Is negative cash flow for investment property always bad?
I read an article that stated that it is bad for an investment property to have negative cash flow because the owner is having to pay to have that investment property. However, the owner probably had to put a down payment on the property, which means the owner "paid" to have the property at that time. Isn't a negative cash flow the same as paying a little bit of an extra down payment in installments each month? And doesn't the loss help a person's tax situation in addition to the fact that the majority of their mortgage is being paid by somebody else tax-free?
- EdaphosLv 41 decade agoFavorite Answer
Not necessarily. You need to see if you're making a profit or not.
If you're paying a mortgage, part of the payment is amortization. Amortization is cash flow but it's not a cost. Therefore, if you add back what you're paying in amortization, you'll find out if you're making a profit or not.
Secondly, negative cash flow means you need to find a source of income to cover your cash shortfall. If you don't have one, the negative cash flow will eat away your savings over time even though your equity on the property increases.
- Dale HLv 41 decade ago
Yes. It looks like the property cannot support itself. You will go broke paying a dollar out to save the taxes. Of course, depreciation is a non-cash expense so it will be added back to a loss on your schedule E before it is treated as a liability for purposes of applying for a loan.
I hope this helps.Source(s): 8 years mortgage lending experience.
- ibu guruLv 71 decade ago
Investment property with a negative cashflow is called "an alligator in your pocket" for just cause. It means you did not put enough down, do not manage your costs effectively, and paid too much for the property to begin with. Your mistakes will eat you alive. Hence, the "alligator."
- David ZLv 71 decade ago
if the negative cash flow was due mostly to repaying debt then you can argue that is not bad.
cash flow for this purpose usually does not include debt repayments.