I recently worked with an investor who withdrew from buying a great one bedroom condo that he was going to use as a rental. He withdrew because he was going to have negative cash flow the first few years that he owned the property.

What really surprised me about the situation is that the investor was buying the condo with a no-money-down loan and despite putting none of his own cash in the property; he still expected to break even right from the start!

This is kind of like buying a cow for the milk, but not being willing to feed her!

The same goes with buying small rental properties, (the kind of properties that an average person could afford).

If you were to make a 30% down payment on a rental property, (the kind of down payment the banks might want on an investment property) you would likely get a small amount of positive cash flow right from the start.

However, if you buy an investment property with a small down payment or no down payment, you should expect to have to “feed” the property during the first few years of ownership. This is not necessarily a bad thing.

Consider the purchase of a $200,000, single family home with 4 bedrooms and 2 bathrooms that could be rented for $1400/month.

Here is what could happen when you make a large down payment, and what might happen when making a small down payment or no down payment:
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Example #1: A large down payment & positive cash flow:

“Joe Investor” makes a 30% down payment ($60,000) when buying his $200,000 rental home. This leaves Joe with a mortgage of $140,000.

At a 6.5% interest rate, Joe’s monthly payment with taxes and insurance would be about $1110 (PITI). Let’s assume maintenance and vacancy costs of $170/month. Joe’s total monthly cost of owning the property would be $1280/month.

The difference between the rental income of $1,400 and the expenses of $1280 gives Joe $120 in monthly positive cash flow.