan for tomorrow.

With limited resources we need to maximize all our resources which include time, energy, relationships, in addition to money. Stress is a huge factor that many investors overlook until they are in the thick of it. Higher stress usually creates heightened emotions, and potentially less effective decisions.

Once clarified, then the investor can get into assessing the market and property.

ABOUT THE INVESTMENT

Market and Property Potential

Here are just a few general market questions to aid you in gaining clarity.

  • Can an investor find positive cash flow with the current interest rate environment?
  • Where are the buy and hold opportunities and does it make sense to invest now?
  • What markets have the highest probability of positive cash flow today and what does the potential future look like in that market? If not, does it make sense to invest in a property currently not providing positive cash flow?
  • What are the key economic market drivers and current/ forecasted economic status?
  • What is the current population demographic makeup and what are the trends?
  • What are the pricing, listing and sales trends in the housing categories that you are considering?
  • Can you buy the property(s) below replacement cost?
  • What is the future property appreciation and rental increase potential over, what time period?
  • What are your EXIT STRATEGIES?

As real estate is a lagging indicator of the economy, understanding the incredibly important long term components (market drivers) will serve you well. Research as much as you can online before spending money. You have time as in these conditions there will be deals to be had for those that are prepared.

Look for those markets that have not gone through an overheated real estate cycle. Investigate those markets that have a strong, diversified, and sustainable economic base that will attract a working population for an extended period of time.

These rapid interest rate hikes are considered to be “market influencers” meaning that they temporarily influence markets for a period of time and then the market settles into the new normal.

The saying “all boats rise and reside with the tide” is often used in real estate, but those markets that had a tsunami of buying typically have a much tougher fall in demand, sales, and eventual price correction, unless  the market possesses some truly unique factors that may counteract extreme price drops, like the geographic constraints of Vancouver.

Carpe Diem

There is great opportunity in being a prepared contrarian. As Warren Buffet says “Be fearful when others are greedy and be greedy when others are fearful”.

Even though the underlying asset may still be good, many positive cash flow properties have turned negative solely because interest rates increased faster than the rents. This is the opportunity that will be available for those prepared value investors that have planned to manage the operating and financing expenses in the short to mid-term.

Does it make sense to invest in negative cash flow properties? From personal experience, it does for the value investor with the right strategy, capabilities, and right market.

As in the title of my book Look Before You Leap BUT LEAP conduct your due diligence and take action.

To your success, proceed with caution with eyes wide open!

Email me at [email protected] as I am working with those prepared investors. I’m setting up specified MLS searches in Vancouver, and Edmonton, as well as getting information on opportunities in Calgary. I am also well-connected with brokerages in Cabo San Lucas, Greater Puerto Vallarta, and Huatulco for those looking for Lifestyle Investing in warmer climate in Mexico.

Get in Touch

If your are interested in investing in real estate, or looking to list your current home, I can help you form the appropriate strategy and answer any questions you may have. 

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