Cash Flow? or Appreciation?

9 Replies

Good morning BP,  

I am curious about your strategy for buy and hold. Are you trying to maximize your cash flow or focusing on appreciation. I feel cash flow and good appreciation are hard to achieve at the same time right now. I would love to hear your thoughts on this. 

Specifically St. Louis investors. I am focussing on small multifamily in South City. What has been your experience? 

@Adam Benenati , I agree with Dave regarding cash flow. Although there are several in the other camp, appreciation camp, I believe otherwise. I think it also depends upon your time horizon. Appreciation is great for two things number one, selling. Wow this is great, you have to reinvest those funds to avoid tax bill, depreciation recapture, and to avoid the devaluation of your money. Number two, get cash back from  refinancing. If you’re refinancing you’re going to receive cash back and this will allow you to reinvest elsewhere. Now what I do like is forced appreciation. This is where you find opportunities to increase the value, things you can control.

"If the cash don't flow, it's a no"

Cash flow is the payment you get while you wait for it to appreciate. Cash flow is also the proof that the property takes care of and pays for its own maintenance, property management, vacancy rates, etc. If it's not cash flowing, you might run into a bad situation when you need a new roof, HVAC, and other repairs. 

If it's a buy and hold for long term, then I would focus more on cash flow, but I would still buy in good areas, in growth corridors. If you are looking at buying and holding for a shorter term (3-5 years), then focusing on appreciation, specifically forced appreciation, makes the most sense. 

We buy for cash flow. Appreciation is more speculative than buying based on what cash flow a property will produce, so we never bank on a property appreciating. That is just a bonus. 

In my opinion, it depends on the investor's goals and financial standing. If your main source of income is REI, cash flow is always going to be a priority. But if it's not and you plan on holding the property, appreciation holds more weight. Speaking for myself, I'm acquiring property to liquidate once I reach a certain age. I think about it in the light of "if this property breaks even each year, I'll get a 15x return on my down payment once I liquidate – assuming I sell at 100% equity.