Negative cash flow in Las Vegas

[abrei]

I recently purchased a single-family home in Las Vegas using interest-only load with 10% down. This is primarily an investment property. Because of my low down-payment the rent will not be enough to cover my mortgage. I will have a negative cash flow of about $500-600 depending on the interest rate. The loan is on 12 month MTA index ARM so interst rate reacts slower. I can manage the monthly negative cash flow for about a year or so as long as I have a job. The only thing I'm betting on is the above average appreciation in Las Vegas. I think I can still come out positive after a couple of years but I would like to know anybody else's opinion and/or experience on this subject.

[Dan Auito]

Abrei, I hope for your sake prices can continue to escalate. This big negative hungry alligator is going to make each day a little more miserable than it needs to be. I would never go this route as it is just as easy to buy a cheaper place that sustains itself and at least breaks even.

If nothing else I would have looked at trying to tie up a preconstruction deal and sellout upon completion thus limiting expense and risk. Granted builders are getting wise but this is still going on to many an investors advantage.

Negative cashflow kills! and if rates do come up on you, that alligator will begin eating even more, OUCH! Sorry for the bad vibes here but this goes against most all the rules!

Sell it as soon as you see a way to get out with a profit.

[Aldo]

With all due respect, I'd have to ask why you, or anyone, would invest in a negative cash flow situation which has a high probability of becoming worse after the first year. The only reason that is usually done is for the tax write-off against personal income which is very unusual. The thing that scares me more is that, based on your post, you may not have secure continued employment. I hope that I misunderstood. Now we get to what scares me most about this. The real estate bubble is imminently going to burst. The only reason it hasn't so far, in my opinion, is that Greenspan can't decide which pin to use. Long story short, the RE market is going to take a serious hit, sooner rather than later. Prices will drop nearly everywhere, but mostly in CA and the Northeast. Vegas is too close to CA for you to not have a serious concern. I won't off-handedly suggest that you bail out now, because I don't know your specific market. I will suggest, though, that you immediately seek the advice of well-qualified real estate professionals in your area. You may very well be okay, but there is a serious risk that must be considered. It's better to research this now than to wish you did later.

[abrei]

I appreciate the reply. Can I claim the negative cash flow as a loss at the end of the year?

[abrei]

Aldo,

I have relatives in LV and they did great last year with their property as their primary residence. At the time I bought it I had very little knowldge in RE investing. I also made a mistake in listening to people who have very limited experience and knowledge in real estate investing. Fortunately, I work as a contractor for the military and my job is secure enough for the next couple of years at least. Thanks or the reply.

[Aldo]

We posted as precisely the same time. Is that a coincidence, or what?

I'm not an accountant but I do know that there are limits to the amount of investment loss that can be charged against your personal income. I may be very wrong, but I think it's in the area of $25K. That sounds like a lot until you remember that depreciation, mortgage interest, property taxes, maint/repair, utilities, etc., all factor into that $25K In addition to talking to RE professionals, you may also want to talk to a RE savvy CPA or accountant.

[dealmaker]

Interesting posts here. You may not like what I'm going to tell you, and I don't mean to hurt you, but I hope others might read it an not make the same mistakes. I think you may be confused about some things:

I have relatives in LV and they did great last year with their property as their primary residence.

No, they didn't "do great". They live in a more expensive house, that's all. The only way to "do great" is to (1) sell and (2) move to an area where prices are lower and they can keep their "profit". If they sell and stay in LV they'll have just exchanged one mortgage for another, higher one!

Can I claim the negative cash flow as a loss at the end of the year?

The key here is that you will have LOST. You'll have given the bank ONE DOLLAR to have earned (not paid in taxes) TWENTY FIVE CENTS. That's not an "investment", an investment if when you end up better than you started off! I realize that later you may/might be better off.

I also made a mistake in listening to people who have very limited experience and knowledge in real estate investing.

So did a lot of other people! Many people confuse the simple fact of LIVING IN A BOOM TIME with being a financial genius! Lots of folks in CA think they're geniuses when it comes to investing in RE, they're not! Millions of Americans who had 401ks in the '90s thought they were stock market investors of great talent. They weren't. They were just in the market during a time of low inflation, high growth, high employment etc. Alan Greenspan may be (is IMO) a financial genius, most people aren't.

Interest rates are going UP. Inflation is going UP. You can't run massive deficits without it being the case. The people who LEND money to U.S.A want to KNOW they're going to get paid back. That would be the Koreans, Japanese and Chinese. If they think they're going to get paid back with cheaper (after inflation) dollars they're going to raise the interest rates at which they lend us money. That's why Greenspan has to continue to raise interest rates. He just doesn't want to do it too quickly and kill off the miniscule growth that we have in our economy today.

If I were you, and I could get out TODAY with little or no financial bruising, I'd probably do it.

Sorry for the "harsh words". But harsh words will hurt you a lot less than harsh economic reality.

dealmaker

[Dan Auito]

Prices of new, resale houses take a fall

By Jennifer Shubinski


New and resale house prices in Las Vegas dropped substantially in February -- the first time resale prices have declined in more than a year, a local research firm reported.


Larry Murphy, president of SalesTraq, reported in his monthly newsletter that the Las Vegas housing market is being transformed.


"The Las Vegas housing market has undergone a profound change and is struggling with its future," Murphy wrote. Murphy publishes the newsletter with Steve Bottfeld of Marketing Solutions.


The price of a resale house in the Las Vegas Valley in February was $235,000 -- $15,000 less than the previous month. But despite the decline, the February price tag for an existing house was still 20 percent more than the same time last year, when the price for a resale house was $195,000, research firm SalesTraq reported Wednesday.


The price of a new house in the Las Vegas Valley in February was $286,805 (including 169 apartment-to-condo conversions), a decline of $11,727. Even though there was a decline, February's housing price was still almost 35 percent over the same time last year, when the price of a new house was $212,966, SalesTraq reported.


If apartment conversions are taken out of the new home statistics, the median price of a new home in February was $296,515, a decline of about $2,000, Sales Traq reported.


Sales prices for new houses fell once last year, when prices dipped by slightly more than $1,000 in July, SalesTraq reported. The firm's data also shows a fall in prices from December to January 2005 of more than $2,200.


Resale housing prices were stagnant much of last year, remaining at about $250,000 from July through January.


While the sales price of houses dipped in February, more new and resale houses sold in February than in January.


There were 2,382 new houses sold in February, compared to 2,313 in January. Existing housing sales totaled 4,162, an increase over 3,250, SalesTraq reported.


Murphy noted in his newsletter that the Las Vegas housing market is breaking into four distinct segments, the traditional housing market, conversions, luxury and high rise.

[Pasquini]

People that buy negative cash flow rentals are not investors. They are speculators. Speculators get killed. May not happen today...but they get killed eventually. Recent analysis I saw indicated Vegas was overvalued by 24% based on income levels and other historical factors. I'm inclined to agree with them. That tells me you aren't going to make it up on the back end. It's just like the stock market. Too many people lose money on an issue, and then hold on to it because they have to get their money back out of it. In the meantime they lose all sorts of opportunity waiting...and waiting...and waiting...because of course they can't lose.

You need to get out from underneath that property sooner rather than later. I just started marketing a program I have over in Vegas that rectifies this exact situation. Understandably it is getting a heckuva response. You aren't alone. Lots of folks got caught up in the frenzy.

[wilcox59]

What type of program are you marketing in Vegas. I would be very interested in hearing some details!!!

[Pasquini]

What type of program are you marketing in Vegas. I would be very interested in hearing some details!!!What sort of details are you looking for? I'm trying to walk that fine line between informing and advertising.

In a nutshell I am marketing the PACTrust/NEHTrust to landlords and FSBO's in the Vegas metro area. Lot of folks bought at the height of the frenzy over there, and now can't sell them and can't cover their nut if they rent them. The trust used the way I use it gets them out of the jam they are in, and does it so everybody in the transaction can win; seller, me, and the new 'homeowner'

Interesting thing...buddy of mine is one of the news anchors over there. Did a big story on the poor, poor homeowners that got whacked when Pulte dropped prices 20%. He found out what I do, and since I am going to be helping some of those Pulte homeowners out of the pickle barrell he wants to do a story on me. How's that for some free publicity?

[Dan Auito]

Just be prepared to take on the onslaught of distressed callers once the news hits the air! :SM108:

[Pasquini]

I like onslaughts!

How many businesses have you heard complaining...I mean really complaining...about having too much business? Those are the problems we all like to have, right? It's all about making sure you have the right infrastructure and alliances.

[Peter Forest]

I sell the 12-MTA product so give me a call and I'll tell you how to use it to your benefit. I will need all the loan parameters in order to correctly access the situation and sending messages back and forth will only waste my time.

Just for the record, negative amortization products are great if you know how to use them. Peter.1-800-499-8343 x 335 Call between the hours of 11:00am and 4:00PM when I am least busy.

[abrei]

I would like to sell the house but I'm going to lose a lot if I sell now. The house has been in MLS for almost 1.5 mos and yet no renters. Ive definitely learned a lot during the past couple of months and I would have taken another route if I knew then what Iknow now. But it looks like I'm stuck with this for the time being. Does anyone see this another way? Thank y'all for your posts!

[Clint]

John Locke, who posts on this board does Vegas well.

Run an ad like this:

NO Bank Qual
$6000 Down (or Whatever)
Payments only $1500 PITI
Beautiful 3/2, tile roof, pool, etc. etc. amenities.
school, shopping, etc.

Call XXX-XXXX

Then, you sell this on a contract for deed. Rather than rent, you sell contact John Locke. He will probably tell you how its done.

Clint

[Pasquini]

I would like to sell the house but I'm going to lose a lot if I sell now. The house has been in MLS for almost 1.5 mos and yet no renters. Ive definitely learned a lot during the past couple of months and I would have taken another route if I knew then what Iknow now. But it looks like I'm stuck with this for the time being. Does anyone see this another way? Thank y'all for your posts!You can sell it now and not lose a lot. You just need to know how. Take a moment to email me with some contact information and let's see what we can do to make this work out better for you.