Real Estate Investing Basics

Why Cash Flow Beats Out Appreciation in Real Estate Any Day of the Week

Expertise: Commercial Real Estate, Personal Finance, Real Estate Marketing, Business Management, Landlording & Rental Properties, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
227 Articles Written
cash-flow-vs-appreciation

There is absolutely no doubt that real estate investing can be risky if it is not taken seriously. However, there is no question that the payoffs can be huge if it is done the right way. Real estate investments are often looked at from two different perspectives — the monthly cash flow and the gradual appreciation. Personally, as you can already tell if you have been keeping up to date with many of my other articles, you can see that I am a cash flow investor. I have absolutely nothing against appreciation, but I prefer to be less reliant on hoping that a property will go up in value and more reliant on a steady stream of cash flow.

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All in all, what I want to do is to make sure that I am earning some cash in hand straightaway on a continuous basis rather than playing my share in a gambling game where I have to wait patiently over a long time with little to no income and absolutely no clue as to whether or not my investment will pay off.

buy-hold-retirement

Related: Does Forced Appreciation Really Work? Sure, But Beware of THIS Caveat.

Lessened Risk

Some people believe that cash flow is a rather foolish way to earn money since you can only receive a few hundred dollars every month — something that they believe pales in comparison to what you can make off appreciation. However, the thing is, while this can be true, investing for cash flow is also a lot less risky, as it is built on more solid and well-known fundamentals. For me, this is great because it will help give you your return in small but sure sums over a longer period of time. Meanwhile, appreciation is a riskier game, as it isn’t guaranteed. So while you might be able to earn back your investment in a nice way, it is balanced out by the fact that you can also make a loss in an equally unfavorable way.

You Can’t Predict the Market With Any Certainty

While the prices might be going up in your area now, there is absolutely nobody who can help you predict what those figures will be doing in the future. Honestly, there are simply too many economic unknowns to be able to accurately determine what the housing market is going to do. For example, interest rates might begin rising, the economy might find itself contracting, and as a consequence, it may completely tank the housing market. Sure, if you buy for cash flow, these factors will affect you a little bit, but at least you are still generating income on a regular basis so they won’t completely pull you down under.

Reliable Returns vs. Taking a Gamble

Lost? Well, perhaps a little scenario will help you understand where I am coming from. If I had to depict cash flow and appreciation as real life situations, then I would most probably relate them to this: cash flow is your workplace, and appreciation is the lotto kiosk. Could you ever imagine yourself completely giving up your job and putting all your hopes into the lotto kiosk to provide for you? I sure hope that your answer is no because while the win might be big, it is not one that is safe to put your bet on.

performance-indicators

Related: Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t

In addition, there is absolutely nothing worse than investing in something and having to face negative cash flow after paying down the mortgage and allocating for expenses. So if you are investing solely for appreciation, you will find yourself under a lot of financial strain to provide for the upkeep of the house while not earning a single cent in return, something I am pleased to say that people investing for cash flow won’t be facing (if they bought right). After all, positive cash flow means that you are earning more money than you are having to spend on expenses.

So all in all, I hope you can see where I am coming from when I say that cash flow is surely the way to go for a profitable future as a real estate investor. Cash flow is king!

What numbers do you weigh most heavily when choosing investments?

Let me know with a comment!

Sterling is an multifamily investor specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded Sonder Investment Group, he owns just under 400 units. Sterling was featured on the BiggerPockets Podcast and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to wholesaling and scaling a business.

    Jason V. investor from Rochester, New York
    Replied over 3 years ago
    Good article! Also, I live in an area where you can cashflow like crazy, but appreciation is minimal – why would I want to invest out of area just to gamble on appreciation? And I’ve also already started the countdown to when @Bob Bowling posts a 12 page reply about why you’re a “poor” investor, and how it’s ignorant to invest in cashflow properties. Have fun with that!
    Zach Quick investor from Pittsburg, Kansas
    Replied over 3 years ago
    Was about to say the same thing, Bob will be commenting on this I’m sure haha.
    Sterling White rental_property_investor from Indianapolis, IN
    Replied over 3 years ago
    Glad you enjoyed the content Jason. Everyone has their own investment strategy that works for them. Sounds like the gentlemen you have mentioned likes appreciation which is great that works personally for them. Are you investing in the midwest, Jason?
    Gautam Venkatesan investor from Dallas, Texas
    Replied over 3 years ago
    I want both!
    Sterling White rental_property_investor from Indianapolis, IN
    Replied over 3 years ago
    Totally agree with you Gautam. It is very achievable to accomplish a mix of both. Have you taken the leap into the RE market since we last spoke, Gautam?
    Solomon Oh new_to_real_estate from Shoreline
    Replied over 3 years ago
    @SterlingWhite Great Article. I would also like both as I am trying to implement Jason Hartman’s strategy of Refi til you die.
    Mike Soto real_estate_agent from Granada Hills, California
    Replied over 3 years ago
    The Refi til u die strategy from Jason Hartman sounds interesting. Where can I view? Thanks
    Johnie Bridges from Gretna, Louisiana
    Replied over 3 years ago
    Great post cash flow has taken my Realestate company from 0-21 units In under 36 months all buy and hold.
    Sterling White rental_property_investor from Indianapolis, IN
    Replied over 3 years ago
    Congrats on your success Johnie! Keep up the great work. Cash flow is king
    Jeff Deleon
    Replied over 3 years ago
    Cash flow is key to replacing income from a traditional job. If you’re wanting to walk away from a job and focus full-time on real estate, it’s cash flow that will replace income so that your bills are paid on a monthly basis. Knowing your household budget allows you to know how much cash flow you need monthly. Great article.
    Sterling White rental_property_investor from Indianapolis, IN
    Replied over 3 years ago
    Completely agree Jeff. Thank you for sharing that piece of insight.
    Kevin Polite flipper_rehabber from Decatur Atlanta, GA
    Replied over 3 years ago
    Sterling, I agree, but definitely like both. Invest in up and coming areas and get appreciation OF your income.
    Dee W. from Memphis, TN
    Replied over 3 years ago
    Great article! I will say that I think that it depends on the asset as well. Residential properties are favorable for cashflow and rely on market conditions in regards to appreciation. The more cashflow (or reduction of expenses) that can be created in apartment buildings, the more you can force the appreciation of the asset of which the “standard” is a few dollars for every $1 invested. Of course you have to consider the cap rate among other factors but again it depends on what you benefits you.
    Frederick
    Replied over 3 years ago
    Cash flow vs appreciation?, let me share my real estate investment. I know nothing about any investment let alone real estate when I bought my first house. After school, I work very hard. I have no time for any reading about property investments. My real estate investment was attributed to my growing-up years living in rented properties. The tough rented public housing environment made me resolve never to be poor again. So as I worked and saved to buy houses. Today, I’m retired, staying in my own house and living off passive incomes from four fully paid houses. Did I consider my properties being purchased then in the light of cash flow or appreciation? no, never! Like Warren Buffet, buy and hold? No, I didn’t even know who he is then. The real reason is, I do not know how to sell them. Perhaps it is due to my culture of shame in selling a property as it attests to turn of fortune. I become a ‘guru’ after I retire. I have so much time in hand to read up, attended seminars, courses and talks, paid and unpaid. I must confess that property investments need no knowledge etc. Most of the properties were bought at the heights of exuberance of the rushing herds when vegetable stall holders, and taxi drivers talk property that I plunged into it. Only realizing my folly after the fact. An example, I bought one in 1997 peak. It was followed by Asian Financial Crises almost immediately. The property’s value remained underwater till 2006. All this time, I just sat on them and serviced their monthly mortgages. In fact all five properties were bought at peak of cycles. Almost immediately after each purchase, it was rented out to accumulate for the next purchase. That’s all. No timing, knowledge or any strategy!
    Marshall Easlick investor from Wellington, Colorado
    Replied about 2 years ago
    It has been over a year since you posted this but I am just reading it now. I like your story a lot! Sometimes I get overwhelmed with how much knowledge there is in real estate but I don’t plan to sell anything, ever, so your story helps me because it’s a reminder that real estate can be as simple as buying houses and paying them off. Thank you for your contribution.
    Jack Mejia from Rye Brook, New York
    Replied almost 3 years ago
    Thank you kindly for the article!