BiggerPockets

I recently (...like an hour ago :mrgreen: ) went through this thread exploring the old argument between the cash flow guys and the appreciation guys.More specifically MikeOH and Nationwidepi (Mike and will) and off course some others.

http://www.biggerpockets.com/forums/12/topics/19548-cash-flow-vs-appreciation?page=1

I have one word - Fascinating!

I strongly urge all the newbies( and the seasoned ..) out there to go back and read it, aside from the personal back and forth between Mike and Will which wasn't really personal but a clash of philosophies, the thread really put the light on the issue and the various approaches.

My only two cents in this is that, if you can, why not have both. Diversity never hurt any business. I own properties in Texas for appreciation and in Alabama for cash flow and whatever I don't make in cash flow with my Texas investments, is paid by the cash flow properties in Alabama. My margins in Texas are small anyway, but who can cash flow in Austin with 20% down this day...?

Also, I think that eventually, if you buy properties using fix rate loan, they will become cash flow. It make take five, seven or ten years, but they'll come around.
:wink:

Happy reading....

I own properties in Texas for appreciation and in Alabama for cash flow and whatever I don't make in cash flow with my Texas investments, is paid by the cash flow properties in Alabama.

So, in other words, your properties in Texas are losing money and are sucking the profits from your Alabama properties. What's the point? Why not sell your losers and buy more winners? The point of being in business is to MAKE MONEY!

Also, I think that eventually, if you buy properties using fix rate loan, they will become cash flow. It make take five, seven or ten years, but they'll come around.

Unfortunately, that's not true unless your mortgage is only 5, 7, or 10 years. While the rent MAY go up over time, you'd better believe that the expenses ARE going up over time. While expenses (especially taxes, fees, and other government costs) will certainly go up over time; rents may go up, down, or stay the same. So, if you're counting on time to make you profitable, I'd think again. Time won't help you until those mortgages are paid off (or refinanced with a lower rate or principal balance).

Mike

Oh Jon - what fun would it be if we did it for both.

That way neither of the two titans would be right :)

Someone has to be right. Maybe it is you :)

So, in other words, your properties in Texas are losing money and are sucking the profits from your Alabama properties. What's the point? Why not sell your losers and buy more winners? The point of being in business is to MAKE MONEY
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Mike,
You should have started by asking what is my goal in all this. Well, let me tell you. I don't make a living out of my properties. I don't even consider them as supplemental income. My real estate ventures are my retirement plan. I I plan to retire in the next 10-15 years and although I have a wonderful pension plan from the Directors Guild of America, I'd like to have a bigger cushion. I have a very good day job that pays very well which I love doing.

If I take all my properties combined, I'm still in cash flow despite the fact that some of my "real estate income" cover losses in Texas. Remember, my profit margin is quite high since I by those properties for $12K-16K, spend another $5K-$7K on rehab and rent for $600-685 a month.

"Unfortunately, that's not true unless your mortgage is only 5, 7, or 10 years. While the rent MAY go up over time, you'd better believe that the expenses ARE going up over time. While expenses (especially taxes, fees, and other government costs) will certainly go up over time; rents may go up, down, or stay the same. So, if you're counting on time to make you profitable, I'd think again. Time won't help you until those mortgages are paid off (or refinanced with a lower rate or principal balance)."
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Well, even if the value of the property stays the same and only goes up at the rate of inflation, your still contributing to your principal, meaning , your stake in the property is growing and although I agree that it may not be the case with 30 years loan (Not for the first 15 years) it is with 15 years loan.

Eddie

Eddie:

Have you done any side-by-side comparisons of your real estate portfolio versus a broad-based low-cost index fund over the same time period? Include the value of your time, of course. I'd be interested in hearing how it stacks up.

My own strategy is to always buy at a discount to market coupled with the 50% rule. This is very difficult, but it can be done.

And since I've already had to lower rents at three units my margin of error has kept me above water (so far).

This makes no sense. When the rents go up ($100 for example), so do the expenses - yes, but applying the 50% rule, you allow for that increase. The increase in rents and expenses ALSO allow for increased cash flow left over!

That has certainly been true in the past and to date, but in case you hadn't noticed, the world in changing. The government has spent trillions of dollars we don't have; they're voting to day on a new cap and tax bill that will cost the average family another $3,000+ per year; and that doesn't even consider socialized health care.

I'm not at all convinced that increased taxes won't outpace rent increases in the future.

Mike

That has certainly been true in the past and to date, but

"If it becomes less attractive to another business, I'll switch in the blink of an eye!"

Exactly. I get killer ROI on real estate....and I'm prepping everything to sell asap. I've got a lead on a bar right next to a casino I'm doing my due diligence on. If it works out to what I've been told, I'd sell my entire RE portfolio in a heartbeat to make the deal happen.

Back to the topic at hand, I do what Mike and Eddie do - get forced equity now. Screw waiting. Big O's been breaking campaign promises left and right and you have to remember - he's a newbie. This is his first executive experience of any type. You don't know what's going to happen day to day in the next 4 years. Getting forced equity now gives you the flexibility to sell cheap if you have to fast. Think it's impossible? Check history. During the progroms in Russia, Jewish residents were given as little as 3 days to sell their properties. While we may not deal with something that dramatic, you never know when you're going to get hit with something like retroactive tax legislation that hits you with a huge tax bill out of nowhere for 4 years retroactive. This is very realistic. There's legislation just like this pending in Indiana's state legislature - and we're traditionally a red state.

If you get hit with something like that - you won't have time to wait for appreciation to pull you out of the hole.

Tim

There is no rule or no law that states that you can not have BOTH cash flow and appreciation in one investment or in one protfolio.

Second thought here - taxes are also a fixture of appreciation depending on when and how you decide to put that appreciation to work.... So really they apply to both topics.