Buying a home for appreciation or rental

Buying & Selling Real Estate
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Buying a home for appreciation or rental

James Haffner
Military · Oak Harbor, WA · Member since 2015 · 37 posts · 3 votes

Hey everyone, 

I just recently decided on growing my knowledge on real estate and starting to use my money for investing in real estate as a vehicle for passive income and financial growth. 

My GF and I almost closed on a fourplex that was going to cash flow $430.00 a month after all the expenses. Unfortunatly many issues on the home where not disclosed. When I found out about them it was too many red flags for me, so we backed out. 

We were going to use a VA loan to finance the property, giving us an extremely high rate of return for the cash we paid.

So now that the home fell through, we're a little curious on what to do. We can't find any properties that cash flow much( which is what our goal is). So were thinking of purchasing out of our area. Somewhere with a better rent to own value, where we can cash flow easier. 

Our other option is to purchase and live in the house until were out of the military, hoping the home will increase in value. We know a lot about the area including the fact that the population is about to spike due to military squadrons moving around, and our BAH going up. But IDK if I want to depend on that? 

What would an experienced investor suggest in the situation? 

Thank you Tony H. 

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y

@James Haffner NW is a solid investment area does your VA loan have to be Owner occ. Like FHA.?.. if so buying the 4 plex to live in is a nice way to get started.. when and if you move on you own 4 doors. with a great long term fixed loan.. if it does nothing more than pays for itself in 10 to 15 years you will have forced equity and some appreciation that when you sell you can actually capture.

Much of the quote un Quote cash flow markets on the lower end are only appropriate for cash flow and for one to scale.. buying one or two does not make a lot of sense in my mind the risk reward just is not there. I think its much better to buy a prime west coast asset that you would hold for your entire lifetime until you wanted to cash out for retirement or whatever.

Or if your going to go into the cash flow markets do so as a business with a goal to get to 10 properties as fast as you can.. you will need that amount to income average.. AS cash flow areas are much tougher to manage than what you will experience with a prime West coast 4 plex.

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  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    10y

    I never consider appreciation when buying. The deal needs to make sense without appreciation. 

    Appreciation is a bonus.

    5Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    10y
    Originally posted by @James Haffner:

    Hey everyone, 

    We were going to use a VA loan to finance the property, giving us an extremely high rate of return for the cash we paid.

    So now that the home fell through, we're a little curious on what to do. We can't find any properties that cash flow much( which is what our goal is). So were thinking of purchasing out of our area. Somewhere with a better rent to own value, where we can cash flow easier. 

    If the strategy you want to use doesn't work in a market, maybe your market, change your market if you want to use that strategy to a market where that strategy does work.

    "Man goes into the Doctor's office and says, "It hurts when I raise my arm".  The Doctor says, "..."

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @James Haffner NW is a solid investment area does your VA loan have to be Owner occ. Like FHA.?.. if so buying the 4 plex to live in is a nice way to get started.. when and if you move on you own 4 doors. with a great long term fixed loan.. if it does nothing more than pays for itself in 10 to 15 years you will have forced equity and some appreciation that when you sell you can actually capture.

    Much of the quote un Quote cash flow markets on the lower end are only appropriate for cash flow and for one to scale.. buying one or two does not make a lot of sense in my mind the risk reward just is not there. I think its much better to buy a prime west coast asset that you would hold for your entire lifetime until you wanted to cash out for retirement or whatever.

    Or if your going to go into the cash flow markets do so as a business with a goal to get to 10 properties as fast as you can.. you will need that amount to income average.. AS cash flow areas are much tougher to manage than what you will experience with a prime West coast 4 plex.

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  • Karen Barber
    Lender · Kansas City, MO · Member since 2015 · 103 posts · 28 votes
    10y
    If you are wanting to build a portfolio appreciation is a bonus. You might try purchasing outside your area to make better net yields. It maybe a little scary since you most likely will need a PM Firm (which in my opinion you should use because I would buy into every sob story why rent is late). But I'm a bottom line person, if I could own 3 houses in KC making 13-14% net yield or 1 TX house at 9%, I'm leaning towards KC. Good luck in your decision. This is a great sight to get a lot of information.
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Karen Barber  I agree with you ... I am fond of the KC market in that same regard as opposed to TX.. those TX property taxs are a downer then your foundation gets messed up and there goes 3 years of cash flow... because the soil expanded or contracted on your home.

    The OP though I think wants to use his VA loan and as such I am thinking he needs it to be owner occ.. I am not positive.. and out here on the West coast I believe a four plex as a starter investment is a very wise move for many folks..

    I am like you though when I had a bunch of rentals my staff would not let me talk to the renters I was always undermining their firm grip on being a landlord... they would get me and the next thing I know I am buying them grocieries  LOL

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  • Account Closed
    Investor · Canton, GA · Member since 2015 · 88 posts · 63 votes
    10y

    I concur with everyone else here @James Haffner. Appreciation is definitely a bonus on rental properties. The deals I look at need to have good margins. Cash flow is what you should be after. It sounds like your lending situation might be hanging you up a bit. Try looking outside of what VA loans can offer, and look to private lending from friends/family, or owner financing. You may find some success with that especially when investing out of state.

    1Reply
  • Aaron B.
    Investor · Indianapolis, IN · Member since 2015 · 80 posts · 82 votes
    10y

    @Jay Hinrichs, I was really intrigued by your comment, "Much of the quote un Quote cash flow markets on the lower end are only appropriate for cash flow and for one to scale.. buying one or two does not make a lot of sense in my mind the risk reward just is not there. I think its much better to buy a prime west coast asset that you would hold for your entire lifetime until you wanted to cash out for retirement or whatever."

    I will be moving to Indianapolis this Summer. I was going to focus on SFH cash flow properties in the 60 - 100k range. I am curious on more details regarding the price range definition of lower end. I don't want to assume my low end and another persons low end are the same. You also spoke about scaling. As a new investor I was planning on taking property acquisition slow to learn the ropes and allow me time to learn from mistakes. No fun repeating the same mistakes. Would one be better served to scale more rapidly as a new investor. Ultimately my goals are financial freedom.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Aaron B.  with SFRs the reason I say scaling is you have one door to rent.. if you have a vacancy your 100% not bringing in income.. if you own 10 rental homes and you have a vacancy you are only 10% vacant.. and the others will cover your vacant.

    financial freedom with rentals is a numbers game you need numbers to achieve this.

    so just buying one or two usually is not going to get you were you want to be.. that's my point.

    you may want to go to our turn key reviews site Brie the owner does pod casts with folks that own SFR's and she owns a ton of rentals herself.. there is some pretty good feedback there that is totally specific to this type of investing.

    And I understand that you have to start somewhere.. however again my point is if your in a non appreciating market the money is made in having as many doors as you can handle .

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  • Aaron B.
    Investor · Indianapolis, IN · Member since 2015 · 80 posts · 82 votes
    10y

    @Jay Hinrichs, I really appreciate the follow-up. Your comments make a lot of sense. 

    I think you also answered my follow-up question regarding comparing/contrasting an Indie market to the WDC/NOVA where I will likely move in circa 3 years. 

    As an aside, I have gotten a lot of value out of "Turnkey Reviews."  I will also check out the POD casts, which I missed. 

    Happy New Year. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Aaron B. I think you will find Brie's podcast for the SFR buyer or turn key buyer to be very good.. these are actual investors like yourself sharing in-depth of how they did it what they do and how they scale. Good luck with it all

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  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    10y

    @Aaron B.

    @Jay Hinrichs

    Is Totally ON POINT with these comments below.. It's definitely not a get rich quick scheme, the tortoise and the hair come to mind when I am dealing with Real Estate Investing slow and steady wins the race.

    Slowly start off acquiring enough properties steady building your portfolio along the way learn as much as you can with the different properties tenants and problems that WILL come along while acquiring the properties. Have as many doors as you or your property manager can handle then retire. 1 or 2 or 3 or 4 doors are not going to retire anyone in this economy...

    Just my 2 cents sorry to jump in on this post.. but Jay I love the comments below:

    "And I understand that you have to start somewhere.. however again my point is if your in a non appreciating market the money is made in having as many doors as you can handle."

    0Reply
  • Aaron B.
    Investor · Indianapolis, IN · Member since 2015 · 80 posts · 82 votes
    10y

    @Derrick Craigthanks for joining the conversation.  Your comments are much appreciated and add context to the discussion.  Happy New Year!

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    10y

    @Aaron B. I agree completely with @Jay Hinrichsabout scaling. If you're going to do this, I think it's important to scale as quickly as you can. As Jay said, when you have one property and have a vacancy, you have a 100% vacancy rate. Having a larger portfolio helps to offset the vacancy and maintenance issues that you will definitely have. When people have just one property, it's easy for them to get disillusioned when a problem comes up. There's other reasons to scale as quickly as possible also, such as rising real estate prices and interest rates.

    2Reply
  • Aaron B.
    Investor · Indianapolis, IN · Member since 2015 · 80 posts · 82 votes
    10y

    @Mike D'Arrigothank you for your comments. I think you raise an interesting point about rising prices and interest rates. Do you think SFH prices will rise in the Mid-west or are we at the upper edge of the real estate cycle? The mid-west; specifically, Indianapolis and Kanas City have a reputation for minimal appreciation. This is a pretty broad question so feel free to take the answer in any direction. Best of luck in the New Year.

    0Reply
  • Mike Gannon
    Rental Property Investor · Enterprise, AL · Member since 2015 · 39 posts · 10 votes
    10y

    It seems you are concerned about the VA loan itself, but perhaps I misread that into your comment. The VA Loan is a very powerful tool you can use up to the four plex level, and if I had it freed up, I plan on using the VA loan on a multi family home once the loan is freed up.

    0Reply
  • Logan Hicks
    Business Owner/Investor · Millersville, MD · Member since 2015 · 191 posts · 71 votes
    10y

    ok, this is a simple way to think about appreciation.

    Would you rather me give you 200 dollars a month for 20 years, or would you rather go buy 200 packs of MLB 2015 Baseball cards? 

    The whole idea is the cash money is residual, and always reoccuring, while the baseball cards are a complete draw of luck based on market factors, and performance, and are only as valuable in the future as people value them, as well as based on the concept if you can even find a buyer to buy them.

    The same is with the housing market.

    What a house is worth today mayis not indicative of what it will be worth 20 years from now.

    Cash money in hand is king, as it can dance and sing. Cash money stowed away is mocked and jabbed all day.

    What it means is money that is actionable by means of accessibility is highly potent, and can be applied to many avenues, while money trapped in asset worth is relatively worthless, and often times the running joke of the upper 10%. You can have billions in assets, thats fantastic. Unless it provides you with cash flow, its worthless.

    2Reply
  • James Paine
    San Diego, CA · Member since 2015 · 136 posts · 62 votes
    10y
    Originally posted by @Mark Holencik:

    I never consider appreciation when buying. The deal needs to make sense without appreciation. 

    Appreciation is a bonus.

     100% agree with the above.  I buy for cashflow, appreciation is a guess. The smartest investors in the world all have one thing in common, they will tell you that they are not sure what is going to happen next. 

    0Reply
  • James Paine
    San Diego, CA · Member since 2015 · 136 posts · 62 votes
    10y
    Originally posted by @Aaron B.:

    @Jay Hinrichs, I was really intrigued by your comment, "Much of the quote un Quote cash flow markets on the lower end are only appropriate for cash flow and for one to scale.. buying one or two does not make a lot of sense in my mind the risk reward just is not there. I think its much better to buy a prime west coast asset that you would hold for your entire lifetime until you wanted to cash out for retirement or whatever."

    I will be moving to Indianapolis this Summer. I was going to focus on SFH cash flow properties in the 60 - 100k range. I am curious on more details regarding the price range definition of lower end. I don't want to assume my low end and another persons low end are the same. You also spoke about scaling. As a new investor I was planning on taking property acquisition slow to learn the ropes and allow me time to learn from mistakes. No fun repeating the same mistakes. Would one be better served to scale more rapidly as a new investor. Ultimately my goals are financial freedom.

     ---

    Aaron - 

    My opinion is that a "lower end" market is one that you can tell is lower end by spending a few hours there.  I'll use Chicago as an example.  There is an area called Dalton which is pretty close to an area called Lansing.  If you drive down many Dalton streets you will see unkept lawns, beat up cars, trash on the streets.  Some pockets are ok but spend 2 hours there any you will feel like it is low end.  If you drive around Lansing you might see an unkept yard every 50 houses, which is just a single low end neighbor, not reflective of the entire neighborhood.    Personally I like areas that not "lower end".  I don't know that price is the real measure.  I think you spend time in an area and that will tell you if it is "low end".  Los Angelas, CA has markets where the average 3/2 house is $500k but they are low end, I promise! 

    Good luck investing!

    3Reply
  • Gloria Mirza
    Real Estate Agent · San Jose, CA · Member since 2015 · 172 posts · 66 votes
    10y

    I tend to look at real estate investing the same way as I look at investing in stocks.  If a proeprty is in an area that is increasing in value then your cash flow will not be as high.  The reason is because more investors are buying homes there expecting prices to go up.  A lot of people will tell you that past performance is not an indicator of future, but it is still something that has to be factored in.  You will pay more (in terms of dollars earned by the company per share i.e. PE) for a stock like Google that is expected to keep growing earnings than you would for a stock like IBM that is pretty steady in its earnings.   The same holds for a house, relative to rent (i.e. earnings) you will pay more for a house that is expected to appreciate in the future than you would for one that is not.  

    A lot of people say appreciation is a bonus, but I disagree, I think it is another factor that needs to be considered when purchasing a house.  

    The pros of a high cash flow property are that it will immediately cash flow and will reduce your debt to income ratio.  If you can come up with money for more properties through either cash out refi or savings then you can keep buying homes.  A lot of people work hard in finding cash flow positive properties below market value, buy those homes, then do a cash out refi to buy more properties.  You can repeat this process to buy multiple properties.

    With high appreciation properties you are not going to be cash flow positive at first, but eventually appreciation of the house value will allow you to do a cash out refi and buy more homes.  Also the house appreciation usually goes hand in hand with rent appreciation.  

    If I had high cash flow properties in my area I would build a portfolio on that.  In my case, I have high appreciation properties because that is what is in my area and it's cheaper to buy high appreciation properties because I don't have to incur any travel expenses or pay a property management company to manage them since it is near by.  

    6Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Gloria Mirza  I agree with you on appreciation..  Not sure who coined the term appreciation is a bonus.. but that is not what most investors want   they want some appreciation.. other wise cap ex kills them.

    I think appreciation needs to be an integral part of an investors strategy.

    Or if you know there Is not going to be appreciation then its just a money thing.. you need cash flow a lot of it and many doors

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    10y

    I talk to a lot of out of state investors... I cannot emphasis enough that scale is so crucial if you are going to do it on your own.  

    As an out of state investor myself, I can tell you at least 1/3 of my properties were bought from failed out of state investors.  I always call them after we close and talk to them about why they sold.  It always boils down to the fact that they did not have enough properties to handle the ups and downs.

    So I feel, if you can't buy 20 units in a year, you need to partner with someone who has the scale, like a turnkey company

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    The nice thing about appreciation is that you can be a total idiot and still make profit.  Bad manager, goodbye cash flow,  Bad manager would be hard pressed to kill your appreciation. 

    I ONLY invest for profit.  I would NEVER trade that away for speculating on paper cash flow.

    2Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    I follow Gary Kellar's advice: you make your money when you buy. Appreciation is just a bonus. You should always get cash flow in my opinion. Thankfully, I don't live on the west coast where certain areas are very difficult to buy cash flowing properties. Alternative: absentee landlord. I don't like this option as well but some investors make it work for them.

    2Reply
  • Scott Raley
    Real Estate Agent · San Jose, CA · Member since 2015 · 84 posts · 50 votes
    10y

    Play the next hand.  Think of this first effort as a lesson and not a failure. 

    In my opinion, the NW within the Redmond / Seattle market looks very promising  to invest in the next 5-10  years. 

    A very critical questions is how long you  plan to be living in that area. If you plan to be there 3-5 years, I would look to make a purchase. 

    I like this area for the following reasons:

    Good job market, pacific rim access for new  immigrants and investors funds who like west coast investments, still affordable housing relative to other west coastal markets ( Bay Area, LA, San Diego, Sacramento, Phoenix) The fact  that its  a cool (no pun intended) place to live for millenials make this a huge positive play. This is a long term growth area as people flock to both jobs and quality of life. If you invest in Seattle proper, understand about 75% of the homes were built before 1960 , so be prepared for lots of potential repair issues. 

    2Reply
  • James Paine
    San Diego, CA · Member since 2015 · 136 posts · 62 votes
    10y
    Originally posted by @Brie Schmidt:

    I talk to a lot of out of state investors... I cannot emphasis enough that scale is so crucial if you are going to do it on your own.  

    As an out of state investor myself, I can tell you at least 1/3 of my properties were bought from failed out of state investors.  I always call them after we close and talk to them about why they sold.  It always boils down to the fact that they did not have enough properties to handle the ups and downs.

    So I feel, if you can't buy 20 units in a year, you need to partner with someone who has the scale, like a turnkey company

     Brie - 

    I agree with you on almost everything.  One thing I'd add is that even if you do partner with a turnkey company you want to still try to get some scale.  You might not need to get it over night but you should try for sure to get a handful of deals within 1-3 years. 

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