Any Appreciation Investors Out There?
Investor · San Jose, CA · Member since 2016 · 26 posts · 9 votes
Any Appreciation Investors Out There?
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesI think it depends on if your in the business or you have a day job and your investing as a side line or as an alternative to other main line investments like stocks bonds and closely held companies.
It seems to me those of us who do this for a living appreciation and or really forced appreciation is the play.. either buying cash flow properties that have been miss managed ( probably like what@Cody L. has done in Houston turning them around raising value through better financials refinancing them.. that's quite popular..
Or others that are like myself developers.. we take raw land create subdivisions and build homes and work on a X factor not a rate of return factor.. IE with leverage we are usually at least 2X on invested capital on a 12 to 18 month cycle...
But like all things we are not perfect.. we tend to talk about the perfect projects on BP but anytime your doing this at any volume your going to have your bummers..
However for most folks the logical and the financial constraints dictate buying rental properties that will make the mortgage with the minimum down.. that's the measuring stick.. and for non appreciating ( historically anyway) markets like you see most turn key companies work in.. there needs to be positive spendable cash above all cost other wise why buy it... other than a forced savings.
Many folks could simply buy some other kind of business and do well.. we all know those who own business's and have done very well... especially if they have a business that can be sold.
Friend of mine in San Francisco sold his court reporting business for 10 million cash... But then bought 2 shopping centers one in Rocklin CA and can't remember the other and a nice 2 million dollar home next to me in Napa... so its not only real estate many ways to make money.
Real estate is just a place to put extra savings unless your going to go into the business.
Then you have agents and commercial agents like @Russell Brazil and myself its all we do. So we are in it daily and you tend to gravitate to what you like and know.. my wife is one of the top brokers in the Portlandia market.. and just selling real estate ( which is a long game) but can be quite rewarding financially and she digs it and is really good at it...
To me there is the thought process of being financially free and I get that people want to retire I tried the retire stuff a few times over the last 20 years it lasted about 2 months.. for me its the art of the deal.. and frankly most of my social life I could not way stop working be bored to tears.. so buying cash flow rentals is not something I really aspire to personally.. helping people buy them I do.. but not owning them.. NO tolerance for tenants anymore or PM's
45 Replies
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes9y
I invest primarily in low risk properties that appreciate well in the DC area. I previously invested in more moderate risk appreciation properties (gentrifying areas) but then my strategy changed a bit to wealth preservation as opposed to wealth creation, so I moved into lower risk properties, high income, good tenant base, but still appreciate well..just not at the levels of gentrifying areas. I have a couple cash flow plays as well...but most of your wealth is going to be created through appreciation, and not from cash flow.
A quick couple thoughts too is I have minimal need for generating more cash flow as I make a very comfortable income as an agent and my wife makes a very comfortable income as well. So I invest using the strategy that meets my needs and goals. Many people invest for cash flow because they are looking for income replacement.
Another thought that always occurs to me is that we call it appreciation when we own hard assets. When we don't we call the same economic force inflation.
District Invest Group545 Reviews - Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes9y
if you do a search on BP treads "cash flow vs appreciation" you will see this topic discussed many times. Indeed I have contributed to many of those threads. You will learn a lot on the various perspectives.
But to make a long story short, cash flow pays the bills, but appreciation will make you rich.
- Real Estate Broker · Temecula, CA · Member since 2014 · 994 posts · 783 votes9y
I have done both. The cash flow ones I have kept long term and am very happy with. (midwest)
The appreciation ones have done either really well (lots of appreciation) or not so great (minimum appreciation). On the not so great ones, i got in to the market too late and the appreciation didn't really go up too much. I still made $60K in 4 years (Arizona) , so thats not too bad, but other areas did better.
I am liking the mix of Appreciation and good rents in the Temecula , CA market. - close to san diego, low crime, good schools. Steady appreciation and rents are increasing as well, steadily. Good renters, Nice area. We've slowly been selling the ones that have appreciated to buy more in this area of southern CAlif. (Way cheaper than san diego or orange county, yet still excellent areas.
- Rental Property Investor · Dallas/Fort Worth, TX · Member since 2017 · 64 posts · 59 votes9y
Have you read "The Automatic Millionaire Homeowner" by David Bach? The premise of his book is that anyone can reach seven figures through real estate primarily because of appreciation and time IN real estate ownership.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9yI've bought right in houston and have been an appreciation investor out there. All my new reif loans are way in excess of my purchase price. So I am negative cash in my deals and they cash flow. When I'm sent deals in San Diego and they're 4 CAPs I have no idea how people buy them. They won't service debt. You can get both if you buy right in the right areas. In "appreciation" areas that's all you get.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
I think it depends on if your in the business or you have a day job and your investing as a side line or as an alternative to other main line investments like stocks bonds and closely held companies.
It seems to me those of us who do this for a living appreciation and or really forced appreciation is the play.. either buying cash flow properties that have been miss managed ( probably like what@Cody L. has done in Houston turning them around raising value through better financials refinancing them.. that's quite popular..
Or others that are like myself developers.. we take raw land create subdivisions and build homes and work on a X factor not a rate of return factor.. IE with leverage we are usually at least 2X on invested capital on a 12 to 18 month cycle...
But like all things we are not perfect.. we tend to talk about the perfect projects on BP but anytime your doing this at any volume your going to have your bummers..
However for most folks the logical and the financial constraints dictate buying rental properties that will make the mortgage with the minimum down.. that's the measuring stick.. and for non appreciating ( historically anyway) markets like you see most turn key companies work in.. there needs to be positive spendable cash above all cost other wise why buy it... other than a forced savings.
Many folks could simply buy some other kind of business and do well.. we all know those who own business's and have done very well... especially if they have a business that can be sold.
Friend of mine in San Francisco sold his court reporting business for 10 million cash... But then bought 2 shopping centers one in Rocklin CA and can't remember the other and a nice 2 million dollar home next to me in Napa... so its not only real estate many ways to make money.
Real estate is just a place to put extra savings unless your going to go into the business.
Then you have agents and commercial agents like @Russell Brazil and myself its all we do. So we are in it daily and you tend to gravitate to what you like and know.. my wife is one of the top brokers in the Portlandia market.. and just selling real estate ( which is a long game) but can be quite rewarding financially and she digs it and is really good at it...
To me there is the thought process of being financially free and I get that people want to retire I tried the retire stuff a few times over the last 20 years it lasted about 2 months.. for me its the art of the deal.. and frankly most of my social life I could not way stop working be bored to tears.. so buying cash flow rentals is not something I really aspire to personally.. helping people buy them I do.. but not owning them.. NO tolerance for tenants anymore or PM's
- Investor · San Jose, CA · Member since 2017 · 343 posts · 102 votes9y
@Wilson Cheung - In both the cases buy right and make sure the positive or negative cash flow is not added on top of appreciation or depreciation.
Good Luck Investing
Vivek
- Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes9y
I don't see why it can't be both. Personally, I think investing for appreciation with no consideration for cash flow whatsoever is not smart (vice versa as well). For me, I put more of a focus on cash flow, however, if I feel the property is not going to appreciate (or go down in appreciation because of the area it's in), I may not purchase. It's a sliding scale though. That being said, I'd take less cash flow if I felt appreciation was going to stellar in the area. The more cash flow possible the less I care about appreciation (and vice versa). Of course, if anyone can do that and be right every time, they are either lucky or from the future :). But, that doesn't mean you can't make an educated guess.
- Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes9y
Depends on the market you're looking at too. I invest in Phoenix and the AZ RE market is one that has extreme highs & lows with macroeconomic cycles. So there is a major appreciation element in my buy/hold strategy in AZ.
- Investor · Cincinnati, OH · Member since 2016 · 34 posts · 53 votes9y
My strategy (in this order):
1. LOAN PAYDOWN -- this is main reason I invest. Others are buying house for me gradually.
2. CASH FLOW -- icing on the cake as #1 is occurring.
3. APPRECIATION -- cherry on top of icing -- I'm a buy and hold investor. My plan is to never sell - hopefully pass these houses down to my kids. So this is a theoretical advantage that will likely never be realized (unless I refi or sell). Appreciation is nothing if it is not REALIZED (refi or sell). I bought a house in 2001 for 175 that now is worth 325 at least, based on comps. What does that do for me? I don't want to sell it because it is a prime rental location. So I don't think about it much. It means little to me as BUY AND HOLD INVESTOR. But the rent I collect means a lot!
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
You are still fighting your wife on this one, Wilson?!? In your case, there is only one thing that can be said: happy wife, happy life. From all accounts, she sounds like a wise woman and you should do what you reasonably can to keep her happy. This extends way beyond investment advise, but important and true none the less.
As for diversification, please do not confuse an active investment from a passive one. In a passive investment, you give up control to others to make or break your investment on your behalf. In this case, diversification is very important. Real Estate investment, as it is practiced and preached here on BP is an active investment, please don't let anyone try to fool you otherwise. In an active investment, you retain as much control as possible and utilize your knowledge, skills, network, etc. to make or break the investment. Diversification only serves to distract you and divide your attention. Diversification is the enemy of an active investment ... for those, you want and need to concentrate.
If this makes you uncomfortable and you still want to invest in REI, then buy a REIT ... that is a passive real estate investment that is diversified. Don't try to have your cake and eat it too, you will likely end up with all the work of an active investment, with none of the extra returns. Going out of state as a newbie is trying to have your cake and eat it too, you give up your control but still think you can pull the returns of an active investment ... though there are plenty here that will try to sell you that fairytale dream of puppy dogs and ice cream, it rarely works out that way in reality.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes9y
Put simply, not every investor has the LUXURY of gambling on continuing appreciation while they'd be haemorrhaging dollars every month with their 75% LTV mortgage (let alone be able to pay all cash in such expensive areas). Cheers...
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Brent Coombs:
Put simply, not every investor has the LUXURY of gambling on continuing appreciation while they'd be haemorrhaging dollars every month with their 75% LTV mortgage (let alone be able to pay all cash in such expensive areas). Cheers...
Why is it that there is always the assumption that appreciation always comes inexorably tied to negative cash flow? For that matter, maybe not every investor has the luxury of gambling on continuing cash flow while their property goes down each and every year in inflation adjusted value. That condition would be equally dangerous, but I would hope that investors would be intelligent enough to spot and avoid that condition just as they would spot and avoid the other kind too ... perhaps we are giving other investors too much credit, though ...
- Investor · Tampa, FL · Member since 2016 · 334 posts · 215 votes9y
Our strategy is cashflow positive with high probability of appreciation.
We focus on this path because it allows us to have some funds coming in after all expenses while at the same time after a few years we can re-finance and draw out the increased equity.
Typically,
more focus on cashflow is
less risk, shorter pay-off time frame, good reward.
More focus on appreciation is
more risk, longer pay-off time frame, fantastic reward!
Like us, you can move the slider between the two, and create a hybrid of the two strategies.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes9y
Originally posted by @David Faulkner:
Originally posted by @Brent Coombs:
Put simply, not every investor has the LUXURY of gambling on continuing appreciation while they'd be haemorrhaging dollars every month with their 75% LTV mortgage (let alone be able to pay all cash in such expensive areas). Cheers...
Why is it that there is always the assumption that appreciation always comes inexorably tied to negative cash flow? For that matter, maybe not every investor has the luxury of gambling on continuing cash flow while their property goes down each and every year in inflation adjusted value. That condition would be equally dangerous, but I would hope that investors would be intelligent enough to spot and avoid that condition just as they would spot and avoid the other kind too ... perhaps we are giving other investors too much credit, though ...
Because, if you DO get positive cash flow at 75% LTV, then you HAVE invested for cash flow (ie. appreciation would be the bonus, NOT the purpose). My premise: high appreciation areas are those that DON'T cash flow positively at 75% LTV.
My "many don't have the luxury" comment also applies to those investors who firstly, can't afford the 25% deposit for properties that are ALREADY too expensive because of PAST appreciation (even if they COULD borrow the rest). Cheers...
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Brent Coombs actually most high cost areas cash flow... with 25% down.. albeit at 1 to maybe 3 to 5% or 3 to 5 caps in multi but they do cash flow.
the comparison always seems to come in with the mid west stuff that investors set the bar at 10% COC and or 8 to 10 caps...
Just ask Minh Le who invests in San Jose or J Martin of BP meetup SF style fame ( actually Oakland) these guys make major cash flow in some of the most expensive markets in the US.
Now if your talking SFR in a residential neighborhood then yes in many high priced west coast and other markets they are not cash flow investments and will be negative with 25% down that's for sure..
its not normal in most of our west coast markets to buy SFR's as investment properties you buy small multi or apartments.. ERGO you have a whole turn key industry selling 1000 houses or better a month as SFR all over the mid west and rust belt as those are the ONLY areas of the US were you can buy detached SFR's with 25% down that cash flow or cash flow positive.. well Vegas and PHx yo can and FLA.. but you know what I mean..
@Steve D. your equity and balance sheet are much loved by your lender bankers if your going to scale.. the investor leveraged to the hilt is not going to enjoy the same opportunities as the investor with really strong equity like you do when they walk into their local bank looking for that sweetheart portfolio loan.. and in my mind paying these down and off is a key component as you get older nothing finer than free and clear real estate.. Its funny that's all I think about.. I am totally debt adverse..
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Brent Coombs:
Originally posted by @David Faulkner:
Originally posted by @Brent Coombs:
Put simply, not every investor has the LUXURY of gambling on continuing appreciation while they'd be haemorrhaging dollars every month with their 75% LTV mortgage (let alone be able to pay all cash in such expensive areas). Cheers...
Why is it that there is always the assumption that appreciation always comes inexorably tied to negative cash flow? For that matter, maybe not every investor has the luxury of gambling on continuing cash flow while their property goes down each and every year in inflation adjusted value. That condition would be equally dangerous, but I would hope that investors would be intelligent enough to spot and avoid that condition just as they would spot and avoid the other kind too ... perhaps we are giving other investors too much credit, though ...
Because, if you DO get positive cash flow at 75% LTV, then you HAVE invested for cash flow (ie. appreciation would be the bonus, NOT the purpose). My premise: high appreciation areas are those that DON'T cash flow positively at 75% LTV.
My "many don't have the luxury" comment also applies to those investors who firstly, can't afford the 25% deposit for properties that are ALREADY too expensive because of PAST appreciation (even if they COULD borrow the rest). Cheers...
I DO get positive cash flow and I DO get positive appreciation. neither of which I consider just a bonus and neither of which are the sole purpose ... I HAVE invested for total return. To pay attention to one and completely ignore the other (no matter which one you pay attention to and which one you ignore) is just plain foolishness IMO. Just because most DON'T cash flow at 75% LTV doesn't mean that ALL don't cash flow at 75% LTV ... I'm sure that there are some properties in your market that don't cash flow at 75% LTV too. There is no magic to 75% LTV either ... I understand that is your criteria, but it is not set in stone. Many different ways to skin a cat.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@David Faulkner its really simple EVERYTHING cash flows if you pay cash... its the max leverage like you allude to that folks tend to gravitate to.. max leverage to me is max RISK.. but that just me.
It is amazing that folks will knowingly by property with the expectation that the property will probably NEVER go up in value.. what they probably don't realize is if the market is that flat .. it will probably go down in value if you had to exit creating a capital loss and for me its all about capital preservation. I can make money many ways.. does not have to be with rentals. so can most other folks..
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes9y
Originally posted by @David Faulkner:
Originally posted by @Brent Coombs:
Originally posted by @David Faulkner:
Originally posted by @Brent Coombs:
Put simply, not every investor has the LUXURY of gambling on continuing appreciation while they'd be haemorrhaging dollars every month with their 75% LTV mortgage (let alone be able to pay all cash in such expensive areas). Cheers...
Why is it that there is always the assumption that appreciation always comes inexorably tied to negative cash flow? For that matter, maybe not every investor has the luxury of gambling on continuing cash flow while their property goes down each and every year in inflation adjusted value. That condition would be equally dangerous, but I would hope that investors would be intelligent enough to spot and avoid that condition just as they would spot and avoid the other kind too ... perhaps we are giving other investors too much credit, though ...
Because, if you DO get positive cash flow at 75% LTV, then you HAVE invested for cash flow (ie. appreciation would be the bonus, NOT the purpose). My premise: high appreciation areas are those that DON'T cash flow positively at 75% LTV.
My "many don't have the luxury" comment also applies to those investors who firstly, can't afford the 25% deposit for properties that are ALREADY too expensive because of PAST appreciation (even if they COULD borrow the rest). Cheers...
I DO get positive cash flow and I DO get positive appreciation. neither of which I consider just a bonus and neither of which are the sole purpose ... I HAVE invested for total return. To pay attention to one and completely ignore the other (no matter which one you pay attention to and which one you ignore) is just plain foolishness IMO. Just because most DON'T cash flow at 75% LTV doesn't mean that ALL don't cash flow at 75% LTV ... I'm sure that there are some properties in your market that don't cash flow at 75% LTV too. There is no magic to 75% LTV either ... I understand that is your criteria, but it is not set in stone. Many different ways to skin a cat.
Very good. It just means that for what the OP is asking, YOU are not an "Appreciation (only) Investor". I distinctly get the impression that Wilson WAS asking "who invests in the Bay Area (and such like) with maximum leverage, rather than say, the mid-west?" Otherwise, answers like yours seem too much like: "I only invest in BOTH" (which will NOT get you into the appreciation-only Bay area, when you have to borrow 75% like NORMAL people). Cheers...
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
@Wilson Cheung The one thing that I always get curious about when looking at cash-flow in an appreciation market is what the interest rates were when the properties were purchased. Are they cash-flowing better now because of appreciation bringing higher rents? I'm guessing the answer is "yes". Are they cash-flowing better now because when they bought interest rates were at 6% and they refinanced when interest rates were sub-4%? Well, that's where you have to be a little more careful. Unless, of course, your posit is that interest rates are going to come back down to the cratered bottom. If you're buying high-dollar properties in Los Angeles, San Francisco, etc. you shouldn't underestimate the huge impact that 'only" a 2% reduction in a 30 year mortgage can have on cash-flow. The trouble is that it's tough to differentiate luck from skill when it comes to buying right in appreciation markets. I'm sure there were a ton of smart people that bought in those markets in 2006.
And, for what it's worth, I have a primary residence ~1 mile from the beach here in San Diego. It's made a ton of money in terms of "appreciation" so it doesn't matter to me if it continues to swing up or dives down. I have my 30 year fixed-rate mortgage, the payment is easy to make, etc. When I look at my out-of-state real estate I can take a huge hit in rental rates, occupancy, etc. and still break-even. There's a lot of cushion there to "make less money" instead of "lose money" when it comes to servicing the debt. I don't know that buying here in San Diego, with as @Cody L. mentioned, the 4-cap properties if I would have that cushion. I doubt it. So I'd have to be much more comfortable with the prospect of coming out-of-pocket (negative cash-flow) if there is any kind of housing hiccup and impact rental rates.
- Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes9y
I like to buy stinky dirty messed up properties and force appreciation. Short answer is you can have both . The long answer can make you chase your tail for ages and never invest--analysis paralysis. If you know what you're doing and have done enough research /experience on a particular market you can make money either or both ways.
There are so many variables...like how much are you putting down, what are your rates, what's the condition of the property, is it a steal/underperforming?Having cash flow is great way to go if you're newer and good advice to remain conservative in a hot market.
I know dozens of investors here in LA that never thought twice to invest and are sitting on property that has tripled in 10-15 years or x10 in 20-30 years. (this is in /PP, they obviously used leverage so really their COC ROI is like x10-100)
To each their own on their decision, but right now is a very difficult time to make an appreciation play unless you already are very financially stable.
In general a newbie not with a lot of cash should shoot for cashflow. A newbie who has other investment/wealth can make some more risky plays.
It really depends on who you are (age, inv risk, personality etc), where you're investing, how much cash you have, how much experience you have in REI, and where you are as an investor before you can really get advice.
- Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes9y
I see a lot of newer people also chasing cap rates all over the country.... seeing 10-15% in 'greener pasteurs' Only for them to really make 2-5% due to higher vacancy or hidden repairs...or lose their shirts to a lawsuit due to mismanagement. Yeah I recommend seeing your properties but that's just me.
I have a couple of out of state properties and I like to see them once a year minimum
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yWill F. You make a great point about factoring in periodic visits. If you have 20+ units those twice-yearly (for me) trips don't have much of an impact. If you have one SFR you could easily obliterate your cash-flow with a plane ticket, hotel, rental car, food, gas, etc. For what it's worth, I also don't think chasing local cash-flow does a new investor any favors either. Other will (heartily) disagree but I don't want to be in the micro-neighborhood of "last resort" to chase a couple more % of cash-flow.
- Investor · Los Angeles County, CA · Member since 2012 · 962 posts · 279 votes9y
For sure Andrew. Good point much less cash-flow with those plane tickets. I think Andrew you're right if you scale more it would make the trips more worthwhile.
If out of state, perhaps invest in an area you'll visit already. Mix business/pleasure.
I invested where I happen to have family so it's hitting two birds with one stone... only thing is it often turned family trip into outright work in past... but not as much since the property has stabilized...
I had a fixer duplex that I self managed out of state it was hell...but a great learning experience after the second lawsuit. I had negative cashflow due to vacancies and unknown repairs, as well as the lawsuits... first year or so. It's since stabilized and the value has gone up tons...combination of market and forced appreciation.
I prefer local investing, but to each their own.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Will F.@Andrew Johnson I have been funding out of state cash flow for investor for going on 15 years now... my simple advice for them.. buy the best you can... and have a way to scale to 10 doors asap... this mitigates the buying in the hood disasters.. it mitigates expense of travel to visit your collection of real estate.. And bonus is to invest in a market that you may actually like to spend time in or near so you can have some fun free time as well.
My new target for out of state is in the micro neighborhoods the kids are clamoring to get into and you have both cash flow and appreciation and really nice forced appreciation.. this is happening in many markets... pay to play Is a little heavier but there are some pretty cool projects to get into and new construction opportunites that are really nice.. better than west coast for the same dollars spent in terms of returns COC with reasonable priced leverage.
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