Should you Buy Breakeven Properties: Are They Actually Worth the Risk?

SPEAKER_1 (0:00)

This episode is brought to you by Nordstrom.

For 125 years, Nordstrom has been part of your story. The stylist who found the perfect outfit for your big interview. The first pair of walking shoes for your one-year-old. The tomato soup you shared with your sister at the cafe.

Gus (0:15)

These are the moments that make Nordstrom, Nordstrom.

SPEAKER_1 (0:18)

Big or small, we're here for all of it.

Gus (0:21)

Celebrating 125 years with new moments still ahead.

SPEAKER_3 (0:25)

Discover it all in Nordstrom stores and at nordstrom.com.

SPEAKER_4 (0:30)

How do you want to split it?

SPEAKER_1 (0:31)

Actually, dinner's on me.

SPEAKER_4 (0:32)

Okay, big money.

SPEAKER_1 (0:33)

Well, I got a Venmo balance that I can spend with my Venmo debit master card, so.

SPEAKER_4 (0:38)

Well, I Venmo'd you three times last week, so it's kind of on me actually.

SPEAKER_1 (0:42)

Yeah, you send it, I spend it.

SPEAKER_4 (0:43)

Did my money get like reincarnated?

SPEAKER_1 (0:45)

Yeah, it's chicken shawarma. Want it back?

SPEAKER_4 (0:48)

I can't believe you like ate my Venmo.

SPEAKER_1 (0:51)

Spend your balance instantly with the Venmo debit card. No monthly fee or minimum balance. Venmo balance account required to get a card and use a balance. Venmo MasterCard is issued by the Bancorp Bank, NA.

Michael Zuber (1:01)

Alrighty, folks, we started a new weekly broadcast with the one and only Gus, where he goes out and takes internet questions on real estate, sometimes from our school community, sometimes from his amazing podcast. And he just asks me to go deeper. So the financial firefighter takes comments and Gus takes questions. So Gus, where do you want to start today?

Gus (1:24)

All right, Mike. So let's go ahead and start. So Mike, sometimes people buy investment properties, and when they're purchasing those properties, they're either breaking even or they're losing money.

Well, in your opinion, would you say it's justifiable to buy a property like that?

Michael Zuber (1:43)

So again, I have to realize that I speak to the masses, and I think that buying for appreciation or additional value or some future good when the current property is negative cash flow is an alligator. And it's the only picture in my first book, One Rental At A Time. I think alligators are bad. And I told a story in that book about a friend of mine who was a VP. He made, I don't know, call it half a million bucks a year. And he told me how he was gonna buy four houses in New Orleans after Katrina because there was some super beneficial tax loophole created for rich people. I don't remember what it was, depreciation or something like that. And he's like, showing me this whiteboard with these four homes. And at the bottom, he circled like negative 250 And negative 250 times four is a thousand bucks. And I'm like, what's that negative 250? And he goes, oh, Michael, don't worry about it. That's negative cash flow.

He didn't say this, but he also said it. He's like, I'm a rich motherfucker, I can afford a thousand dollars negative cash flow. And fast forward three years or four years, the great real estate collapse, those properties lose more than half their value. And this rich guy lost three of them to short sale and one to foreclosure. So Gus, I don't like this strategy at all.

I hate it. Now, are there two or three percent of the people that can make a go of this? Sure. But it is not a strategy I think most people should do. If it doesn't cash flow, don't buy it, put more down, or pay less. It's okay.

So I hate the strategy. I hate it. You can spend it all you want, you can tell me how good you are and how great a deal is. But if the bitch doesn't cash flow, I'm not buying it, and I'm not going to say that's a good deal.

Okay.

Gus (3:49)

Fair enough. All right. Well, I kind of had a question. I wanted to slide in there, but maybe-

Michael Zuber (3:55)

No, go ahead.

Gus (3:57)

Okay. So I'm not trying to be messy. I'm a good guy. I want the audience to think I'm a good guy.

So I was on a podcast with Dion, and Dion told me his first property didn't cash flow. It was break even. So to someone who's close to you, you've been able to see that, what would you say to that?

Michael Zuber (4:18)

Again, Dion's strategy works for Dion. Again, I think he has these other criteria that's important to him, which gives it a go. But I've told Dion, and we talk all the time a couple of times a week, and I will never do a break even deal. Now, you have to remember, Dion was also house hacking in the beginning. So the house hacking brings a whole different variable to the situation. I'm talking to the investor who's buying a rental property. I think break even properties are stupid.