Is investing based on appreciation a recipe for disaster?
Rental Property Investor · Cleveland, OH · Member since 2018 · 95 posts · 61 votes
Is investing based on appreciation a recipe for disaster?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
2yAny property in the major coastal cities leveraged at 75% ltv would be cash flow negative. Yet those are the cities that are going to make you rich, and pretty quickly.
Remember the higher the cap rate, the higher the cash flow, means the higher the risk. This is a fundamental rule to finance. The low risk markets, with low cap rates are that way because they are high demand and appreciate quickly.
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- Member since 2024 · 1k+ posts · 351 votes2y
I invest mainly on appreciation. Also as the tenant helps pay the mortgage down after a few years you can use heloc etc and buy more properties to scale or sell it off
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesSo not only is it OK to have negative CF, but when you do (if you do) gain some equity from appreciation, you think it's also POK to spend it on another negative CF property, while increasing the negative CF from the HOLOC payment on the original Property?
Quote from @John Mason:
I invest mainly on appreciation. Also as the tenant helps pay the mortgage down after a few years you can use heloc etc and buy more properties to scale or sell it off
- Member since 2024 · 1k+ posts · 351 votes2y
Negative cash flow of about 200 is okay per month. My property is in prime location and will appreciate
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesPrime location, and will appreciate, based on what? How long will it take before the accumulated appreciation, outgain the accumulated negative CF?
Quote from @John Mason:
Negative cash flow of about 200 is okay per month. My property is in prime location and will appreciate
- Member since 2024 · 1k+ posts · 351 votes2y
I am not concerned about losing 5000 a year in cashflow as I will make it up based on my other acquisitions using the HELOC
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
Any property in the major coastal cities leveraged at 75% ltv would be cash flow negative. Yet those are the cities that are going to make you rich, and pretty quickly.
Remember the higher the cap rate, the higher the cash flow, means the higher the risk. This is a fundamental rule to finance. The low risk markets, with low cap rates are that way because they are high demand and appreciate quickly.
District Invest Group545 Reviews - Member since 2024 · 1k+ posts · 351 votes2y
My property is on a barrier island where it appreciates almost 10 percent for past 10 years..I would think that give or take it would do so next 5 years and I would use it to buy other properties
I think people should read John Schaub books more:)
- Member since 2024 · 1k+ posts · 351 votes2y
So on a 400 k house I would lose 3000 per year in cashflow but would make roughly 35000 per year on appreciation.. so would still be ahead
- Member since 2024 · 1k+ posts · 351 votes2y
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes2y
I don't invest solely on appreciation but I agree with Russell's comments. There are lots of millionaires in the Bay Area who weren't six figure earners and own a few properties who bought back in 2008 or way back in the 1960s and held onto them.
I'm about -$1300 a month on a Bay Area SFH, largely because I'm renting to family members so they're getting a great deal. I have partial ownership of an apartment complex in the Bay Area so there's rent control which limits cash flow but it's still performing well. Both acquired pre-2013. I've also kept an Indianapolis suburban home in a great area with highly ranked schools - my property taxes have gone up significantly but I'm still about $110 CF.
If I were to do it over I would not have bought Class C in 2023 in Indianapolis, would have gone for appreciation in Nevada or Arizona. That cash flow on paper is non-existent in reality and I don't think the path of gentrification is predictable - will it appreciate enough to make up for all my repairs, etc?
- 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I care about total return and have barely a concern about the source of the return but try to minimize the return from cash flow due to the tax consequences. Equity extracted is taxed deferred until sale and can be extended further via a 1031. At death, the property gets a new base value and all gain is gone from a tax perspective. Seems crazy, but that is the current rules.
To answer @Joe Villeneuve question “How long will it take before the accumulated appreciation, outgain the accumulated negative CF?” is day 1. My worst appreciating property has appreciated ~$2700/month over its hold. My best has appreciated ~$10k/month over its hold. Neither of them ever had projected negative cash flow close to these amounts using conservative expense numbers.
Some act like cash flow is guaranteed, but at the Great Recession there was many markets that had large decreases to revenue (lower rent and/or higher vacancy rates). cash flow can decrease.
I recommend everyone start in their local market whether that is a cash flow market or appreciation market. You can succeed in both markets if you make smart decisions and perform the work necessary.
Good luck
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesTwo things:
Quote from @Dan H.:
I care about total return and have barely a concern about the source of the return but try to minimize the return from cash flow due to the tax consequences. Equity extracted is taxed deferred until sale and can be extended further via a 1031. At death, the property gets a new base value and all gain is gone from a tax perspective. Seems crazy, but that is the current rules.
To answer @Joe Villeneuve question “How long will it take before the accumulated appreciation, outgain the accumulated negative CF?” is day 1. My worst appreciating property has appreciated ~$2700/month over its hold. My best has appreciated ~$10k/month over its hold. Neither of them ever had projected negative cash flow close to these amounts using conservative expense numbers.
Some act like cash flow is guaranteed, but at the Great Recession there was many markets that had large decreases to revenue (lower rent and/or higher vacancy rates). cash flow can decrease.
I recommend everyone start in their local market whether that is a cash flow market or appreciation market. You can succeed in both markets if you make smart decisions and perform the work necessary.
Good luck
1 - Rents usually go up, if the property is bought correctly, when there is a recession due to fewer owners and more renters.
2 - Property values go down, in large amounts, when there is that same recession. Since equity is what is lost when property values go down,... - 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Joe Villeneuve:
Two things:Quote from @Dan H.:
I care about total return and have barely a concern about the source of the return but try to minimize the return from cash flow due to the tax consequences. Equity extracted is taxed deferred until sale and can be extended further via a 1031. At death, the property gets a new base value and all gain is gone from a tax perspective. Seems crazy, but that is the current rules.
To answer @Joe Villeneuve question “How long will it take before the accumulated appreciation, outgain the accumulated negative CF?” is day 1. My worst appreciating property has appreciated ~$2700/month over its hold. My best has appreciated ~$10k/month over its hold. Neither of them ever had projected negative cash flow close to these amounts using conservative expense numbers.
Some act like cash flow is guaranteed, but at the Great Recession there was many markets that had large decreases to revenue (lower rent and/or higher vacancy rates). cash flow can decrease.
I recommend everyone start in their local market whether that is a cash flow market or appreciation market. You can succeed in both markets if you make smart decisions and perform the work necessary.
Good luck
1 - Rents usually go up, if the property is bought correctly, when there is a recession due to fewer owners and more renters.
2 - Property values go down, in large amounts, when there is that same recession. Since equity is what is lost when property values go down,...Both of your comments are market specific.
I suspect virtually everyone realizes property values can go down and do go down in the short term (in every market that I am aware of).
I believe many people believe cash flow does not go down. At a minimum their comments seem to imply this. “Appreciation is not guarateed”. Cash flow is also not guaranteed. Detroit, Las Vegas, much of Arizona and Florida had huge revenue declines at the Great Recession. People moved in with family or higher occupancy homes. In the case of Las Vegas and Detroit, many people moved away due to minimal employment opportunities. I am not stating this was the case in all markets, but people who think cash flow is guaranteed need to study their RE history.
Best wishes - 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Account Closed:
Hmmm, I've been through the "real estate always goes up" cycle. It doesn't.Quote from @Golan Corshidi:
One of the most common topics discussed on bigger pockets and other real estate forums is the decision between a property that cash flows and one that has the potential to appreciate.
To take this further, I recently tuned in to the Bigger Pockets podcast and one of the featured guests proudly stated that they are negative cash flow but that's fine because the property is expected to appreciate in 10+ years. I know this is an extreme example but the framework is there.
I don't think making an investment decision based solely on predictions of the future is a wise decision. Some markets may not cash flow that well and I get that but to say that it's okay to be in the red for multiple years because you have underwritten the market and know values will go up sounds crazy to me.
I have only done a few deals to this point so maybe I am missing something but I would love to hear your thoughts on heavily weighing appreciation as the decision to move forward with a deal even when negative cash flows are the most likely short-term situation.
Do you invest solely based on appreciation? If so, why?
Here is the reality, to quote Tyler Durden at Zerohedge ""how many Gen-Xers and Millennials have the means to buy million-dollar bungalows and overpriced portfolios? If buyers are scarce due to entrenched wealth-income inequality, then once Boomers start selling their vast holdings of stocks and millions of overpriced homes, prices will plummet if sellers outnumber qualified and willing buyers."
Does that not at least concern you?
This is not 2006. Perhaps the top of the market is actually here.
Why would boomers have to sell? Most have loans at half of today’s rates. My preferred money market is returning near 2x my lowest rates. S&P over last 10 years has returned over 4x my lowest rates.
>Perhaps the top of the market is actually here.
Perhaps. But there have been people thinking this for at least a half dozen years. At some point they will be right. However, what is the cost of staying out of the market? Note in most markets there is no 12 year period of RE decline in virtually any of our lifetimes. That 12 year decline was a result of the Great Recession (GR) and many markets recovered in less than 12 years. There is no way to know with certainty when the next large decline will occur, but mathematically there are a lot more years of RE appreciation than depreciation.
Having said that my last purchases were Dec 2021 (I purchased $4m of RE that month). The reason I have not purchased is not fear of RE depreciation as much as the rates hurt the return such that my underwriting does not depict the level of return I seek. Note if I had purchased in 2022 in my market, I would have done alright due to the appreciation but in my 2022 underwriting I was depicting 0% near term appreciation (I strive for conservative underwriting).
You have a choice to either pursue RE or not. There are many reasons not to pursue RE, but if you make that choice and are further priced out of the market, it is due to choices you have made.
Good luck.
- Member since 2024 · 14 posts · 6 votes2y
There 4 types of income from real estate, appreciation, cashflow flow, principal pay down and tax write offs. In an ideal perfect world you are cash flowing or near break even starting out and also either buy the property under its actual value or add forced appreciation quickly.
It would be a good goal to base your deals on assuming no appreciation, but that thinking is no longer realistic for this high interest rate market.Assuming you choose good locations for appreciation and don't buy an overvalued property, that should be good income. There are different philosophies to real estate investing and it depends on your finances, if you have less capital, you're going to have to be more creative on deals and need cash flow, if you have access to some capital, you can tolerate cash flow losses. Some people will say leverage, leverage keep growing but it depends on your risk tolerance.
I would keep in mind the global cash flow of your portfolio, because while a few properties not cash flowing is fine, if you have 30 and none are, that would be concerning. As they say, you are sort of rolling the dice, you can keep winning 30 times then lose big once and go broke. Decreasing risk may decrease your gains though.
Ideally, within a few years, you could pull your own and your investors capital out of the deal and take that back and leave the property hopefully at that point cash flowing. You can either take those profits or let the property just pay itself down overtime.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
@Golan Corshidi if your W2 is providing a healthy surplus, you can be a bit more tolerant and "loose" a couple hundred bucks for a year one or two - if you are in a desirable neighborhood.
1.) The absence of vacancy losses alone can easily more than make up for that.
2.) And it might be in better condition and save you a bundle on future capex.
3.) And yes, good neighborhoods tend to appreciate.
4.) Once you have an older portfolio the tax write-offs start to become really attractive
5.) if you buy 4x leveraged and pay down your mortgage 3% per year, you have a 12% ROI just by making your payments, no appreciation necessary.
Real estate investing as a whole is generally cash flow negative. Buying properties and improving them takes money in orders of magnitude more than cash flow. That's why it's called in-venting.
That being said, my bank won't let me buy much under 1.2 DSCR and I think that is healthy. Even here in Milwaukee that often means 30% down in recent years, but we are seeing steady appreciation. And while I don't know what the market will do next year, I am pretty sure that in the long run Milwaukee home prices will creek up towards the national average.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
I am a bit skeptical with these newspaper lists. I can't speak to all of the list, but we have family in Green Bay, Wisconsin and we live 2 hours south. It is a fine city, but how it made the top 24 of all places to retire in the US I am not sure.
Yes, it is considered climate change resilient and won't get too hot in the summer, but then there are the other 6 months. The Wisconsin overall tax burden is middle of the road. Health care is pretty good. It speaks for the humble nature of locals that they are happy. Midwest-friendly is a real thing. But there is also Midwest boring. Not that much to do, pretty flat landscape, too large to be cute and too small to be interesting. 5 hours to a major airport.
If it has to be Wisconsin to retire, I'd rather look at the west side of Milwaukee ("lake country") - it's pretty, you have lakes and at least some hills, 30 min access to a 1.6 million people metro area (Milwaukee) and you are in Chicago in an hour and a half.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
I dont agree with this thought process never have never will.. its all situational..
or as they say in RE location location location.
in markets with slow to historic negligible appreciation sure it does not take a rocket scientist to run the math that if your negative cash flow and the house is not going up its not the greatest investment your value play there is tenant is paying off the majority of the property and your getting some tax bene's if its not bare land.
If we used this thought process IE the only good deals are ones that are positive cash flow day one with max leverage 80% loans then as @Russell Brazil states no one would invest in the majority of the east cost and West coast and well Denver and other select cities.. everyone would be in the Rust belt and mid west or deep south in C class properties.
wealth is created for most investors with appreciation full stop.. because most investors cant buy enough property or doors to make a difference when cash flow is 200.00 a month your not going to retire on that. your going to retire on paid for nicely appreciated property.
I just got my tax bill here in Lake Oswego and my house has gone from 500k in 2014 to 1.5 mil and its just the house I live in.. now granted I built it so probably forced 100k or so equity by owner builder but you get the point.. thats real money I go to sell and 500k is TAX FREE thats how you build wealth for retirement.
- 2yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Quote from @Golan Corshidi:
One of the most common topics discussed on bigger pockets and other real estate forums is the decision between a property that cash flows and one that has the potential to appreciate.
To take this further, I recently tuned in to the Bigger Pockets podcast and one of the featured guests proudly stated that they are negative cash flow but that's fine because the property is expected to appreciate in 10+ years. I know this is an extreme example but the framework is there.
I don't think making an investment decision based solely on predictions of the future is a wise decision. Some markets may not cash flow that well and I get that but to say that it's okay to be in the red for multiple years because you have underwritten the market and know values will go up sounds crazy to me.
I have only done a few deals to this point so maybe I am missing something but I would love to hear your thoughts on heavily weighing appreciation as the decision to move forward with a deal even when negative cash flows are the most likely short-term situation.
Do you invest solely based on appreciation? If so, why?
Great post Golan,
I have always been of the belief that appreciation is more speculative and unpredictable.
Nobody has a crystal ball to predict the future.
Cashflow is more "certain" and based of the numbers as they are today rather than forecasting what might happen in the future.
You take the income vs the expenses, plus including a margin of safety for misc expenses and then you look at the bottom line.
If the numbers make sense, the deal is worth pursuing further.
"The numbers" from a cashflow standpoint will mean different things for different people.
Personally, I won't get out of bed unless I can earn a 15% net cashflow ROI yearly on any deal.
Any appreciation I consider just the cherry on top.
Granted, I wouldn't complain if I had some major appreciation on any rental since the time I started investing in 2011.
Also, you can't really live/survive off the appreciation unless you tap into a HELOC.
You can however always live/survive of the cashflow.
Just my opinion.
Thanks - Lender · United States · Member since 2020 · 1k+ posts · 499 votes2y
I would say no. Some of my highest net worth clients focus mainly on appreciation. It's a little risky, because if you buy a property with barely/no cash flow and rely on appreciation and the market turns around, you now own a property that's generating nothing for a few years until the market rebounds.
I love appreciation. Cashing-out the equity every 5 or 6 years on a refinance is TAX FREE., while cash flow is taxed.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Timothy Hero:
I would say no. Some of my highest net worth clients focus mainly on appreciation. It's a little risky, because if you buy a property with barely/no cash flow and rely on appreciation and the market turns around, you now own a property that's generating nothing for a few years until the market rebounds.
I love appreciation. Cashing-out the equity every 5 or 6 years on a refinance is TAX FREE., while cash flow is taxed.
Tax Differed not free .. but get your point no tax at that moment. - 2yCorey ConklinPro MemberInvestor · Member since 2021 · 129 posts · 209 votes
I think it's important to look at the portfolio as a whole.
Investing off of appreciation can be pretty lucrative and it can be a way to gain a lot of wealth.
Would I put everything I have into a few deals in one area hoping for great appreciation? Absolutely not. I don't think it's a great strategy if you are just getting started.
If you have the financial stability and experience to take on negative cash flow betting on the high appreciation then I think there isn't a problem with this strategy at all.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
is it fair to say (and I am saying this as a compliment to you) that what you are doing is just... investing? and not 'investing for appreciation'? you know your market. you are successful there. that's it.
if a new, undercapitalized investor with $14 came on BP and said - "I am going to invest for appreciation by buying a negative cash flowing property in Austin and hope that it goes up 7% a year" - bad idea! I'd refer them to @Joe Villeneuve. similarly - if they came on BP and said, I have $17 and i live in Maine and I am going to invest in Milwaukee and "hope for $700 a month in cash flow" - bad idea! I'd refer them to @Marcus Auerbach.
what we want are investors who KNOW MARKETS. if you can be successful in Milwaukee - great, invest there. f you can be successful in Hawaii - great, invest there.
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