Am I Crazy? My Third House Hack Doesn't Cash Flow

Hear ye, hear ye! The court is now in session. 

Today’s case: The Real Estate Community at-Large vs. Kyle’s Third House Hack.

The charge? Blasphemy. 

A mentor of mine once said “an investment that loses money isn’t an investment.” And yet, in 2023, I bought a brand-new construction condo as a house hack knowing full well it wouldn’t cash flow when I moved on. Today, this rental property of mine loses roughly $1,200 per month after principal, interest, taxes, insurance, and HOA dues.

I stand before you as the defendant. The real estate investing community is the plaintiff. The charge is simple: owning a property that loses money every month. Does that make me crazy?

That’s up to you. 

Your role as juror is to read the evidence and determine the verdict.

1. Appreciation 

If you’ve tried to buy cash-flowing real estate in the present interest rate environment, then you know that it’s hard to come by. And yes, I know that some people buy houses in Ohio for $50,000 and a pack of smokes. In the Boston metro area, that’s hardly a 5% downpayment. Well, unless you’re looking into C-class or worse areas,...that’s not my jam.

I consciously chose to buy in a fast-growing area of the city with the understanding that it would lose money in the short-term. Here’s why:

South Boston used to be gritty, blue-collar, and home to the infamous Whitey Bulger. Fast forward to present, Southie’s done a complete 180. It’s the epicenter of life for young professionals and Vineyard Vine wearing “yuppies” where modest condos near the water trade for $1 million without blinking.

I’m planting my flag that East Boston is the next Southie.

The condo sits in Orient Heights in East Boston, a pocket that’s quietly transforming as young professionals continue to move in and rent nearby. Just down the road is the Suffolk Downs redevelopment, one of the largest development projects in the United States, bringing housing, retail, and long-term economic gravity to the area. Add in Blue Line train access to downtown, proximity to the beach, and the fact that it’s newer construction, and the arguments for future appreciation start to stack up. This is a 10-year bet on location, infrastructure, and demographic momentum.

Yes, I’m covering $1,200 towards the mortgage each month. No, it’s not all gone to waste.

Tenants are paying the majority of the mortgage and each payment reduces the loan balance while increasing my equity– regardless of what the market does this year. Over time, rents will go up, the property will naturally appreciate AND my mortgage will eventually shift to paying more principal than interest each month.

On paper, the property shows a loss. Given my wife and I’s combined income and the fact that I have real estate professional status for tax purposes, I can offset income from my other ventures to reduce my overall tax burden. 

While cash flowing properties can also serve as tax havens, I’m using this lever to bridge the gap between negative cash flow and gradual appreciation.

I’m of the opinion that appreciation makes you rich, cash flow keeps you afloat. That’s why it’s important to think about a portfolio comprehensively.

I have another rental that offsets my losses here so I’m cash flow neutral at the moment and I don’t need the money right now so I consider it a re-investment that will pay off down the line.

I put 5% down on a $700,000 purchase or $35,000. About half of that was covered by the commission I earned representing myself on the deal. Could I have put significantly more down to reduce or even eliminate the negative cash flow? Absolutely.

Let’s just say I had an extra $120,000 to put down. At $1,200 per month in negative cash flow, it would take 100 months (eight years) to equal that $120,000. 

Instead, I kept that lump sum liquid and deployed it into flips and other investments generating returns higher than the 6.7% interest rate on the condo. So far, that income has exceeded the $1,200 monthly difference. And I still get to keep the rental property, the leverage, and the upside.

And the jury says…

I don’t know, you tell me. You’re the juror :)

Send me an email and let me know if I’m crazy for keeping this property. 

P.S. Stay tuned for a follow-up article that explores how to extract more cash flow from this property as well as exit strategy options.