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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  • 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. 

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  • Paul Santos
    Sarasota, FL · Member since 2014 · 151 posts · 80 votes
    10y

    Cash flow you control when you buy at the right price, right place, and right location. Appreciation you can't control, the market and economy will dictate, although hold on to a property long enough and your appreciation stands a better chance. In the meantime, you have someone paying down your principle and building equity. Good property management is vital.

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  • Cashmere Robinson
    Wholesaler · Bronx, NY · Member since 2015 · 46 posts · 11 votes
    10y

    There is no such definition of "lower end". It is defined and bounded by the living standard of the place you want to deal. So we need to study that first. 

    Appreciation is not to be considered while doing a deal, its a bonus.

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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    10y

    You don't have to buy 20 a year to be successful investing out of state. Just work with a trusted partner and you can scale at a comfortable pace. But like Jay said, you have 1 property and a vacancy, and that's 100% of your revenue. That's just math.

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  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @James Haffner:

    My GF and I almost closed on a fourplex that was going to cash flow $430.00 a month after all the expenses. 

    Out of curiosity, did this $430 include you paying rent if you intended to be an owner-occupant for the VA loan?

    When analyzing an owner-occupant multifamily property, always consider all units' incomes, even if you're one of the tenants.

    My only addition to the great turnkey/cash flow debate is that you should buy what you know.  You can find deals in every market and the one you live in is usually the one you understand the best.  Most people who invest in cash flowing turnkeys live in ridiculous markets.

    Good luck.

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  • Gloria Mirza
    Real Estate Agent · San Jose, CA · Member since 2015 · 172 posts · 66 votes
    10y
    Originally posted by @Paul Santos:

    Cash flow you control when you buy at the right price, right place, and right location. Appreciation you can't control, the market and economy will dictate, although hold on to a property long enough and your appreciation stands a better chance. In the meantime, you have someone paying down your principle and building equity. Good property management is vital.

     Well your statement is kind of right.  Any property will do well if you buy at the right price, right time and right location, it's when you do something at the wrong time.  Home prices in a high cash flow area are usually dependent on a specific business like manufacturing, coal, or oil.  When the local economy collapses, think Detroit in the beginning of the financial crisis, it can get really ugly.  With high appreciation properties, it can take you 10 years or more to get back to the price you paid and you will be cash flow negative during those 10 years.  Basically what I'm saying is both situations are ugly when you get in them.  

    As a side note in San Jose prices are well about the pre-market boom prices in 2008 because tech workers earnings have gone up enought ot raise home prices to new levels.  While in Stockton and Sacramento, another high appreciation market, prices are still well bellow 2008 levels because they haven't seen the same growth in income.  

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  • Ryan Rogers
    Investor · Boston, MA · Member since 2015 · 95 posts · 32 votes
    10y

    Both!  Remember if your property is appreciated through time or forced appreciation you can pull the equity through refinancing to acquire more Cash Flowing properties!!!

    Best of luck in 2016!

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @James Painem

    Some markets have historical appreciation and some don't. I think San Diego generally and historically is 5%? annually. It is not a matter of predicting or bonus. It is a matter of location. There are some exceptions where the location has been on a multi decade slide and now starting to appreciate like in certain downtown locations across the nation. And there are adjacent locations to those that are at 1980s prices. If one never factors for this they might rethink rule number one "location". Obviously there is more competition for areas that appreciate and it is a dime a dozen for areas that don't. For many real estate is an appreciation business and they will not invest in locations that have no appreciation history. Then you have many who invest for just cash flow which is more like a management intensive business. It could be said they both are equally speculating on that investments performance. Many bail appreciation markets for straight cash flow markets but overtime this is probably going to be shortsided thinking history has shown. 

    Say you have two equal investments and want to sell one. Do you sell the one that is appreciating or the one that has not? In order to make a intelligent business decision you would need to factor for appreciation. So you sell the stuck in the mud 80s priced one and keep the downtown high flyer. It is not guessing unless you don't factor for appreciation.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Gloria Mirza  as we know all this talk of appreciation VS cash flow is largely regionalized.

    And we know that there is a tremendous appetite for the general investing public to hop into the RE space...

    This is what propels much of the mid west TK type investments it purely price point.  folks can get their foot in the door  when your total cash net worth may be 20 to 30k.. you can buy a nice little cash flow home in many markets for 60 to 80k and now that lenders are back in the game and some are doing the ultra low value mortgage loans again at bank rates.. someone with 20k can put 15k down on a property .. have 5k in reserves and make a hundred or 200 a month cash flow and get in the game.. this is what drives out of state TK business plane and simple..

     When Chris Clothier was asked to describe his very impressive investor base.. the overwhelming majority of his clients owned one or two rentals.. he had a handful that had 10 or more and few that owned 20 or more.  And this was from I believe north of 2000 homes he manages and or has sold in the last 10 years.

    Where as in the Bay Area were your domiciled as an investor your minimum cash requirements are going to be probably north of 100k and you may break even or have a slightly negative cash flow. Ergo most SFR's are sold to homeowners not to investors. And of course investors are worried about bubbles and declining prices that happen in RE cycles. However if your investing and you can break even and not feed a property.. I submit the Bay Area property is a stronger investment over time. as its far more liquid generally and values historically have risen.... who knows if we have come to the final market tops.. I grew up in Cupertino when houses got to 100K we new it was not sustainable.. :)

    I like Sacramento these days personally

    And I think the OP if they can get into a nice 4 plex in the WA area will make a fine investment over time...

    However to Echo Brie's comments  NOt just because I think she is smart and a hard worker.. if its cash flow your after Scale is important. But at the end of the day if you just break even on your deals I Cash flow markets you will have some value at the end of the your mortgage term.. however rare is the investor who holds a rental 30 years that does not live in the community.

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    10y
    Originally posted by @Aaron B.:

    @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.

    Aaron, real estate trends are highly local so you can't generalize about the Midwest. Indianapolis and Kansas City have seen a lot of appreciation over the last couple of years and although the rate of appreciation is slowing down as it is in most markets, will probably continue this year. Prices are still below their pre crash peaks in both markets so their is still room for growth.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Mike D'Arrigo:
    Originally posted by @Aaron B.:

    @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.

    Aaron, real estate trends are highly local so you can't generalize about the Midwest. Indianapolis and Kansas City have seen a lot of appreciation over the last couple of years and although the rate of appreciation is slowing down as it is in most markets, will probably continue this year. Prices are still below their pre crash peaks in both markets so their is still room for growth.

    Aaron what did that $50,000 Indy house sell for 10 years ago?  How about in the 90's 80's 70's?  Now inflation adjust it.  Cash flow??  Maybe just your money back in monthly installments.  Shoot, send me $50,000 and I'll give it back to you in 360 monthly installments.  Whee!

    3Reply
  • Aaron B.
    Investor · Indianapolis, IN · Member since 2015 · 80 posts · 82 votes
    10y

    @Account Closed Thanks for your perspective.  Boy, you really raise an interesting point. I have to admit I have been struggling with this very issue.  I understand what you are driving at in your comment but let me make sure.  We all know what it means to assume ; )

    So 50k a decade ago at 2.12% annual inflation or 23.39% total, would have been roughly 40,500.  Hop in your DeLorean, punch in the year 1965 inflation was about 4.12% or 652.6 total. That 50K is roughly 6,640.  I am not familiar enough with the Indianapolis market but I am guessing that a 50K home sold for 6,6k in 1965.  

    I also think that others will make the argument that CAPex, refurb, vacancy will chew-up cash flow.  Even if the residence is initially fully renovated, after likely 15 years you will have to put in some more expensive items (ie HVAC) and repeat again at the 30 year mark.  So no real cash flow is obtained.

    So we are left with the old principle and interest pay down and inflation working in our favor.  The customers paid off your 38K loan (50,000 - 12,000).   For argument sake we will take the same historic 30 year inflation rate of 652%which means that 50k home is worth 326k in 2045 but in real terms it remains 50K because inflation hits all cost of living expenses.

    Bob, what are your thoughts on just using the 50K to get into real estate, with the understanding where one starts is not where one wants to stay/end.   As an investor builds their portfolio they look for markets with cash flow but greater possibility of appreciation.  These same markets are also likely have a greater entrance fee.

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

    @Mike D'Arrigo thank you for the insights.  Much appreciated.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    Hey Tony! It completely depends on how much you enjoy risk. Buying something and just hoping on the appreciation is much riskier than other options because it's purely speculation. If you are losing money every month, that really puts the nail in the risk coffin. Appreciation also is greatly dependent on how long you are planning to hold and whether or not you are planning to use a mortgage for it. 

    There are a ton of cash flowing options non-locally to you. Solidify monthly cash flow, in a market with appreciation potential, and you get the best of both worlds. You may not bank appreciation to levels that some CA investors have done, but it's all about risk trade-off. I live in LA and have always invested out-of-state for the cash flow options. It's easy to do with the right teams in place. Risk items will differ between investors, but I feel good about the non-local cash flow properties. They've worked great for me and I feel better about that and trying for appreciation.

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  • James Haffner
    OP
    Military · Oak Harbor, WA · Member since 2015 · 37 posts · 3 votes
    10y

    There was a ton of responses on this post, and I'm still reading over some of them 2 to 3 times to grasp the info. 

    This is what I'm leaning to as far as a business model: 

    it makes sense to get out of the renter status and move to being an owner. I want to purchase a multi unit property and rent the other units out. This way I can use the VA, keep my savings super strong and hopefully cash flow.

    I haven't found anything in the area that cash flows, but it seems like best practice is to at least offer what your comforatable with. If that doesn't work I'll move to sfr. I'm thinking of doing a live in fixer upper and holding on to it. Then at least I get the discount and appreciation. What I'll do is finance the property using a minimal down rehab loan, rehab it, and refi using the VA. I'll live in the home and either rent, or sell after I'm out of the military. Most likely rent if we can at least break even. Sell in 30.

    For my fiancée and I. Our goal is to supplement our incomes so we can travel, build our own home, and most of all build something with each other, as a team. 

    Im thinking the best option would be to look on to markets where we could rack up as many doors as it takes to supplement our income at the best price possible (better to pay 25k per door than 80k per door) especially if the market falls out.

    We have almost 100k saved up. It would be pretty awesome to use the VA and pay less than 5k to get into a multi unit property so we could save even more.

    Btw I checked out turn key reviews. I was floored to see the cost of housing in other areas. It's tempting to just research an area in the Midwest, go there, build a team and start purchasing. But it seems like getting out of being a renter is the most important thing? Idk, what are the views of renting vs. purchasing? 

    And also do you see any holes in my very basic business model haha? 

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  • James Haffner
    OP
    Military · Oak Harbor, WA · Member since 2015 · 37 posts · 3 votes
    10y
    Originally posted by @William Hochstedler:
    Originally posted by @James Haffner:

    My GF and I almost closed on a fourplex that was going to cash flow $430.00 a month after all the expenses. 

    Out of curiosity, did this $430 include you paying rent if you intended to be an owner-occupant for the VA loan?

    When analyzing an owner-occupant multifamily property, always consider all units' incomes, even if you're one of the tenants.

    My only addition to the great turnkey/cash flow debate is that you should buy what you know.  You can find deals in every market and the one you live in is usually the one you understand the best.  Most people who invest in cash flowing turnkeys live in ridiculous markets.

    Good luck.

     Yea, we analyzed all the units of the property. It was a pretty sweet deal.

    We where in contract and excited about the purchase. But, my fiancée went and looked at the property, she met up with the landlords PM who spilled the beans on the place. apparently there where dead decaying rats in the walls, and one of the units had flooded every year consistently, there was more...I just don't remember it all.  

    After that I had to back out because of none of it being disposed on the seller disclosure, the shadiness spooked me. 

    1Reply
  • Jay Thoms
    Investor · Dayton, OH · Member since 2015 · 74 posts · 21 votes
    10y

    @James Haffner

    Counting on appreciation is speculating.  

    Examine the numbers thoroughly to determine cash flow with BiggerPockets calculators.

    Not only would I rule out appreciation as a factor but I would never buy a property that didn't have instant equity.  I specifically target properties that are less than market value.  Also cash flow is important.  

    Have you ever considered investing in Ohio?  It's a great market for investing.  

    I personally like south Dayton and Northern Cincinnati.

    2Reply
  • James Haffner
    OP
    Military · Oak Harbor, WA · Member since 2015 · 37 posts · 3 votes
    10y
    Originally posted by @Jay Thoms:

    @James Haffner

    Counting on appreciation is speculating.  

    Examine the numbers thoroughly to determine cash flow with BiggerPockets calculators.

    Not only would I rule out appreciation as a factor but I would never buy a property that didn't have instant equity.  I specifically target properties that are less than market value.  Also cash flow is important.  

    Have you ever considered investing in Ohio?  It's a great market for investing.  

    I personally like south Dayton and Northern Cincinnati.

    Would you say that becoming an absentee owner is something the beginning investor could manage?With a full time job that is highly demanding? 

    0Reply
  • Jay Thoms
    Investor · Dayton, OH · Member since 2015 · 74 posts · 21 votes
    10y

    @James Haffner

    You need to buy in a good area and if you qualify a good property manager to be your "feet on the ground," yes.  If you have any questions with this process reach out to me to connect.  

    0Reply
  • Steven W.
    Investor · SAN FRANCISCO, CA - California · Member since 2014 · 78 posts · 32 votes
    10y
    Originally posted by @Jay Thoms:

    @James Haffner

    Counting on appreciation is speculating.  

    Examine the numbers thoroughly to determine cash flow with BiggerPockets calculators.

    Not only would I rule out appreciation as a factor but I would never buy a property that didn't have instant equity.  I specifically target properties that are less than market value.  Also cash flow is important.  

    Have you ever considered investing in Ohio?  It's a great market for investing.  

    I personally like south Dayton and Northern Cincinnati.

     Jay,

    I think that this advice is right on. I haven't looked into Dayton and Cincinnati, but I think that it's wise, especially when starting out, to go for some solid investments that provide cash flow from the beginning--this definitely whets one's appetite for subsequent investments!

    Best of luck, James.

    Steven

    0Reply
  • Nick Taskani
    Investor · Cincinnati, OH · Member since 2015 · 23 posts · 2 votes
    10y
    Originally posted by @Jay Thoms:

    @James Haffner

    Counting on appreciation is speculating.  

    Examine the numbers thoroughly to determine cash flow with BiggerPockets calculators.

    Not only would I rule out appreciation as a factor but I would never buy a property that didn't have instant equity.  I specifically target properties that are less than market value.  Also cash flow is important.  

    Have you ever considered investing in Ohio?  It's a great market for investing.  

    I personally like south Dayton and Northern Cincinnati.

     Don't you think real estate taxes are high in Cincinnati market?   They seem higher than other places around country and its hard to make the numbers cash flow with the taxes. 

    0Reply
  • Jay Thoms
    Investor · Dayton, OH · Member since 2015 · 74 posts · 21 votes
    10y

    @Nick Taskani

    Every situation is different. I like to evaluate the profitability of each deal individually. I have a couple rentals that are in a higher tax rate area but my particular properties assessed value are not high so my ROI is good. While I do agree that cash flow is extremely important, I also think areas with higher taxes can be very good rentals(usually because the school districts are rated highly) as long as you can achieve your target ROI and cash flow.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Aaron B.:

    @Account Closed Thanks for your perspective.  Boy, you really raise an interesting point. I have to admit I have been struggling with this very issue.  I understand what you are driving at in your comment but let me make sure.  We all know what it means to assume ; )

    So 50k a decade ago at 2.12% annual inflation or 23.39% total, would have been roughly 40,500.  Hop in your DeLorean, punch in the year 1965 inflation was about 4.12% or 652.6 total. That 50K is roughly 6,640.  I am not familiar enough with the Indianapolis market but I am guessing that a 50K home sold for 6,6k in 1965.  

    I also think that others will make the argument that CAPex, refurb, vacancy will chew-up cash flow.  Even if the residence is initially fully renovated, after likely 15 years you will have to put in some more expensive items (ie HVAC) and repeat again at the 30 year mark.  So no real cash flow is obtained.

    So we are left with the old principle and interest pay down and inflation working in our favor.  The customers paid off your 38K loan (50,000 - 12,000).   For argument sake we will take the same historic 30 year inflation rate of 652%which means that 50k home is worth 326k in 2045 but in real terms it remains 50K because inflation hits all cost of living expenses.

    Bob, what are your thoughts on just using the 50K to get into real estate, with the understanding where one starts is not where one wants to stay/end.   As an investor builds their portfolio they look for markets with cash flow but greater possibility of appreciation.  These same markets are also likely have a greater entrance fee.

    More than likely that house in Indy sold for around $20,000 in the 60's.  I'm basing that on the Cincinnati market 112 miles away.  So only a $30,000 gain over 40 years!  (1.8%)  See how you are losing money?

    Now if you'd bought in SF at the same time, well you'd probably need a partner to buy a $40,000 property.  That property would conservatively worth $1,300,000 so $650,000 to you.  $30,000 or $650,000? 

    1Reply
  • Jay Thoms
    Investor · Dayton, OH · Member since 2015 · 74 posts · 21 votes
    10y

    @Steven W.

    Thanks for the complement Steven.   Yes I agree with the appetite of the cash flow.  The immediate gratification of the cash flow positive rental is motivating.  I'll message you sometime soon or you can message me if you decide you want to know more about Dayton or Cincinnati.

    Best Regards

    Jay

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