Where should I reinvest?
Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes
Where should I reinvest?
Most Popular Reply
Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
12yto whomever. Yeah look, I'm not interested in a pissing match on cash flow vs appreciation. My only point was, how many small/mid size RE investors do you know who have made a few million dollars from cash flow? I know many small/mid size investors in the Bay Area who have a few million dollars in equity. And they still have their equity, just a few years after the "Great Recession." Plus they have cash flow too, although maybe not as much as other places optimized for cash flow.
45 Replies
- Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 1k+ posts · 557 votes12y
Originally posted by @Toby Johnston:
I'm in contract to sell a rental property in San Jose, CA and trying to decide what to do with the proceeds. Given that the numbers don't really work where I live, I'm willing to invest out of state. My primary focus is SFR or small multi-family rental. I'm a long-term buy and hold investor. Ideally I'd like to buy somewhere with favorable long-term demographics, warmer weather, and low taxes but it seems like prices have really run up in a lot of places I look. Any suggestions for me? Ideally I want it to be a short plane ride away so I've ruled out the East Coast including Florida. Should I just sit on the money for a while to see if we have a market correction? I'm afraid of missing out on low interest rates if I wait too long. Thanks for your thoughts.It sounds like you may be thinking about this for awhile.
In the mean time, have you thought about lending the money out has a hard money short term loan to generate some income? I'd look at your local REIA, I'm sure you can find someone that wants to borrow.
You should be able to get at least 14% APR plus 3-6 points for a 6-12 month loan...just a thought.
- Rental Property Investor · San Jose, CA · Member since 2013 · 486 posts · 170 votes12y
@Account Closed I agree about Reno.
Ever since California legalized gambling, it has slowly been siphoning off new gamblers from the Reno crowd. I usually head up to reno once a year, and unfortunately downtown is littered with abandoned commercial buildings. I hope I'm proved wrong, but the longterm viability of Reno, which is based on entertainment, is in major peril.
Toby: Scout out areas outside of the bay area first, then think about exploring out of state. It's better to own a property you can drive to and manage so you learn the trade of being a landlord, rather then buying a property out of state and praying that your property manager won't screw you.
- 12yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
The Midwest offers some amazingly undervalued properties.
We have been buying quite a few properties in solid B class areas of Toledo, Ohio.
KC is another market we were buying quite heavily in 2013.
Just my opinion :)
Thanks for reading and have a great day.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes12y
Amit I was actually interested in hearing a defense of your predilection for appreciation over cash flow as the road to real wealth. I have no doubt you can show anecdotal and real evidence of appreciation providing a better ROI over a given timeframe than cash flowing properties given the same initial investment in specific markets. Of course George has already provided an eloquent explanation of why I will always prefer cash flow over investing solely for appreciation so no need to iterate that here.
If you have paid for property you can handle a loss of value if the market sours, so even a bad bet isn't necessarily a show stopper with non-cash flowing property. I will say that anyone who is speculating for appreciation with non-cash flowing properties and is using leverage to do it is headed for disaster unless they have extraordinary timing. Normally the leverage crowd will keep buying until the market turns down at which point they go bankrupt. We saw a lot of this in 2007 and we will see it again.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @Pete T.:
What about Florida? Low cost, good caps, constantly growing,...Low cost=Cheap. Is cheap profitable? Good caps=???? Please explain. Constantly growing=more supply than demand. Florida seems like a place to lose money. Oh wait, it's already been done. ;-)
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @George N.:
Bob, cash flow is a real tangible thing, as is debt pay down. What happens when the market tanks and there is no appreciation for quite awhile? What happens when your projections of appreciation don't materialize? What if you want/need the cash in your property before you have seen the appreciation? What if your financial situation changes? And when the economy tumbles the markets with the lowest cash flow take it on the chin the worst. I was a home owner in Omaha in 2008. The downturn was marginally felt relatively speaking. When I saw the price/rent ratio when I moved to CA I knew I would never buy there in case I had to turn it into a rental. That's how a lot of people lost their shorts though.
Additionally, cash flow has the ability to propel you into more investments. Lenders will be looking at your cash flow numbers and DTI. If you have a cash flow pig and promise them future appreciating that won't get you any friends at a bank. You buy a few cash flowing properties and not only will they pay for your next down payment but lenders will be happy to keep opening the door.
There isn't a doubt in my mind that cash flow > appreciation. Break even cash flow might be acceptable under the right circumstances. Ultimately I think the "Holy Trinity of debt pay down, inflation, and long term conventional financing is the key but I would never knowingly sign on to a property losing money every month. Again, why? There are properties that will both appreciate and cash flow.George, it's like you're saying that you believe in the tooth fairy but NOT the Easter Bunny. Let's start a thread that discusses the ACTUAL numbers of cash flow and appreciation instead of derailing this thread even tho Toby seems reluctant to explain HIS ACTUAL APPRECIATION.
But just to start things off how do you explain the one bedroom condos in SF that sell for $700,000 today, and $350,000 in 2004 and $175,000 in 1994 and $88,000 in 1984? Magic?
I hope you'll participate in a civil discussion as you seem to have experience and insight into this topic. This is a VERY important aspect of real estate investing and noobies can learn from experienced investors. And it's not stupidity but ignorance that people don't understand appreciation. Hell, I'll admit that at one time I stated that NO ONE would ever pay more than $250,000 for a one bedroom condo in Honolulu! It would be STUPID to say that now.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
@Steve B. You seem hung up on the perils of buying non cash flowing properties. Where did I ever say that? All I said was that cashflow is NOT the most important aspect of investing. And I'd still like to hear of examples of small/medium size investors that have made millions in cash flow (and not at age 80 btw.) For I know a lot of Bay Area investors that have made millions in equity with a few well chosen properties.
The other aspect of appreciation, is that it generally comes with higher cash flow too. What may be a poor or modest cash flow bldg now, generally turn into a strong cash flow later.
To succeed you have to know your micro markets incredibly well. I'm more willing to discuss investing concepts than specific market plays. There are enough investors stumbling around in my markets already.
- Investor · Provo, UT · Member since 2013 · 37 posts · 18 votes12yInteresting discussion on cash flow versus appreciation. Personally I don't believe there is one right answer, just different strategies for different markets/investors and different levels of risk. As we all know, markets are cyclical. I'm selling my rental property for an all time high and benefiting from appreciation. Now I feel more comfortable going after some cash flow, meaning investments that will self maintain and provide a little extra which I can reinvest in other properties. I realize this is likely not a home run strategy but I am ok with that. I've been advising clients on taxes here in Silicon Valley for the past 15 years and right now it feels like the tech stocks are getting a little bubbly. I personally believe that is what drives the Bay Area economy to new highs. So I took some risk off the table. Still have my primary residence and will keep that either forever or at least until I have a $500k tax free gain.
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Toby Johnston , @Amit M. , @Account Closed seem to be on the same page with me.. Bay Area folks, cover your head from falling appreciation rocks from the rest of BP! I agree appreciation is an important part of RE investing (especially with leverage, in high-demand areas with no/little buildable land). I still buy properties that cash flow from day 1 in the Bay, but oftentimes, you need to put in a bit of elbow grease before it really starts producing good numbers. And some years before the gravy returns that come from increased rents and appreciation..
Btw, I'd love to see everyone come out to the MASSIVE RE INVESTOR SUMMIT I'm organizing in the SF Bay in October! We can reconcile all these differences there, peacefully, over a beer :)
- Real estate investor · Las Vegas · Member since 2013 · 798 posts · 171 votes12y
Originally posted by @Account Closed:
Originally posted by @Pete T.:
What about Florida? Low cost, good caps, constantly growing,...Low cost=Cheap. Is cheap profitable? Good caps=???? Please explain. Constantly growing=more supply than demand. Florida seems like a place to lose money. Oh wait, it's already been done. ;-)
Cost to rent ratio is a huge factor in profitability. Ask anyone that owns in the Midwest and California (or the simple math). IMO cap rates exceeding 10 are good, but that obviously varies by region, type of neighborhood, and class of building. Growing was referring to the population, so I think that would be the opposite- supply depends on the individual area. I pretty sure you know a few people that are doing well in Florida-
As to comments about CF vs appreciation, while there are people who "made" millions in CA, there those all over that have done worse. None of those people realized that profit until they sold or refi AND if they would need to reinvest elsewhere to actually utilize the profit. While I think both are advantages to consider, CF is easier to plan for, more predictable, and receivable immediately. How many CF landlords have made millions? At 10k a month it doesn't take long.
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
I just think the OP is underestimating how hard it is to get a foothold in the Bay Area investment market. He's already in now! Since he lived in that home, I'm assuming it's not in ghetto-land, meaning it should have solid appreciation potential. If he brought it a few years back and has a low fixed interest rate, it's probably cash flowing now and not loosing money. If all that is true I think it's a mistake to sell it to buy something in fly over states for more income, plus all the risk and uncertainty of managing property from afar. IMO it's a non brainer- you keep quality property, in a market/area that you know, prop 13 tax advantage, low fixed rate, high probability of more appreciation in the immediate 2 years. Then refi or HELOC to pull cash, and buy something else.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @Account Closed:
@Account Closed and @Amit M. ,
I don't think you two give enough credit to the OP. He's a CPA and a CFP. I would think he weighted his options and decided taking the capital gains tax-free was the best option at this time.@Account Closed
Over 4 decades I've seen plenty of smart people make bad decisions. EVERY decade I've seen CA & Honolulu people with equity burning a hole in their pockets run for the "cash flow". I've been tempted at times but everyone I know that gave into the temptation regretted their decision.
What stopped me from cashing out was "the numbers". Let's add some hypothetical numbers here. So @Toby Johnston bought in 2008/2009 for $500,000 and now has a $1,000,000 property with $500,000 in capital gains. He's going to have about $60,000 in Realtor fees + sellers expenses.
The State of California is subsidizing his rental property taxes roughly $5,500 each and every year. So you would need cash flow of almost $460 a month forever just to cover the loss of that. I would assume his property will appreciate about the same that it has since the 70's of about 10% and rents will increase about 6%.
He could borrow against the house and have the same $500,000 to invest in "fly over states" and NOT give up $60,000 + $5,500 annually and $100,000. I would like to see the detailed cash flow plan that will cover these expenses and loss.
His property is at a "all time high" just like it was in the 70's 80's 90's 00's and this decade. There have been people in every decade that predicted that it would NEVER be higher so they HAD to cash out. Famous last words.
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
$100.000/12 = $8,333.33 a month in LOST appreciation. Now if I reinvest in a area with appreciation at the rate of inflation, say 3% then I'm only losing $70,000 a year so Monthly $5833. So if I'm cash flowing $200 per door I need almost 30 doors just to break even!
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes12y
Originally posted by J. Martin:
@Toby Johnston , @Amit M. , @Minh L. and @Bob Bowling seem to be on the same page with me.. Bay Area folks, cover your head from falling appreciation rocks from the rest of BP! I agree appreciation is an important part of RE investing (especially with leverage, in high-demand areas with no/little buildable land).Bob & Amit,
I agree with what J said above. I have been studying well-off real estate investors/individuals in the Bay Area. Apparently, it looks like most of them either never sell, or they only trade up their holdings. Most of their real estate are free and clear in their golden years. Their rents tend to be way below fair market. Their property taxes are laughably low thanks to Prop 13. Unfortunately, once the kids inherit them, they sell them.
Based on my findings, it's true for real estate in the Bay Area that cash-flow pays the bills; appreciation makes you rich. Real estate looks expensive now, but looks so cheap later. Inflation is, no doubt, investors' best friend.
- 12yJ. MartinPro MemberRental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
@Toby Johnston , @Account Closed , @Amit M. , @Account Closed , before we sidetrack this forum too much, I was curious what you all think about long-term rent and price appreciation that exceed increases in income.. play nice everyone!
http://www.biggerpockets.com/forums/88/topics/126556-3-6--avg-appreciation-forever---maybe
- Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes12y
@Account Closed all of a suddenly getting all the credit (and all he can do is further sidetrack us...:) :)
But seriously, here a few succinct comments:
- agree with Bob, CPA or not, plenty of smart or well educated people make investing mistakes. I've personally know several that royally screwed the pooch, especially 08-09.
- Minh, you're right about old timers that never sell. But you/I are not anywhere near golden years! We don't have that luxury to have no debt properties and below rent tenants for long...even me in crazy San Francisco-land.
- final advise to @Toby Johnston is simple: think hard before getting out of SJ, for it may not be easy to get back in. In expensive markets, acquiring the first two properties is the hardest. Once you have two investments under your belt, you have a bit more breathing room and flexibility. Fortunately, I'm experiencing that now, but a few years back I was much more limited.
Ok @J. Martin ...let's check out your link :)
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes12y
Originally posted by @Amit M.:
@Account Closed- Minh, you're right about old timers that never sell. But you/I are not anywhere near golden years! We don't have that luxury to have no debt properties and below rent tenants for long...even me in crazy San Francisco-land.
I thought 59.5 was the new 40! You kids GET OFF my beach.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.