Appreciation Rate Isn’t What’s Most Important

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Lost in the weekend conversation about the current state of your portfolios, beside the fact your steak just cruised past medium rare, is what’s really important. Assuming your main goal is an ever increasing net worth, obsessing on appreciation can sometimes take your eye off the ball.

That ball is capital growth.

But isn’t appreciation required to grow my capital? It’s nice to have, and we’ll all take it if we can get it, but it’s not absolutely necessary. Furthermore, when appreciation takes a holiday, as it does from time to time, your strategy should adjust to turbo charge capital growth. What? Huh? It’s not rocket science. Just do what Grandma said to do when life gives ya lemons — make lemonade.

Let’s do a quick, down and dirty example of how, in an appreciation free market, you can experience ‘capital growth’ while simultaneously amassing some serious (future) retirement cash flow — much of which will be tax sheltered for a decade after your retirement commences. This is an excellent way to help the conservative guy recover from recent losses on the Wall Street side of their portfolio.

You find a well located duplex, new, for under $250K. It’ll run you roughly $53K to close it, as you’re gettin’ some credits for closing and loan costs from the seller. A 20% down payment leaves you with a 5.5% (+/-) 30 year fixed rate, fully amortized loan.  Your annual tax savings through depreciation is over $1K. Your cash flow is just over $4K.

You don’t need the $5K a year in cash flow and tax savings. Therefore you apply a month’s worth of each to your monthly loan payments. See? Told ya it wasn’t rocket science.

In about 16 years you’ll own a free and clear duplex spinning off somewhere between $17-25K in yearly income — a significant portion of which will be tax sheltered for many more years.

Contrary to popular opinion, appreciation, though much preferred, isn’t necessary to get ya where ya wanna be. A 49 year old couple would arrive at retirement with their originally invested capital having ‘grown’ into a quarter million bucks. In 16 years that’s over a 10% annual growth rate for their capital, without a dime’s worth of appreciation. If we say the cash flow at retirement is just $20K/yr., it would reflect an 8% yield on the quarter million. (Again, just using simple, non-rocket science numbers.)

Think you’re gonna get 10% a year without one year of loss over the next 16 years in the stock market? Really?

It’s called risk capital for a reason, so don’t go away sayin’ I told ya there’s no chance of your cash flow disappearing in a down economy during the holding period. Still, when you’re probably buying at an historically low price AND rent/price ratio — AND historically low interest rates, the odds of making the above scenario a reality are way more in your favor than producing 16 consecutive years of over 10% return in the stock market.

You did it without a drop of appreciation. In order to match that on Wall Street, you can’t have a negative year, as that would force you to enter ‘treadmill’ mode for the number of years it takes to get you back to ground zero. Then you’d be forced to figure a way to make much more than 10% annually to even stay close to your real estate investor buddy.

Repeat: This isn’t sophisticated in any way. It’s pretty simple math. Given the potential economy we may be experiencing the next few (several?) years, simple may be the way to go from where you’re standing.

Looked at another way, imagine you’d done this 16 years ago. You now have a free and clear duplex with a buncha cash flow. During that time you were euphoric with huge appreciation and crestfallen when you lost all of it, finding yourself back where you began. Know what you wouldn’t be doing about now?

Wondering how in the heck you’re gonna make up for a 40% loss in your stock portfolio, that’s what.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Eric in Silicon Valley on

    It seems this strategy focuses on paying down the loan quickly so as to enjoy the benefits of maximum cash flow. Could you achieve the same by paying all cash to begin with, theoretically?

    In this scenario, you are foregoing using the cash to invest in the stock market with a higher but uncertain return, and instead paying off debt at a lower but certain return. While it’s certainly true that the stock market is volatile, it’s not a fair comparison to ask for steady returns every single year, but rather, look at the long-term return (which is going to be lower than 10%).

    Anyway, just a few thoughts – I might be missing something.

    I enjoy your posts – keep them coming 🙂

  2. Jeff Brown

    Hey Eric — The problem with ‘long term’ investments in the stock market is the inevitable losing years. At that point it’s ‘time out’ for your agenda, as you’re now on the catch-up treadmill to nowhere, workin’ your way back to where you were before the loss. You can never get those catch up years back, as they’re lost forever. Meanwhile, the countdown to your retirement never stops running. 🙂

    On the other hand, you can execute the post’s strategy with your real estate investments — lose value — and STILL end up with retirement income.

    Payin’ cash up front vs paying down over time.

    The answer to that question is wholly dependent upon the investor’s specific set of circumstances. I’ve had clients pay cash and call it a day. Most of the time however, that doesn’t maximize what’s possible.

    Remember, the idea is to arrive at retirement with the largest after tax income possible. I wrote a post earlier this year in which a client acquired a combination of free ‘n clear props and leveraged props. The Plan called for them to retire in less than 10 years, preferably less than eight. They acquired a couple duplexes with cash, and put 30% down on three more. This will result in reaching retirement with five debt free duplexes, which will throw off roughly $85-100K in retirement income, much of which will be tax sheltered.

    Even if those props lose value, they’ll still produce income, which even if in a reduced amount, will be significant. The same scenario in stocks simply isn’t possible.

    Make sense?

  3. Hi Jeff,

    I’m pretty much doing the same thing as your client, but what do you mean by “This will result in reaching retirement with five debt free duplexes, which will throw off roughly $85-100K in retirement income, much of which will be tax sheltered.”

    Are these duplexes in a Roth IRA?
    I have a few free & clears, but I pay taxes on my income.


    • Hey Bruce — In the post’s scenario, retirement happens 16 years after acquisition. Using normal depreciation, i.e. 27.5 years, you’d have a bit over 11 years left of solid annual depreciation. Let’s say the cash flow per duplex, using Murphy’s Spreadsheet, (50% rule) is about $16,000. If the yearly depreciation figure is say, $8,000, that means for the first 11 years of your retirement your cash flow would be about 50% sheltered. You’d be taxed on the other half. Make sense?

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