I have 100,000 and i dont know where to put it...
New to Real Estate · Hong Kong · Member since 2020 · 14 posts · 19 votes
If money was not an issue and i had 100,000 USD on the side to put for down payments, would investing in expensive cities like los angeles be a good idea because of the rental occupancy rate there, or would it be wiser to invest it in somewhere that has a lower occupancy rate but i can buy more with 100,000 in down payments.
If money was not an issue and i had 100,000 USD on the side to put for down payments, would investing in expensive cities like los angeles be a good idea because of the rental occupancy rate there, or would it be wiser to invest it in somewhere that has a lower occupancy rate but i can buy more with 100,000 in down payments.
Etienne, I'd invest for appreciation in a market like Los Angeles. If money's not an issue at present, and you want your money put to best use, invest in a place like LA (and I vote specifically for LA).
Let's just do some quick math:
Let's say $100K is going to be 25% down payment on one or several properties. In your appreciation market, you'll receive no cashflow, but the building will appreciate 5% per year. In the cashflow market, you'll earn a fantastic 15% cash-on-cash return but no appreciation. All financing terms are identical. Let's remove costs associated by buying and selling. To further simplify, let's say there's no principal paydown (since it will be equivalent in both examples).
What's your investment horizon? Let's say seven years...
In seven years, in your appreciation market, you'll own a property worth $562,840. You borrowed $300k to buy it, so you profit in year 7 is $262,840.
In the cashflow market, after seven years, you will have made $105,000 in cashflow. You'll have no profit in the sale of the building because it didn't appreciate.
Now, cashflow-lovers are going to make the following argument: cashflow is money-in-hand whereas appreciation is speculative.
They would be right that cashflow is money-in-hand in that you get it regularly, not as a big lump sum at the end. This makes the early cashflow payments more valuable than the later appreciation harvesting. However, if money is not a current concern, as is the case in this example, the actual value of those earlier payments is lower. To be really nerdy and mathy about it, you can use a much lower discount rate when analyzing the value of future earnings.
However, is appreciation speculative? In the Midwest, yes. In cities that have populations under 1M and might or might not be ascendant, absolutely. But in an international gateway city with a longterm average appreciation rate of 6.7% going back to 1975 -- meaning this longterm average incorporates the five recessions that have occurred since? Appreciation is far less speculative than Midwestern investors make it out to be, and to the extent that it is more speculative, the reward is much greater.
So, buy LA, my friend!
Best,
Jon
@Tony Kim @Jenning Yu @Jon Schwartz
To the other two that jumped in you may have missed a few things. I certainly look for appreciation and was not suggesting you don’t look at it! That’s part of our model. However please don’t make an uneducated comment that cash flow does not create wealth. It’s what you do with the cash flow that builds wealth. And it’s combining strategies to become a ROCKSTAR that create wealth. You can do both at the same time! And let me be arrogant for a minute, I like being wealthy, I like having my pockets full of cash, I like my wife being able to buy whatever she wants, I like planning a last minute trip to VEGAS and never worrying whether I have the money to do it. And while I do it, my buildings will appreciate just fine.
Wow, take it easy. I'm not sure why you're putting me into the uneducated comment section. I clearly stated that forced appreciation is important...and I know that's your bread and butter along with cash flow. I agree that combining is important...perhaps I should have made that more clear. And yeah, cash flow also pays for trips to Vegas also...
I agree that spending 100K right now in LA is not the best move.
@Tony Kim sorry Tony that was not meant for you buddy! Only the one that made the comment lol! I just tagged you and Jon to be a part of the conversation. Sorry for that confusion, it was not directed at you or Jon.
"A high cap rate market like LA" ? What?
@Todd Pultz seem like you found excellent business model for yourself, congrats on that.
As mostly an out-of-state investor living in a ok-cash-flow but not-ok-appreciation state, and not a handyman myself, I made up my mind to invest mainly on appreciation and loan paydown on condition that cash flow can break even. So far so good, in less than 9 years, every $1 cash I invested, appreciated about $11, loan paydown about $2, and with 0 cash flow. I absolutely have no regret by increasing my wealth by almost 14 times but with 0 cash flow. Some people like to say "cash flow is king", but I like to say " Wealth is King".
Yes, cash flow can build wealth, but probably not as great as appreciation. Most importantly, it is very HARD to get cash flow for a REMOTE investor if we outsource everything like PM and contractor etc. All kind of fees eaten almost all my projected cash flow. Have you ever thought about if you were an out of state investor and if you outsourced everything, can you still get that good cash flow? Can you still find deals as good as you can find now if you were an OOS investor?
If you are a slumlord and you invest locally, you may still have chance to make decent profit. But if you are a REMOTE slumlord there's little chance you can make any profit.
Now maybe not a good time to invest in LA, but if given 20~30 years time horizon and force me to make a choice, I will choose to invest LA other than other non-appreciation area, and there are high probability that I will be right!
Let's me repeat my main point again: If you are OUT-OF-STATE investor and your main focus is cash flow, you get the wrong idea. (Some exceptions: large apartment buildings, or large scale investors have their own boots on the ground).
@Todd Pultz seem like you found excellent business model for yourself, congrats on that.
As mostly an out-of-state investor living in a ok-cash-flow but not-ok-appreciation state, and not a handyman myself, I made up my mind to invest mainly on appreciation and loan paydown on condition that cash flow can break even. So far so good, in less than 9 years, every $1 cash I invested, appreciated about $11, loan paydown about $2, and with 0 cash flow. I absolutely have no regret by increasing my wealth by almost 14 times but with 0 cash flow. Some people like to say "cash flow is king", but I like to say " Wealth is King".
Yes, cash flow can build wealth, but probably not as great as appreciation. Most importantly, it is very HARD to get cash flow for a REMOTE investor if we outsource everything like PM and contractor etc. All kind of fees eaten almost all my projected cash flow. Have you ever thought about if you were an out of state investor and if you outsourced everything, can you still get that good cash flow? Can you still find deals as good as you can find now if you were an OOS investor?
If you are a slumlord and you invest locally, you may still have chance to make decent profit. But if you are a REMOTE slumlord there's little chance you can make any profit.
Now maybe not a good time to invest in LA, but if given 20~30 years time horizon and force me to make a choice, I will choose to invest LA other than other non-appreciation area, and there are high probability that I will be right!
Let's me repeat my main point again: If you are OUT-OF-STATE investor and your main focus is cash flow, you get the wrong idea. (Some exceptions: large apartment buildings, or large scale investors have their own boots on the ground).
I can appreciate what your saying and your perspective on appreciation and cash flow. However I do have one point to bring up, the biggest glaring issue with all of this. Wealth should be looked at as a measurement of time, not how large your net worth is. As in if you stopped working right now how long would your wealth support you before you had to start working again.
Appreciation is great but you only realize the gain or a return when you sell. Then once you sell what do you do with the money? You have to reinvest it into something that makes a return or you will begin to eat into your principal.
Not really understanding why someone would think cashflow does not build wealth. Try to image cashflow as if it was the safe withdrawal rate (4%) from a brokerage account. So $3,300/month cashflow would roughly be comparable to a $1,000,000 brokerage account.
What’s easier and quicker, buying 3 rentals that cashflow $1,100/month each, for a total of $3,300/month. Roughly equivalent to $1,000,000 net worth. Or use that $100,000 to buy the $400,000 property in LA and wait 50 years at 5% annually for the property to appreciate $1,000,000?
@Jenning Yu some valid points and I completely agree that a lot of out of state investors get eaten up by Property management and sometimes greedy real estate agents! So I completely see why you would go for appreciation. That is how many of us buy properties on the cheap when owners are frustrated because they have been abused by property management.
With that said, yes, out of state investors can be very successful with cash flow and appreciation at the same time. I have very close friends (now) that invest here and I manage their properties for them. They cash flow very nicely and their properties appreciate. They appreciate much slower here, but we also do not and will not face the drastic downturn that other cities might in down market. Because of them I started my management company and got my real estate license as I was tired of seeing out of state investors get taken to the cleaners by less than ethical people.
It’s much easier for me being local and investing local, I agree, but out of state investors can also be very successful if they take the time to build deep relationships with individuals they trust.
And lastly, slumlords are not truly successful in any market whether they be out of state or local and none of us like them!
Appreciation will build wealth I agree, but cash flow + appreciation will create wealth much faster if you continue to invest in your business!
Keep the money and educate yourself about real estate
@Todd Pultz seem like you found excellent business model for yourself, congrats on that.
As mostly an out-of-state investor living in a ok-cash-flow but not-ok-appreciation state, and not a handyman myself, I made up my mind to invest mainly on appreciation and loan paydown on condition that cash flow can break even. So far so good, in less than 9 years, every $1 cash I invested, appreciated about $11, loan paydown about $2, and with 0 cash flow. I absolutely have no regret by increasing my wealth by almost 14 times but with 0 cash flow. Some people like to say "cash flow is king", but I like to say " Wealth is King".
Yes, cash flow can build wealth, but probably not as great as appreciation. Most importantly, it is very HARD to get cash flow for a REMOTE investor if we outsource everything like PM and contractor etc. All kind of fees eaten almost all my projected cash flow. Have you ever thought about if you were an out of state investor and if you outsourced everything, can you still get that good cash flow? Can you still find deals as good as you can find now if you were an OOS investor?
If you are a slumlord and you invest locally, you may still have chance to make decent profit. But if you are a REMOTE slumlord there's little chance you can make any profit.
Now maybe not a good time to invest in LA, but if given 20~30 years time horizon and force me to make a choice, I will choose to invest LA other than other non-appreciation area, and there are high probability that I will be right!
Let's me repeat my main point again: If you are OUT-OF-STATE investor and your main focus is cash flow, you get the wrong idea. (Some exceptions: large apartment buildings, or large scale investors have their own boots on the ground).
I can appreciate what your saying and your perspective on appreciation and cash flow. However I do have one point to bring up, the biggest glaring issue with all of this. Wealth should be looked at as a measurement of time, not how large your net worth is. As in if you stopped working right now how long would your wealth support you before you had to start working again.
Appreciation is great but you only realize the gain or a return when you sell. Then once you sell what do you do with the money? You have to reinvest it into something that makes a return or you will begin to eat into your principal.
Not really understanding why someone would think cashflow does not build wealth. Try to image cashflow as if it was the safe withdrawal rate (4%) from a brokerage account. So $3,300/month cashflow would roughly be comparable to a $1,000,000 brokerage account.
What’s easier and quicker, buying 3 rentals that cashflow $1,100/month each, for a total of $3,300/month. Roughly equivalent to $1,000,000 net worth. Or use that $100,000 to buy the $400,000 property in LA and wait 50 years at 5% annually for the property to appreciate $1,000,000?
Some of what you have said is true.
I am not saying cash flow can not build wealth. What I mean is: 1) it is very slow to build wealth if ONLY on cash flow. 2) It is very hard to get cash flow if you are a REMOTE investor.
There are many ways ( or strategies) to make money. When I said my cash flow is 0, that does not mean I do not have cash on hand. In fact, I tapped(mainly cash out refinanced) close to about $1m equity from my properties and invested into new properties. Even in the past one year, I amassed( cash out refinance or sold some not performing properties) about $300k cash on hand as reserve.
In your second case, you can always cash out refinance and tap the appreciation in your property. So the two cases are the same.
It is easier to build wealth if you cashflow then if you don’t. I know that is a smart *** response! But how do you plan on keeping a property through a downturn if you are not cash flowing. Do you already massive amounts of wealth? If you don’t you need to make sure you cashflow or else you could very well lose the property. I live far away from LA but my properties have significantly appreciated since I bought them. But if they didn’t cashflow I might not still have them.
Any real estate investor that doesn’t cashflow might lose everything. The #1 factor that makes real estate investors successful is how long they have owned the property the longer the better. In order to keep it for a long time you need to cashflow. Hence the don’t wait to buy real estate, buy real estate and wait.
@Jon Schwartz Oh... Wow... Ok. So instead of tearing down that whole thing....Im going to point out the most obvious oversight...
You stated 100k is 25% down.
If he follows your plan, it means he is not only going to put his money in a
"non-interest" bearing,
non-early withdrawable,
non FDIC insured,
game of risk roulette with
yearly "in-game" spending requirements for scheduled maintenance costs,
an "out of state" renters rights water heater repair concierge premium,
"4 months same as burned cash" eviction moratorium,
and carries a "non-reimbursable" tenant hunt cashflow loss during game vacancies
and last but not least, a profit reduction coefficient of negative (300k * ((mortgage interest rate) +(2nd home interest rate modifier))...Aka interest on a 300k loan.
Interesting...
Wow, taking some big swings there, Gavin. I love it! I love the energy.
Let me address your points specifically and, in the process, make my argument more clear and try to understand what in the world you're talking about.
You stated 100k is 25% down.
Actually, the original poster asked about using $100K for down payments, and I'm using the standard, conservative 25% down for non-owner-occupied residential property.
If he follows your plan, it means he is not only going to put his money in a
"non-interest" bearing,
non-early withdrawable,
non FDIC insured,
Gavin, you appear to be describing a savings account here. The best rate I can find for an interest-bearing, liquid, FDIC-insured savings account is 1% (source: https://www.bankrate.com/banki...). Are you suggesting the original poster should put his $100K into a savings account? That's only going to yield $1000 in cashflow per year -- and he'll only get that much if he doesn't withdraw any funds. That's an awfully conservative approach! Are you aware of any real estate investment vehicles that bear interest, are liquid, and are FDIC-insured? If so, let us know!!
game of risk roulette with
Game of risk roulette? How do you mean? Are you saying that expecting appreciation gains is playing risk roulette? Since 1975, the Los Angeles MSA has achieve a longterm average appreciation rate of 6.7% according to the FHFA home price index. Here's the chart:
https://fred.stlouisfed.org/se...
In my example, I was accounting for an average appreciation rate of 5%. So I was being conservative by LA standards! I was also using a Midwest cash-on-cash return of 15% -- which I think is aggressive if the original poster is trying to run his portfolio from Hong Kong. Perhaps appreciation is uncommon in your town, but in Los Angeles, where we're surrounded by ocean on two sides and mountains on the other two, it's a fact of life. It won't be a consistent 6.7% each year, but jeez, this ain't Indianapolis!
yearly "in-game" spending requirements for scheduled maintenance costs,
an "out of state" renters rights water heater repair concierge premium,
I should have been more clear: in my example, when I said the appreciating property would have no cashflow, I meant no positive or negative cashflow. In other words, the income from the property covers all expenses, including property management and mortgage and capex reserves, but doesn't deliver a cent of cashflow beyond that. These properties exist in LA. Folks outside of California seem to think that appreciation is only possible on properties that have negative cashflow, or that properties in California only produce negative cashflow. Such is not the case; I don't buy anything with negative cashflow. So these maintenance costs are accounted for in my scenario.
"4 months same as burned cash" eviction moratorium,
You've probably heard by now that the CDC has ordered a national eviction moratorium (source: https://www.cdc.gov/coronaviru...), so this dilemma exists in any scenario. But let's address this, anyway. Our Los Angeles property would need a GRM of, say, 16 to be cashflow neutral. That means four months of rent would be $10,416. That's not enough to tip the scales; appreciation still wins.
and carries a "non-reimbursable" tenant hunt cashflow loss during game vacancies
Vacancy is accounted for in the cashflow neutral proposition, though I will take this moment to point out that LA has one of the lowest vacancy rates in the country. It was 4% pre-COVID, and with COVID and the unprecedented unemployment in LA right now, we're at about 6.5%. The national average pre-COVID, FYI, was 9%.
and last but not least, a profit reduction coefficient of negative (300k * ((mortgage interest rate) +(2nd home interest rate modifier))...Aka interest on a 300k loan.
Again, the debt service is accounted for in the cashflow neutral proposition. And anyway, both scenarios carried the same interest cost, so they negate each other. But here's my question, Gavin: are you against leverage? Are you arguing that the original poster is best served by buying a property in cash?
Let me expand that question: what are you proposing, Gavin? The oversights you pointed out where not oversights at all. (I should mention that the cashflowing property carried the same assumptions: that expenses, debt service, and vacancy were accounted for in the 15% cash-on-cash). What's your suggestion for the original poster?
Also, what's the argument behind your post? It seems to boil down to your not liking appreciating assets. Is that right?
Best,
Jon
What would be your risk assesment about maximum drawdown in LA?
If things don't go as expected how much value could a property in LA lose over a 5-year period?
Juan,
What do you mean by "maximum drawdown"? I'm not familiar with that term.
The worst five-year period in LA was 2006-2011, during which time median home prices dropped 35%. It's worth noting that rents only dropped a few percentage points over that same period.
Jon
Thanks for your answer. So we could be looking at an average -35% if things did not work out..
It is a term used to get an idea of the risk that an investment, usually in the stock markets, entails..
«A maximum drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period»
Juan,
Thanks for sharing that term with me! It sounds like you're transitioning from equities to real estate; is that correct? The real estate market has some significant differences that you should be aware of (for example, liquid markets move fast and illiquid markets move slow; liquid markets lead the general economy and illiquid markets lag it).
Also, that -35% is definitely not average; it's the worst drop in history. I'm actually gearing up to do a thorough appreciation analysis of Los Angeles and other major MSA in the country. I'm looking for exactly what you asked about: what's the best case, worst case, average case, and median case for 5-, 10-, and 20-year holds in different markets. Is the potential gain symmetrical to the potential loss? Etc., etc., etc. PM me if you're interested in getting the numbers I find.
Best,
Jon
Hi Jon,
I said "average drop of -35%" as that would be a ballpark figure for the overall LA market, according to your data, but risk could be different taking into account the particular features of a property, its specific location etc
Many concepts from the stock market can be applied to real estate investing, like volatility, maximum drawdown, etc.. it is possible to get an idea of what those figures may be for a particular market observing historical data.
However, in order to get the best data available one has to be a player in the market and know the historical off market prices, and also the prices at which distressed property can be bought (usually for prices way below what is publicly offered). In many countries there are deals that are closed "offline", meaning that absolutely no data about those deals will be public, let alone be on the Internet.
Best,
Juan
Lower price point does not equate to lower occupancy rate, or vic versa - while those factors are both present in some markets in other markets they are not dependent upon each other.
Furthermore, while LA may have great occupancy it has terrible landlord tenant laws, much like Oregon, where I live. Which is why I invest in areas that make more sense, both as a landlord and as an investor looking to maximize my ROI, NOI, and mitigate my over all risk.
Basically, I look for markets that have good landlord laws as well as show good job growth, population growth, rent growth and unemployment rates lower than the national average for the last 3 years. Long story short - the midwest and south east states. In particular, we like Ohio, North Carolina, and Texas right now.
Plus your dollar will go a further and your occupancy rates will match or exceed LA.
Hope that helps.
Pay OFF All of your debt if any?! Then invest into a mutual fund or any real estate investment properties. (flip - flip - hold) #CashFlow #CashIsKing
@Etienne Dubois
This isn’t a hard sell but I’m always proud of my local market(s), in Tulsa and Oklahoma City, where *modest* appreciation and decent cash flow are both possible. $100k down would go a long ways here. I’m sure there are similar midwestern type markets elsewhere, hence, my disclaimer in avoiding the hard sell.
I don’t necessarily have the analytical genius several gentlemen did before my comment, but, I don’t know that there has to be a polarizing & binary selection process between cash flow and appreciation. In slang terms you could possibly have your cake & eat it too. In my (very) humble opinion.
Furthermore, in the multi space there are always ways to create the “appreciation” through value add components & rent raising opportunities which then drive up your exit price, and that has a different nuance to it VS typical single family metrics where it’s all about being “cute” etc.
Good luck! Sounds like you are in a great place.
@Matt Morrell, sorry! Low cap rate market like LA! I type too fast sometimes....
@Rudy Avila I was under the impression that class C properties are better for flip and not for rent, since they are located in less desirable areas and they have low rent rates.
@Todd Pultz thanks for sharing your insight, knowledge and expertise, I only wish NJ offered the opportunities that Dayton appears to offer. I've always subscribed to investing in your own backyard but you offer a ton to think about, from a out of state investment consideration, ROIC perspective. What appreciation has the Dayton market shown since the 2009 downturn if average acquisition is so inexpensive and how do you continually find so many opportunities at that price point? Is it wholesaling, Preforeclosure, offmarket, Lis Pendens, FSBO, all of the above??
@Jon Schwartz thx for all of your insight as well. I LOVE the Tableau maps. I had never seen that before.
Both of you really offer a ton of knowledge in this chain. Gotta love BiggerPockets!
Thx @Brandon Turner for making this community all it has been. I’ve learned so much while watching from a distance. This is my first post. I’m going to get more actively involved.
Cheers all,
Adam
Hey Alci, My names Joseph, I was in your position as well until I built out a team and a stream of deals in Ohio.. Great Cash flow.. You are welcome to tap in with us.
Was your tag intended for me?
If so, I’m not sure where you got C class properties from, I never said anything about property classes.
To address your points, 1. As I pointed out in my example. Its much faster to buy three properties that cashflow $3,300/month combined, then it is to wait 50 YEARS at 5% appreciation for the same equivalency in net worth.
2. There are literally tens of thousand of investor on this site alone that invest remotely and cashflow.
I never said anything about cash on hand or accessing equity. Neither of which have anything to do with realizing the gain from the appreciation.
My question is once you do realize the gain, what do you do with the money? You have to reinvest it into something that makes a return or you will deplete your principal and have to start all over again building it back up.
@Alci Martinez that is quite the contrary depending on your goals. When flipping often people say get the worst house in the best neighborhood, so C class would not meet that test usually. You can still flip here.
However, C class with a lower entry point allows more cash flow, but often more modest appreciation. A strategy some use is to trade up. So get in at at lower entry then move your way up to B, A buy selling a performing C class asset.
I have 75% C class rentals and they are phenomenal, but you have to know how to manage them.
@Todd Pultz agree, thank you.
@Jon Schwartz regarding California I would be more concerned about businesses moving out, terrible policies, high taxation and an (almost?) bankrupt state, relying on foreign cash for real estate appreciation. What are your thoughts about these?
@Adam Ross I agree, I love Bigger pockets as well! I’ve met some really incredible people on here.
Your questions;
1. We can continue to buy properties at low entry because we still have a huge inventory of properties managed by mom and pops that are nearing the retirement age, but also we can continue to buy in this manner due to out of state investors that don’t understand the market and/or get drained by the incredible number of poor property management companies here.
2. Appreciation.......I entered my first quad in 2013 for 20k. I put 12k into it to rent out and that was it. I sold that property in 2018 for 90k. The buyer was out of state and actually became a close friend and now business partner. He just refinanced it and it appraised at 107k. Quads are now being listed at 115k-120k. There are a few under contract now for around 120k that will push our comps some.
This means we have to hustle and find the quads and others off market which is very doable. I’m speaking of 1 bedroom quads. Two bedrooms we can but 95-110k in decent shape and cash flowing. They will appraise 135-140k.
I did a podcast on August 17th with Whitney Sewell Daily Syndication show. Find that and listen to it. I gave pretty much my Dayton story on there!
I see our market in C class quads rising to around 135k over the next 1-2 years.
Thanks for the nice comment and best of luck to you!
@Todd Pultz would like to connect with you as well please.
@Jon Schwartz regarding California I would be more concerned about businesses moving out, terrible policies, high taxation and an (almost?) bankrupt state, relying on foreign cash for real estate appreciation. What are your thoughts about these?
I think your fears are overblown.
Some business is moving out, but Silicon Valley isn't going anywhere. The farms of California aren't going anywhere. Netflix (which has its largest footprint now in Hollywood) isn't going anywhere. You have to keep in mind that 1 in 8 Americans lives in California. To put things in perspective: California's GDP is almost twice Texas's GDP. So when a company moves from California to Texas, it has twice as much impact on Texas as it does on California.
What terrible policies are you referring to?
High taxation is a buzzkill, no question. I think a lot of us see it as the price to pay for sound environmental policies and worker protections and all the other things that all this tax money pays for.
Is California bankrupt? I did some quick googling and found that, at least currently, California's public debt as a percentage of its GDP ranks ahead of Kentucky, New York, Illinois, Connecticut, Rhode Island, Nevada, Hawaii, Alaska, Alabama, Colorado, Massachusetts, New Mexico, Pennsylvania, North Dakota, West Virginia, Texas, Washington, and New Jersey (source: https://www.usgovernmentspendi...). I'm sure California's finances are in the stinker right now, but what state has a pristine balance sheet at the moment?
Does California's real estate rely on foreign cash for appreciation? Chinese buyers are a serious power here -- so much so that catering to Chinese buyers is covered in agent education. But I think the biggest driver of appreciation is the vast undersupply of houses (source: https://www.ppic.org/wp-conten...). In markets like mine, Los Angeles, you also have physical barriers to expansion -- namely, the ocean and the mountains. So I think your take is off the mark.
Best,
Jon
If money was not an issue and i had 100,000 USD on the side to put for down payments, would investing in expensive cities like los angeles be a good idea because of the rental occupancy rate there, or would it be wiser to invest it in somewhere that has a lower occupancy rate but i can buy more with 100,000 in down payments.
Etienne, I'd invest for appreciation in a market like Los Angeles. If money's not an issue at present, and you want your money put to best use, invest in a place like LA (and I vote specifically for LA).
Let's just do some quick math:
Let's say $100K is going to be 25% down payment on one or several properties. In your appreciation market, you'll receive no cashflow, but the building will appreciate 5% per year. In the cashflow market, you'll earn a fantastic 15% cash-on-cash return but no appreciation. All financing terms are identical. Let's remove costs associated by buying and selling. To further simplify, let's say there's no principal paydown (since it will be equivalent in both examples).
What's your investment horizon? Let's say seven years...
In seven years, in your appreciation market, you'll own a property worth $562,840. You borrowed $300k to buy it, so you profit in year 7 is $262,840.
In the cashflow market, after seven years, you will have made $105,000 in cashflow. You'll have no profit in the sale of the building because it didn't appreciate.
Now, cashflow-lovers are going to make the following argument: cashflow is money-in-hand whereas appreciation is speculative.
They would be right that cashflow is money-in-hand in that you get it regularly, not as a big lump sum at the end. This makes the early cashflow payments more valuable than the later appreciation harvesting. However, if money is not a current concern, as is the case in this example, the actual value of those earlier payments is lower. To be really nerdy and mathy about it, you can use a much lower discount rate when analyzing the value of future earnings.
However, is appreciation speculative? In the Midwest, yes. In cities that have populations under 1M and might or might not be ascendant, absolutely. But in an international gateway city with a longterm average appreciation rate of 6.7% going back to 1975 -- meaning this longterm average incorporates the five recessions that have occurred since? Appreciation is far less speculative than Midwestern investors make it out to be, and to the extent that it is more speculative, the reward is much greater.
So, buy LA, my friend!
Best,
Jon