Invest in Cashflow or Appreciating property?
Vancouver BC, CAN · Member since 2019 · 9 posts · 5 votes
I've been debating this for so long and I just can't decide what's best. I live in Greater Vancouver, Canada.. Would it be best to invest in a non-appreciating duplex that cashflows well (in Saskatoon or Edmonton- compare to midwest for US folks) or a non-cashflowing detached home in the coastal region of Vancouver area (think Seattle!) where there is tons of appreciation but NO cashflow. We would have to supplement the rent for a few years, but these properties are million dollar homes with great value. I'm so torn. what would you do? We have a decent amount to put in for a down payment (200k) but would stay with the 20% downpayment if going with a cheaper property (400-600k). We want to maximize our money to go as far as possible. Help please!! thank you so much for any responses!!!
I am embarrassed how complicated others are making this, it's actually very simple.
If the choice is as stated, ALWAYS 100% of the time go with APPRECIATION.
Appreciation CREATES cash-flow. But cash-flow does NOT create appreciation.
Actually, most often, properties with cash-flow and low or no appreciation create EXPENSES, like cap-x realization, and thus destroy there cash-flow so one is left with neither. A great example of this is the MFH market today, without appreciation there stuck in a bad way for a long time, until appreciation comes back into that picture.
Think of it this way:
Appreciation without cash-flow is a SEED. Nurture it, it will grow and blossom into a nice money tree.
Cash-flow without appreciation is an old-old tree who's done it's growing and what's left, yeah, rotting and dying. No thanks.
Investing for appreciation with negative cash flow is a crap shoot and It may work, or not. I invested in Silicon Valley properties for 30+ years and sold 5 years ago. My wife and I made a bundle. Would I repeat that bet today? No this market is very different and I do not know where the next Silicon Valley is.
The answer can depend on quite a few factors. What is your end goal? Is it to get out of your day job in a shorter period of time by stacking up cash flowing properties, or do you not mind working your day job and are more focused on creating a large amount of wealth through appreciation for later in life? Are you up for the risk of betting on the market for appreciation?
Cash flow vs. appreciation is constantly debated but really comes down to what your end goal is.
The answer can depend on quite a few factors. What is your end goal? Is it to get out of your day job in a shorter period of time by stacking up cash flowing properties, or do you not mind working your day job and are more focused on creating a large amount of wealth through appreciation for later in life? Are you up for the risk of betting on the market for appreciation?
Cash flow vs. appreciation is constantly debated but really comes down to what your end goal is.
Neither. If you don't have both, don't buy it.
How could you possibly state the property is "non-appreciating"? Use this rule of thumb, no property you buy is going to appreciate. Buy with cash flow and equity day 1.
I've been debating this for so long and I just can't decide what's best. I live in Greater Vancouver, Canada.. Would it be best to invest in a non-appreciating duplex that cashflows well (in Saskatoon or Edmonton- compare to midwest for US folks) or a non-cashflowing detached home in the coastal region of Vancouver area (think Seattle!) where there is tons of appreciation but NO cashflow. We would have to supplement the rent for a few years, but these properties are million dollar homes with great value. I'm so torn. what would you do? We have a decent amount to put in for a down payment (200k) but would stay with the 20% downpayment if going with a cheaper property (400-600k). We want to maximize our money to go as far as possible. Help please!! thank you so much for any responses!!!
You need to examine the mortgage first, will you use 10YFRM at very least ?
I'm in one of those that is purchasing in appreciation ; but also purchasing in cash-flow.
There's theory and there is real time practice, both is producing different result.
Think it like this. If you want you bill to be paid, invest in cash flow.
If you want to create actual wealth for retirement, invest in appreciation.
In Cash flow property, the most money you make probably 4x dinner cost at nice downtown Vancouver restaurant LOL
I don’t think you can go wrong with buying in Vancouver if you can afford the mortgage and have a long road to regiment. Especially if you could find a deal where you could add value. Where about in Vancouver are you looking? Buying for cash flow out of province maybe headache as well.
I've been debating this for so long and I just can't decide what's best. I live in Greater Vancouver, Canada.. Would it be best to invest in a non-appreciating duplex that cashflows well (in Saskatoon or Edmonton- compare to midwest for US folks) or a non-cashflowing detached home in the coastal region of Vancouver area (think Seattle!) where there is tons of appreciation but NO cashflow. We would have to supplement the rent for a few years, but these properties are million dollar homes with great value. I'm so torn. what would you do? We have a decent amount to put in for a down payment (200k) but would stay with the 20% downpayment if going with a cheaper property (400-600k). We want to maximize our money to go as far as possible. Help please!! thank you so much for any responses!!!
To make thing easier for you, you can use my excel sheet how to forecast appreciatio and how much money you make, this is still dead accurate after 10 years lol
| Original investments: | $120,000 | Prop Price: | $560,000 | |||||||||
| Appreciation factor: | 106.00% | Rate=3.3% | ||||||||||
| year | Price | Actual_LTV | Rem Balance | Equity | Net_Sale 7% | net_Cash_Flow_pa_after_PITI | net_after_capital_gain_Tax_if_investments | Date | Principal | Interest | Remaining balance | |
| 2013 | $560,000 | 0.214538875 | $439,858.23 | $120,142 | - | $2,400 | - | 2013 | $8,141.77 | $13,440.67 | $439,858.23 | |
| 2014 | $593,600 | 0.2744419474 | $430,691.26 | $162,909 | $121,357 | $2,400 | $80,095 | 2014 | $17,308.74 | $27,818.16 | $430,691.26 | |
| 2015 | $629,216 | 0.3305682786 | $421,217.15 | $207,999 | $163,954 | $2,400 | $108,209 | 2015 | $26,782.85 | $41,888.53 | $421,217.15 | |
| 2016 | $666,969 | 0.3831412634 | $411,425.63 | $255,543 | $208,856 | $2,400 | $137,845 | 2016 | $36,574.37 | $55,641.48 | $411,425.63 | |
| 2017 | $706,987 | 0.4323714515 | $401,306.06 | $305,681 | $256,192 | $2,400 | $169,087 | 2017 | $46,693.94 | $69,066.38 | $401,306.06 | |
| 2018 | $749,406 | 0.4784572431 | $390,847.44 | $358,559 | $306,100 | $2,400 | $202,026 | 2018 | $57,152.56 | $82,152.23 | $390,847.44 | |
| 2019 | $794,371 | 0.5215855537 | $380,038.42 | $414,332 | $358,726 | $2,400 | $236,759 | 2019 | $67,961.58 | $94,887.68 | $380,038.42 | |
| 2020 | $842,033 | 0.5619325204 | $368,867.25 | $473,166 | $414,223 | $2,400 | $273,387 | 2020 | $79,132.75 | $107,260.99 | $368,867.25 | |
| 2021 | $892,555 | 0.599664064 | $357,321.81 | $535,233 | $472,754 | $2,400 | $312,018 | 2021 | $90,678.19 | $119,260.03 | $357,321.81 | |
| 2022 | $946,108 | 0.6349365181 | $345,389.56 | $600,719 | $534,491 | $2,400 | $352,764 | 2022 | $102,610.44 | $130,872.25 | $345,389.56 | |
| 2023 | $1,002,875 | 0.6678971693 | $333,057.53 | $669,817 | $599,616 | $2,400 | $395,747 | 2023 | $114,942.47 | $142,084.69 | $333,057.53 |
@Suzanne Laird wealth in real estate is built through appreciation, so if you’re not forcing appreciation through renovations then you need to be prepared to wait a long period of time.
Cash flow is needed to help you hold the property long enough to see that appreciation (to cover the inevitable repairs, Capex, turnovers, vacancies, etc.) So I wouldn't buy a property unless I was expecting both cash flow and appreciation.
When you’re older and ready to “retire”, maybe then it makes more sense to cash in on all that equity and buy purely for cash flow. But only you know what your time horizon and goals are.
@Suzanne Laird
I grew up in Vancouver/Lower Mainland and now have lived in Calgary for the past 7 years. This will all depend on your risk level/tolerance as well as future goals.
For me personally, I would not like to be in a negative cash flow off the bat and risk housing appreciation. Properties in Alberta (in Calgary specifically) I've noticed rents have gone significantly up so the cash flow can be there. My speculation, is that properties here will appreciate due to the fact that no one can invest in the west and are going to start moving East. (ie. Your situation)
@Suzanne Laird wealth in real estate is built through appreciation, so if you’re not forcing appreciation through renovations then you need to be prepared to wait a long period of time.
Cash flow is needed to help you hold the property long enough to see that appreciation (to cover the inevitable repairs, Capex, turnovers, vacancies, etc.) So I wouldn't buy a property unless I was expecting both cash flow and appreciation.
When you’re older and ready to “retire”, maybe then it makes more sense to cash in on all that equity and buy purely for cash flow. But only you know what your time horizon and goals are.
Thanks @Nick Sansivero, I appreciate the feedback. My problem is that there is no positive cashflow in the area I'm looking at that has good appreciative value (West coast homes) that's why i'm looking to go east (midwest) where it can cashflow but it doesn't have that same appreciation as the westcoast. So, I'm a bit stuck on what to do.
@Suzanne Laird
I grew up in Vancouver/Lower Mainland and now have lived in Calgary for the past 7 years. This will all depend on your risk level/tolerance as well as future goals.
For me personally, I would not like to be in a negative cash flow off the bat and risk housing appreciation. Properties in Alberta (in Calgary specifically) I've noticed rents have gone significantly up so the cash flow can be there. My speculation, is that properties here will appreciate due to the fact that no one can invest in the west and are going to start moving East. (ie. Your situation)
@Vincent A. Hey Vincent, thanks for the response. I have a duplex in Saskatchewan, Prince Albert and it's been hard. It cashflows nicely but it barely appreciated in the last decade and the tenants have been rough. I'm looking at Saskatoon because I'm originally from Sask and now the areas. I have been looking in Edmonton as well but again its not an appreciative market but it cashflows. Do you think I'm better off looking in AB or SK rather than Chilliwack or Abbotsford? It would be negative cashflow but just until the rates go down.. might be able to risk it. Or get a condo instead of a detached house with more down payment. Just feels like a waste of my cash though. Anyway, thanks for the response. It's a hard decision to make!
The only answer needs to be BOTH, or you need to find another property.
@Suzanne Laird
I grew up in Vancouver/Lower Mainland and now have lived in Calgary for the past 7 years. This will all depend on your risk level/tolerance as well as future goals.
For me personally, I would not like to be in a negative cash flow off the bat and risk housing appreciation. Properties in Alberta (in Calgary specifically) I've noticed rents have gone significantly up so the cash flow can be there. My speculation, is that properties here will appreciate due to the fact that no one can invest in the west and are going to start moving East. (ie. Your situation)
@Vincent A. Hey Vincent, thanks for the response. I have a duplex in Saskatchewan, Prince Albert and it's been hard. It cashflows nicely but it barely appreciated in the last decade and the tenants have been rough. I'm looking at Saskatoon because I'm originally from Sask and now the areas. I have been looking in Edmonton as well but again its not an appreciative market but it cashflows. Do you think I'm better off looking in AB or SK rather than Chilliwack or Abbotsford? It would be negative cashflow but just until the rates go down.. might be able to risk it. Or get a condo instead of a detached house with more down payment. Just feels like a waste of my cash though. Anyway, thanks for the response. It's a hard decision to make!
Theres a few things to unpack here. Generally speaking buying a property that is negative cash flow isn't ideal unless it's part of the strategy itself such as a flip. We should also consider forced vs organic appreciation. If you can go in and force appreciation it might make sense to take some neg cashflow for a short period if there was a very clear path to being positive. I.e. .. If you could BRRRR and time the interest rates well
Otherwise, Buying a property that is negative cash flow without any forced appreciation or a clear short term upside(flip) might be described more as gambling then investing.
PA is a tough market for those exact two reasons you described. We dumped a property there last year just behind the ambulance station, it took a minute to sell and as you say the appreciation is minimal, it's a cap rate town. I would hesitate to lump Edmonton into that though. Traditionally it's been more of a boom/bust affected by Oil+Gas. Alberta in general is booming currently. There is definitely cashflowing properties if you look in the right spots, but they come with their own risks. Saskatoon could see decent appreciation over the next 5-6 years as sask is often a top performing economy in the world during downturns. There is deals in all of these spots if you know the right thing to look for.
Sounds like you guys have done a great job so far. It can get tricky to find deals in these ultra competitive markets, Keep patient :)
Thanks @Christopher H. I'm hesitant to look into Edmonton because I don't know the neighborhoods well enough but I have to admit those fourplexes that seem to be everywhere are enticing. I know Saskatoon so I feel more confident looking there. I would love to buy in Chilliwack, closer to where I live but that would be a gamble for sure, it would be tough to make it cashflowing. Anyway, thank you for taking the time to respond to my query.
I am embarrassed how complicated others are making this, it's actually very simple.
If the choice is as stated, ALWAYS 100% of the time go with APPRECIATION.
Appreciation CREATES cash-flow. But cash-flow does NOT create appreciation.
Actually, most often, properties with cash-flow and low or no appreciation create EXPENSES, like cap-x realization, and thus destroy there cash-flow so one is left with neither. A great example of this is the MFH market today, without appreciation there stuck in a bad way for a long time, until appreciation comes back into that picture.
Think of it this way:
Appreciation without cash-flow is a SEED. Nurture it, it will grow and blossom into a nice money tree.
Cash-flow without appreciation is an old-old tree who's done it's growing and what's left, yeah, rotting and dying. No thanks.
@Suzanne Laird a balanced portfolio has both, make a choice, then build around that choice with the next choices. If you enjoy investing, you will do this the next 20-30 years perhaps. Lots of creative asset class use, etc. It’s all good, you will create both, you will gain more momentum and confidence in time. Your real estate focussed CPA and your intuition will guide you. ;)
@James Hamling Amazing response, I love it! thank you so much for the analogy.
I've been debating this for so long and I just can't decide what's best. I live in Greater Vancouver, Canada.. Would it be best to invest in a non-appreciating duplex that cashflows well (in Saskatoon or Edmonton- compare to midwest for US folks) or a non-cashflowing detached home in the coastal region of Vancouver area (think Seattle!) where there is tons of appreciation but NO cashflow. We would have to supplement the rent for a few years, but these properties are million dollar homes with great value. I'm so torn. what would you do? We have a decent amount to put in for a down payment (200k) but would stay with the 20% downpayment if going with a cheaper property (400-600k). We want to maximize our money to go as far as possible. Help please!! thank you so much for any responses!!!
It needs to be both, and a lot of markets can provide that (such as my local market Calgary). I think every property should at a minimum have a small cashflow to protect you (especially as you scale up the number of properties you own) but it DEFINITELY should have strong appreciation potential as well, most of the returns are still made from the appreciation and not the cashflow. It's more of a balancing act of how much cashflow you are willing to sacrifice for extra appreciation (which let's all be honest is a lot more speculative than the cashflow portion) and that will depend on your goals and financial situation. I've been through downturn markets with reduced rents and property value and unlike some of my fellow investors in my market that did not care about cashflow and were struggling to stay above water, and very stressed out I slept very well at night and was able to afford for the market to turn because I had healthy cashflow going into the downturn.
I think if your goal is to use these properties for retirement, it’s best to find something that cash flows. Granted I’m new to this whole scene but I think looking at it through a basic lens might help. If your property cash flows, that’s more money in your pocket every month. It is possible that over the next however many years, that property could also appreciate in value. On the flip side, if you invest for appreciation, it might turn out that you’re not producing cash flow, AND the property doesn’t appreciate as much as you’d hoped for. Just my two cents!
I think if your goal is to use these properties for retirement, it’s best to find something that cash flows. Granted I’m new to this whole scene but I think looking at it through a basic lens might help. If your property cash flows, that’s more money in your pocket every month. It is possible that over the next however many years, that property could also appreciate in value. On the flip side, if you invest for appreciation, it might turn out that you’re not producing cash flow, AND the property doesn’t appreciate as much as you’d hoped for. Just my two cents!
Well, I have to write a new post how to project appreciation, it's not really that difficult. I wrote it here:
https://www.biggerpockets.com/...
If you want retirement, you focus on appreciation, why? because at certain times you would sell everything.
You don't want to have 20 SF or MF in Indianapolis when you are 59 that gives you $300 per/mo but the tenant is very cranky. You want two or three houses that produce half a million each.
What you should never do is expect a cash-flow city to become an appreciation city in a matter of years, because to do that there needs to be an economic miracle where people suddenly move to that area with higher buying power. It's not too difficult to comprehend. The list of which cities that's appreciating and the one on cash-flow list, is always stable and not too dynamic.
If you buy in areas with better appreciation, you will see greater future rent growth potential, less turnover, less property damage in between tenants, etc. All of these things lead to better future cash flow. While it may not cash flow in the first few years of purchase, you will have future cash flow and more equity in the property with better tenants and less headache. Real estate investing is a long play. Invest in more sought after areas that will appreciate at a more rapid pace with future cash flow potential.
If you buy in areas with better appreciation, you will see greater future rent growth potential, less turnover, less property damage in between tenants, etc. All of these things lead to better future cash flow. While it may not cash flow in the first few years of purchase, you will have future cash flow and more equity in the property with better tenants and less headache. Real estate investing is a long play. Invest in more sought after areas that will appreciate at a more rapid pace with future cash flow potential.
Definitely not always the case, I can name you countless areas of Calgary where appreciation is very strong (re-development potentials, high land value) and you would be cashflow negative it would not be improving over time, and have a pretty bad tenant profile too. A lot of the areas with very high land value in ratio to building values are great for appreciation but often don't commend much higher rents (and in some cases lower rents) while requiring you to pay significantly more for the property.
If you buy in areas with better appreciation, you will see greater future rent growth potential, less turnover, less property damage in between tenants, etc. All of these things lead to better future cash flow. While it may not cash flow in the first few years of purchase, you will have future cash flow and more equity in the property with better tenants and less headache. Real estate investing is a long play. Invest in more sought after areas that will appreciate at a more rapid pace with future cash flow potential.
Definitely not always the case, I can name you countless areas of Calgary where appreciation is very strong (re-development potentials, high land value) and you would be cashflow negative it would not be improving over time, and have a pretty bad tenant profile too. A lot of the areas with very high land value in ratio to building values are great for appreciation but often don't commend much higher rents (and in some cases lower rents) while requiring you to pay significantly more for the property.
I can confirm this 😄