8/29/24 – Why Negative Cash Flow Isn’t Always A Deal Breaker As interest rates gradually decline, we anticipate a renewed wave of investor activity in the market, particularly for buy-and-hold properties. While negative cash flow can be daunting for investors, it’s essential to understand that this alone shouldn’t deter a purchase. There are several compelling reasons why holding onto a departing residence or acquiring a property - even with negative cash flow - can be a smart, strategic move. Long-Term Appreciation Potential: Real estate has historically been one of the most reliable vehicles for long-term wealth creation. Even if a property isn’t generating positive cash flow initially, its value could appreciate significantly over time, providing substantial returns when sold. Tax Benefits: Negative cash flow can lead to tax deductions, as the shortfall can often be written off against other income. Investors can benefit from deductions related to mortgage interest, property taxes, depreciation, and other operating expenses, which can soften the impact of negative cash flow. Depreciation: One of the most valuable tax advantages of real estate is depreciation. Even though real estate typically appreciates, the IRS allows investors to depreciate the property over time, reducing taxable income. This non-cash deduction can offset rental income and help reduce or eliminate the impact of negative cash flow. Depreciation may only work for some, so make sure your clients check with the CPA about Depreciation. Equity Buildup: Even if the monthly cash flow is negative, each mortgage payment contributes to building equity in the property. Over time, this can result in substantial wealth accumulation, particularly as the loan balance decreases and the property’s value appreciates. Ability to Refinance: As interest rates decline, the potential to refinance to a lower rate becomes a significant advantage. Refinancing can reduce monthly mortgage payments, potentially turning a negative cash flow situation into a positive one. This flexibility allows investors to adjust their financial strategy in response to changing market conditions. Leverage: Real estate allows for leverage, meaning an investor can control a valuable asset with a small down payment. Even if the market grows at a modest pace of 4% annually, the power of leverage can amplify returns significantly. For example, if an investor puts down $200,000 on an $800 property, which goes up by 4%, $32,000, the buyer makes 16% on their money because they leveraged the property. Market Timing: Holding onto a property during a market downturn, even with negative cash flow, can position investors to capitalize on future market upswings. When the market rebounds, the property’s value could rise substantially, turning what was once a financial challenge into a lucrative asset. Rental Rate Increases: Negative cash flow today doesn’t mean it will stay that way. As the market stabilizes or improves, rental rates will likely increase, turning a negative cash flow property into a positive one over time. Portfolio Diversification: Real estate remains a crucial component of a diversified investment portfolio. By holding onto properties, investors can spread risk across different asset types, balancing potential losses in one area with gains in another. In conclusion, while negative cash flow is undoubtedly a factor to consider, it’s just one piece of the puzzle. The bigger picture often reveals that the long-term benefits of holding onto or acquiring real estate far outweigh the short-term challenges. As interest rates continue to decline, now is the time for investors to think strategically and take advantage of opportunities that might not be immediately obvious. Most people feel that interest rates will go down in the future, and prices will likely rise when that happens. The remainder of 2024 may be a good opportunity for your well-to-do clients to look at investment properties for their retirement! I am available all weekend if you need anything. Let me know if you have any questions or if someone is interested in buying a property! My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. My direct line is 661-291-2222. When you text me, please text (661-714-6258) or email me at Mike@AugustaFinancial.com. But wait, there’s more! Interest rates are a tad higher today, but they have improved on the week. We are at the lowest levels in almost two years, and we need some bad economic numbers to push these rates lower, so stop spending money!!! 12-day escrows if your buyer is pre-approved - Conventional / FHA / Jumbo / Bridge We do loans in all states, so call me with anything you need. Government Loans (FHA / VA/ USDA) are in the mid to high 5’s Conventional Loans up to $766,550.00 are in the low to mid 6’s High Balance Loans $766,550.01 – $ 1,149,825.00 are mid to high 6’s Jumbo loans above $1,149,625 are in the mid to high 6’s Bank statement loans - They are available with 10% down again! Starting in the mid-6s. Profit and Loss Statement loans – 20% down – You don’t need bank statements, just a profit and loss statement! No income qualifier – 40% down with reserves! In the 8’s! 0 down loans are in the high 6’s – 620 credit score min right now, up to $1,191,000.00. Private Money lenders - Hard Money Loans – 35% down! No Ratio Loans 30% down DSCR – Debt Service Coverage loans with as little as 15% down Bridge Loans - typically 7.99% with limited fees – and they get you where you need to go! 3/2/1 Buydowns 2/1 Buydowns and 1/0 Buydowns are available at great start rates! Interest rates are subject to change without notice! The above are LA County Loan Limits. Good news on Condos – N/A – LOL! Bad news – Condo Update? 44 and counting! 13801 Hoyt Village LLC – 26 units and 14 are owned by one entity! Briarcrest – 12720 Burbank Blvd Valley Village – Insurance and repairs Magnolia Manor – 12416 Magnolia – Insurance and repairs. Condo / Townhome – issues we know of now. Properties can be financed with 10% down and are considered NON-WARRANTABLE: American Beauty Condos - The brown ones - Insurance: 50 Million in coverage for 748 units is not nearly enough! American Beauty Gardens: 19% delinquency on special assessments due. 19% are 60 days or more late! We can do with 5% down, but others can’t! American Beauty Village West: On Fannie’s List. Per Fannie, this project needs critical repairs and may have conditions such as material deficiencies and significant deferred maintenance. This project’s master insurance policy deductible exceeds the allowable limit. Bella Ventana – $50,000 deductible per unit is naughty. Bouquet Canyon Village – $50K deductible per unit is naughty! Briarcrest – 12720 Burbank Blvd Valley Village – Insurance and repairs Bridgewater, Emeryville - On Fannie’s list! Insufficient Insurance Brookside Walk – Insufficient Insurance Cabrini Villas, Burbank - On Fannie’s list! Insufficient Insurance Calla and Rowan – 27513 Illumination – Fannie Mae Approval expired – New Construction. See Blog on 5/7/2024 Cameo Woods HOA - Per the litigation disclosure, the association is being sued by a homeowner for water heater damage and discrimination, and the damage is still ongoing. We received confirmation that the HOA’s insurance agency is not covering the lawsuit, and the claim was denied due to the nature of the complaint. Canyon Village – Reserves and 10% of the dues not going to reserves! Canyon Oaks – Insurance On Fannie’s list! Casa Marabella – 13951 Sherman Way, Van Nuys -On Fannie’s list! Cassia and Jasmine – 26949 Winding Trail Court – Fannie Mae Approval Expired. See Blog on 5/7/2024 Cimmaron Oaks – Castaic – Insurance is too low! Cornerstone – Insurance -On Fannie’s list! Creekside – Insufficient insurance District Community Association – Northridge – Fannie Denied – Insufficient Insurance Encino Oaks – 5460 White Oak Ave – On Fannie’s list! Heather Ridge – Deductible too high! not enough insurance – Fannie Naughty List! Liberty Canyon HOA – 27409 Country Glen Road, Agoura Hills, CA- On Fannie’s list! Madison at Towne Center – Litigation – We can do with 5% down, but others can’t! Magnolia Manor – 12416 Magnolia – Lots of issues from insurance to repairs. Mariposa: On Fannies List. Per Fannie Mae – This project’s master insurance policy coverage does not meet the requirements. Market Street Community – Corona – No Wildfire coverage Mesa Vista North Townhomes – San Juan Capistrano – 50K deductible per unit is naughty! Orchid at Valencia – 27033 Open Sky Place – Fannie Mae Approval Expired. See Blog on 5/7/2024 Penn Court HOA – 4201 Pennsylvania Ave La Crescenta On Fannie’s list! Princessa Estates – insufficient reserves Rainbow Sierra Terrace – On Fannie’s Naughty List – This project’s master insurance policy is not written to Replacement Cost Value. See Selling Guide Sec. B7-3-03, Master Property Insurance Requirements for Project Developments. Scenic Hills – Insurance – On Fannie’s list! This project’s master insurance policy coverage does not meet the requirements in Selling Guide Sec. B7-3-03, Master Property Insurance Requirements for Project Developments. Shadow Ridge – Oak Park – Insurance -On Fannie’s list! Sherman Way Condos – 17900 Sherman Way Reseda – On Fannie’s list! Tyler Villas – Sylmar – Coverage is good, but non-warrantable for delinquencies The District Community Association – 19533 Cardigan Dr, Northridge – On Fannie’s list! Treana - Stevenson Ranch: On Fannie’s list! Per Fannie, this project needs critical repairs and may have conditions such as material deficiencies and significant deferred maintenance. Valle Di Oro is on Fannie’s list! Per Fannie Mae, this project contains timeshare, fractional, segmented, or split ownership units or other arrangements (such as mandatory rental pooling, shared interest apartments, or community apartments) restricting the unit owner’s ability to occupy the unit. Village Park Condo – It’s over the max deductible with that 50k per unit. Vista Del Canon – Insurance is too low, UGH! Walnut Gardens II – 7320 Lennox Ave Van Nuys CA – On Fannie’s list! Warner Center Condos – 5515 Canoga Ave, Woodland Hills, CA – On Fannie’s list! West Creek Condos and Townhomes: On Fannie’s List. Per Fannie, this project’s master insurance policy coverage does not meet the requirements in the Selling Guide! 13801 Hoyt Village LLC – 26 units and 14 are owned by one entity! Please let me know if you hear anything new on condos or townhouses. I am still available all weekend, including Labor Day if you need anything. Let me know if you have any questions or if someone is interested in buying a property! My cell is 661-714-6258, and my office line is 661-260-2970 ext. 2222. My direct line is 661-291-2222. When you text me, please text (661-714-6258) or email me at Mike@AugustaFinancial.com. Have a great day and an even better tomorrow! Please call me when you have a client who needs to borrow! Mike Meena President | Loan Officer Click to Call or Text: (661) 714-6258 This entry has 0 replies Comments are closed.
