I am not a real estate investor but I wonder about all of you (e.g. manch, elt1, sfdragonboy, wuqijun) who seem to own multiple properties. They may all be cash flow positive now but probably not in the early days. Did you ever worry about a scenario where most of your properties became cash flow negative, and you didn’t have enough cash reserves to keep making the payments? What was your planned response to that scenario?
My portfolio as a whole was cashflow negative at the beginning, by design. I was betting on property value and rent increase, while keeping mortgage fixed and property tax on a very gentle uptrend.
If I didn’t have enough money to make ends meet? I would just sell some of them. Non-recourse loans are one-way bet. Heads I win and tails the bank loses. Why not take that bet?
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First 10-12 years, I had the fear of big mortgage loan and fear of jobloss, which is clearly my ignorance.
I was worried long time until I got hit by dot.com in 2002/3, lay off notice. Had tough skills, got a job in 7 days after lay off, becoming independent consultant. My wife started a job, to support me, when I got my lay off notice. she faced three lay offs during 2003/4 periods. Got the confidence that I can survive in bay area with any number of downturns, bought the first home.
Market went down in 2007-8. Having seen dot.com lay off, I strongly believed in recovery, bought another home (REO). The home went down 25%, cash flow negative, but able to hold on.
Two years over, market never came up, tried to get another home, got it in 2011-2012 after 15 offers failed, luckily this is lowest period. Turned primary into rental and moved to new home.
Next Three years, got few homes…but this year sold one with 25% profit (simple flip), paid off two homes loan.
First three homes we had a plan how to manage our self in case of jobless or permanent income loss. We planned to sell our first home (in case of financial hardship) which never came down except brief time 5% down that was higher than our purchase price.
With current valuations, my LTV is 37% and DTI is 15.54% as I paid off some homes. Until last pay off, I was cash flow slightly negative, but after that it is high cash flow positive !
If you carefully plan it, and if you are having confidence to survive anywhere in USA, you will not file bankruptcy.
Key is savings = Income - expenses (including mortgage) > 0. Second, for safety, choose best retirement plan like 401k or IRAs or both.
Now, staying away from real estate buying (except blogging and helping my friends) as I want to diversify my investments through stocks.
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Negative cash flow could result in foreclosure when coupled with property value decline. If you are running a big negative cash flow, better find a way to reduce it to neutral or positive.
But primary home is a huge negative cash flow by design. If you own a primary home, you already have the highest negative flow property. If you are not afraid of buying your primary home, you are brave by definition 
To me, the biggest risk is to buy the primary home to consume. A rental property is less risky since there’s rental income to offset the expenses. Your primary home needs to be paid by your earnings 100%
Recently heard that quite a few people buying 2M primary homes. These are average senior level tech workers, I’m a little worried about the 1.6M mortgage and 2k per month property tax bill for them. Are we at the final stages of appreciation?
By having primary home, you avoid the mandatory rent! If PITI of primary home is slightly higher (10%-25%) than rent, it is safe.
Recently heard that quite a few people buying 2M primary homes. These are average senior level tech workers, I’m a little worried about the 1.6M mortgage and 2k per month property tax bill for them.
Are we at the final stages of appreciation?
Is $10k per month housing expense safe for double income tech workers? Their current DTI is not super high, I guess my concern is whether they can count on current double income to sustain for most buyers statistically?
They will have sufficient cash down payment and taking minimum mortgage less than 729k or around. They will also have enough cash reserve to cover their life term property tax ! This is all stock options/stocks jump which no one knows except IRS and the individual+CPAs.
Looks to me 2018 will also go higher. Expecting one more year to go before we see a fall . This is my guess work, no proofs or justification.
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Good morning @zensri,
Since I didn’t have a lot of cash right after college, I bought in where properties were fairly cheap (Oakland at the time). Have to start somewhere. Since cheaper, I wasn’t too concerned since money at risk was not too bad and if the market tanked (even at the lower end) rental housing is always needed and wanted. I was not much cash flow negative with the first property, a North Oakland SFH with a legal back unit. I soon maxed out the rent on the back unit after rehabbing it, especially with Cal students renting, and I was cash neutral if not slightly positive at that point. This is why I always advocate for multi units, never really SFHs for rental purposes especially in these high valuation days. One would have to pay a hefty amount down to be remotely cash positive. Once I traded up to the 4plex, boom, cash flow positive from Day 1. My IRS buddy who was already doing my taxes was fairly surprised when he saw that at inception. Keep in mind I grew up in a multi unit building where our family huddled up into one unit and rented the rest out. It is what I am used to even today, renting out the other units or extra space and maxing out the revenue streams.
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I think the assumption of only 20% down is faulty.
I have always been cash flow negative with my primary home. Luckily I paid it off so the only negative part is the tax and insurance.
As far as rentals go, I’ve been cash flow positive since day 1, because I bought in a low income area and avoided the trophy neighborhoods. However, I later diversified into trophy homes because I could offset the negative cash flow with my positive elsewhere.
I’m now into the flipping business. The money I make there can help pay off some of the loans. My LTV is over 50% and DTI is also over 50%.
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I doubt people buy $2m properties with only 20% down…I would guess half are cash and the rest are more like 50% min…
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I thought only purchase mortgage for primary home is non-recourse? Are purchase loans for investment properties non-recourse too? You lose that protection if you refinance. Also, any HELOC amount is non-recourse. I guess if it all goes south you can rely on a slow foreclosure process. Just collect rent for as long as possible and stall foreclosure for as long as possible. Build up as much nest egg as possible during that time. That happened quite a bit back in 2008.
Nobody is prepared. You can read it in these lines. We are like the gambler who doesn’t notice they are pick pocking his wallet while winning. Why? Because that’s the nature of the beast. If we knew what’s coming, everybody here would be in the Bahamas enjoying life and not throwing numbers, buy this, buy the other one, not this one but the other though, etc, etc.
RE downturn is based on what? From your answer you can plan. Being dumb at economics, let’s mumble jumble about it:
Is it about jobs nationwide?
About the global economy?
Local economy?
So, I guess, dumb guess, that everything depends on the stock market. Right? That’s where all your money is being played no matter if you agree on yes or no.
Market crashes, or gives you -38.5 as last time, there you go!
Jobs are lost. You are there with empty units. Knock, knock, who’s there? The loan department at x bank!
You pay with the money left in your 401K or what? There, you go to borrow money that you may not return on time. Taxes and penalties.
Got cash? Good for you! For how long?
So, for now, I don’t see anything bad coming our way. We had so many months of good economy from Obama’s administration. You better jump in one foot from November on. That’s where you should focus your attention on. The new budget, the new ceiling debt, the new no nothing and so on.
Well, you have to remember that for us Chinese (and others), the notion of simply owning the roof over your head goes way, way back. It wasn’t always about just appreciation and flipping this or that.
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You maybe surprised. The few 2M buyers I know all used 20-25% down and borrowing 1.5-1.6M. Their income can qualify and the DTI ratio is fine. BA salary and RSU income has increased a lot in the past 5 years.
Still I’m a little worried about the monthly $10k housing expense when even one of them lost their income. I guess they have some cash or stock reserve, not sure how much though
Hispanics either. We have a better way of living when it comes to owning a home in our native countries.
It’s when we come here that we find all the don’t do this, or don’t do that.
We all know those investors when running to the hill will be invoking the non-recourse thingy. Many did it last time, many will do it next time. Shame on them for utilizing something from the liberal state of California! 
Agree. I see a number of $1.5M loans out there. All it needs is one person to stay home (kids!) or to lose a job and it could become tricky. especially in a downturn. Also servicing your property tax on a $2M loan is $25,000/yr and growing at 2% annually. That would wipe out any income from social security so you better be saving…
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May not be necessary to offset positive cashflow. All my Austin rentals are cash flow positive from day 1 but no need to offset them as they are negative profits after accounting for depreciation.
Your positive cash flow is not positive enough 