Buying a house that cashflows that will not appreciate

Buying & Selling Real Estate
9yFollow

Buying a house that cashflows that will not appreciate

Josh H.
Kansas City, MO · Member since 2017 · 20 posts · 11 votes

Long story short I have an opportunity to purchase a 2bd 1 bth non-listed home straight from the seller (financing already lined up) that is fundamentally sound. New roof, new AC, relatively new furnace and house has current tenant that wants to re-sign. 

The house is in a decent area (call it class B $80-100K) very close to the really nice areas however it is on a busy street where houses tend to sit on the market for a long time and historically do not appreciate. I have looked at the historicals for many of the houses on the same street and they are selling for the same price that they were bought for 10-15 years ago and show little fluctuation in between. This house is in Kansas City, MO an area that is experiencing phenomenal growth and increases in property values. 

The house has a 7% CAP and has no problem getting rented and receives quality tenants. I have received all the records for the house and copies of past leases, the house has never sat vacant for longer than a week in between tenants.

So, the magic question. Is it still a 'good' investment knowing that it is very unlikely that the house will ever appreciate? I never bank on appreciation or factor it into any calculations, but I think we all agree that it is a very nice added bonus when our property has a chance to appreciate at the very least with the market trend.  The owner has owned the house for 12 years (rental for 7) and is selling to me at less than he bought it for, slightly lower than loan current loan amount. 

My strategy is buy and hold. Some might be asking why I am worried about resale, but I think there are many obvious reasons as to why it is still an important trait regardless of strategy. 

Any thoughts or comments would be appreciated, I always enjoy other people's perspectives. 

0Reply
16 views

4 Replies

Jump to latestLatest
  • Jared Viernes
    Investor · Wichita, KS · Member since 2017 · 293 posts · 192 votes
    9y
    Josh H. Let me preface this by saying I am a total noob and am still in the learning phase and I don't know all the specifics of your deal. I personally would not be too concerned about appreciation as you will still be earning through cash flow and equity building (assuming you are leveraging with a mortgage). The only thing I would be concerned about if your property historically lost value. In your position, especially since your strategy is buy and hold; I would definitely purchase. Especially since the history of the property as a rental is so solid.
    0Reply
  • Josh H.
    OP
    Kansas City, MO · Member since 2017 · 20 posts · 11 votes
    9y

    Yes, leveraged. I would like to stray away from the ins-and-outs of my particular deal and focus on the concept in general of buying to receive average to good returns with no appreciation. If this property were located in the not so great neighborhoods of KC, I would not be shocked by the fact the home value has not risen and likely wont for a long time. But, to me it is a little hard to take in that it is in a significantly better area, much higher price point and has shown no appreciation in whats been a great local market. 

    0Reply
  • Gregory N.
    Investor · Vista, CA · Member since 2016 · 35 posts · 17 votes
    9y

    If you have no expectations for appreciation and the numbers still pencil out to give you the kind of return you are satisfied with, then why not go ahead with the deal.  Curious why the owner has no equity after 12 years of owning the property?  Was there a refi at some point?

    0Reply
  • Josh H.
    OP
    Kansas City, MO · Member since 2017 · 20 posts · 11 votes
    9y

    Great points @Gregory N. 

    Personally, I feel like at that class (B), you should be able to find a property that allows you the 'chance' to receive appreciation gains on the back end and ultimately strengthening or providing a positive exit strategy. 7% isn't bad, nor is it great in my opinion. Let me ask you this, would you rather take a 6% CAP in trade for average appreciation?

    I think people often neglect to take in the time value of money in their investment decisions, an $80K house now, certainly is not the same as $80k 10 years from now.  

    Good question, yes. He did a cash out refi 7 years ago for $20k more than he bought the house for, I am amazed he was able to pull that, must have been the timing. The house would never appraise for that amount now.  

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free