Is investing based on appreciation a recipe for disaster?
Rental Property Investor · Cleveland, OH · Member since 2018 · 100 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.
District Invest Group545 Reviews
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Quote from @Nicholas L.:
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.
>what we want are investors who KNOW MARKETS.
I very much agree.
My opinion is in both cases I would recommend them start in their home market or a market that they know like their home market and educate themselves on options. owner occupancy provides opportunities that are unavailable by long distance RE investing.In my high cost market, a new investor can use a NACA loan or 95% LTV conventional financing on up to a 4 unit owner occupied property. They can use alternative rent models (STR, MTR, rent by room, etc) to increase cash flow.
In their local market new investors can find mentors that are successful in that market. These successful RE investors may know sophisticated localized value adds.
Use a NACA loan for high LTV, low interest (relative to most other options) to purchase a duplex with value add opportunities. Use the value add to obtain sweat equity. Use alternate rent models to maximize cash flow.
Note most value adds add more value in high cost areas. I recently added a half bath in area (a very high cost area where properties are significantly over $1k/ft) that stats show a half bath adds ~$50k value. Of course looking at data leaves out some details for example it seems plausible that units with the extra half bathroom may have slightly better finishes than the property without the half bathroom.
Regardless if they invest in a high cost market or a low cost market, I recommend they concentrate on total return and place less focus on the source of the return (as long as they are not over leveraged and in danger of default).
I like to minimize what I pay in taxes and therefore actively manage to reduce my taxes. This includes minimizing cash flow as well as other strategies. This is part of achieving highest total return.
good luck- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Investing in your own market, just because you know it, is also a bad idea if that knowledge tells you it's not a good market to invest in. A good market has both CF and appreciation history. If it lacks BOTH, don't invest there.
- 2yJake AndronicoBusiness MemberRealtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
Great topic and thread.
To me this discussion has a ton to do with how well capitalized folks are.
If you're in a position where you never HAVE to sell, banking on appreciation makes a lot more sense.
The problem with super high cap rates is newer investors don't realize the headache factor/risks associated and think they simply print money.
There are pros and cons to it all, but at the end of the day it varies for every investor.
Starting in your local market and house hacking to me is the best way to get started to try to reduce risk as much as possible, be flexible with the asset use case, have a roof over your head, and see if this business is for you or not.
"When the tide goes out, you'll know who was really skinny dipping."
- 2yNick HarringtonBusiness MemberReal Estate Agent · Milwaukee, WI · Member since 2019 · 31 posts · 28 votes
Would love to add my 2-cents here.
The correct answer is it completely depends on your situation, your goals, and what you are looking to accomplish.
If your goal is to retire in the next 5 years strictly off of rental property income, then banking on appreciation is clearly not the case.
If you have a steady paying job as-is, and your goal of real estate investing is to build your net worth long term, than I'd say it is going to be much more important to find a market that has appreciation.
More often than not, real estate gains come from the actual property appreciating in value over time. Think about the stories we hear from people buying homes in the 80's that held onto it for 30 years and are now retired from their homes value increasing. More often than not, these homes purchased were not even for investment properties, but just a place for them to live.
Should you bank entirely on appreciation? No, you shouldn't, and the cash flow has to make sense for your personal situation and goals, but saying "you are not banking on appreciation" is in my opinion saying that "you are not banking on the stock market going up over the next 10 years", when the majority of peoples sole retirement is in a 401(k) with the whole idea of the market going up. Why would it be different for real estate?
In my opinion, there is a direct correlation to real estate investing between your cash flow and your risk: the higher the risk, the higher the cash flow. The less the risk, the less the cash flow.
Risk is most often times associated with the area / neighborhood you buy and covers things like tenants ability to pay rent, ability to find quality tenants, ability to find good property management and contractors, likelihood of tenants keeping your property in good shape, etc.
There is an inverse correlation between risk and appreciation: the less the risk, the more the appreciation. The more the risk, the less the appreciation.
So to boil it down- good location = low risk, low cash flow, high appreciation. Bad location = high risk, high cash flow, high appreciation.
I purchased my first rental property in 2020 for $225k. It cash flows fine, but the gains I have seen from appreciation are more than I could ever see in cash flow from the property.
Nick Harrington | Compass532 Reviews - 2yAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
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
Always start in your backyard or where you know best. Too many people chasing cash flows in markets they don't understand
Alan Asriants - New Century Real Estate 591 Reviews - Lender · Austin, TX · Member since 2021 · 448 posts · 441 votes2y
It really depends on your financial situation. If you are starting out, I think it makes more sense to chase cash flow to build a solid foundation; then, you can start to add appreciation plays to your portfolio as long as you have a reliable stream of cash flow already coming in.
- Rental Property Investor · Member since 2019 · 411 posts · 148 votes2y
@Golan Corshidi The only way I will invest in an asset only for appreciation is if I'm the one forcing the appreciation.
This is a recipe for disaster. Cashflow negatively $200-300/ mo if you are lucky and can deal with that is fine, but what about other expenses Including maintenance, capex, unit turns. This is now all out of pocket instead of being paid for by the tenants.
Not for me. Plus if you aren't forcing appreciation, appreciation is generally slow.
Buy assets that are making some money today, doesn't have to be a ton; when and if the I/R drops, then refi and likely cashflow significantly better as you will have a better payment with higher rents.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
Quote from @Joe Villeneuve:
Investing in your own market, just because you know it, is also a bad idea if that knowledge tells you it's not a good market to invest in. A good market has both CF and appreciation history. If it lacks BOTH, don't invest there.
So your contention that low cap rate markets shouldnt be invested in? Only high cap rate markets?
District Invest Group545 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Golan Corshidi
I do not invest solely based on appreciation I invest based on area which if it’s a good area then yes it should have appreciation
Two assets I have at first had little to no cash flow in them and ten years later the cash flow is there as well as the appreciation because not only were values increasing but so were rents in that area - and this was pre covid
This answer also is based on your time frame or horizon - I invest long term and find again investing in good areas is a great way to build wealth
I would rather have 1 $500,000 asset in northern Virginia than 10 50,000 assets in Gary Indiana
On paper will Gary have a lot more cash flow - yes - but in ten years who has a higher net worth - it will be that one property in NOVA
7e investments53 Reviews - Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes2y
Its just a matter of opinion if done correctly. The problem is, just like every other facet of real estate, people dont know what the hell they are doing. I never ever plan on going after negative cash flow. I know how to structure deals so I have some (even if low) while I am confident of vast appreciation. The lowest I could go may be break even, provided it will be short lived and I believe the appreciation will go through the roof. However, many are open to way beyond this this. I think its dumb to be hundreds of dollars under water for a drawn out, sustained periods. What they dont understand is with maintenance, vacancy, holding costs, repairs, turn over renovations and a thousand other things, many will never recover what they put in. Some of its emotional and they feel real cool and successful being in Class AB communities with decent tenants. I just dont come in to lose. However, the very experienced and grounded investors can figure out cap rates and multiple other carefully assessed characteristics to come out ahead. For instance, Iḿ sure in Congress Heights DC, you could get a property that is in distress; add value and accurately break even or lose a small amount for a short lived, precise degree of time. They know how to get deals, renovate, push equity, screen tenants and manage. Within a 5 year time frame they know how to be ahead of the curve by well over 100k and more. However, the conversations I often hear are silly and hard for me to comprehend. People saying they are cool losing 1k a month multiple years, honestly believing this is intelligent (break even in 2039). All in all itś a preference and opinion but wont be mine.
- Member since 2024 · 1k+ posts · 351 votes2y
Need to buy Class A assets in cities where there is demand and population growth and also diverse industries to drive job growth..or buy in a barrier island where there is no more land which can built upon
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes2y
Check out Columbus, OH it’s the land of milk 🥛 and honey 🍯 and cashflow 💰 and appreciation 📈.
- Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 656 votes2y
Quote from @Mark Cruse:
Its just a matter of opinion if done correctly. The problem is, just like every other facet of real estate, people dont know what the hell they are doing. I never ever plan on going after negative cash flow. I know how to structure deals so I have some (even if low) while I am confident of vast appreciation. The lowest I could go may be break even, provided it will be short lived and I believe the appreciation will go through the roof. However, many are open to way beyond this this. I think its dumb to be hundreds of dollars under water for a drawn out, sustained periods. What they dont understand is with maintenance, vacancy, holding costs, repairs, turn over renovations and a thousand other things, many will never recover what they put in. Some of its emotional and they feel real cool and successful being in Class AB communities with decent tenants. I just dont come in to lose. However, the very experienced and grounded investors can figure out cap rates and multiple other carefully assessed characteristics to come out ahead. For instance, Iḿ sure in Congress Heights DC, you could get a property that is in distress; add value and accurately break even or lose a small amount for a short lived, precise degree of time. They know how to get deals, renovate, push equity, screen tenants and manage. Within a 5 year time frame they know how to be ahead of the curve by well over 100k and more. However, the conversations I often hear are silly and hard for me to comprehend. People saying they are cool losing 1k a month multiple years, honestly believing this is intelligent (break even in 2039). All in all itś a preference and opinion but wont be mine.
^^^^This, and I’ll add you need to have a thesis for why an area will not only appreciate but appreciate enough to cover both losses and opportunity cost (I.E. stocks and bonds return money as well) I think too many people get caught fighting the last battle both in counting on a level of appreciation that was a historic anomaly & betting on markets that have already had their huge run, the most likely winners of the last market are likely to be quite different than the winners of this bull market.
Quote from @Mark Cruse:
Its just a matter of opinion if done correctly. The problem is, just like every other facet of real estate, people dont know what the hell they are doing. I never ever plan on going after negative cash flow. I know how to structure deals so I have some (even if low) while I am confident of vast appreciation. The lowest I could go may be break even, provided it will be short lived and I believe the appreciation will go through the roof. However, many are open to way beyond this this. I think its dumb to be hundreds of dollars under water for a drawn out, sustained periods. What they dont understand is with maintenance, vacancy, holding costs, repairs, turn over renovations and a thousand other things, many will never recover what they put in. Some of its emotional and they feel real cool and successful being in Class AB communities with decent tenants. I just dont come in to lose. However, the very experienced and grounded investors can figure out cap rates and multiple other carefully assessed characteristics to come out ahead. For instance, Iḿ sure in Congress Heights DC, you could get a property that is in distress; add value and accurately break even or lose a small amount for a short lived, precise degree of time. They know how to get deals, renovate, push equity, screen tenants and manage. Within a 5 year time frame they know how to be ahead of the curve by well over 100k and more. However, the conversations I often hear are silly and hard for me to comprehend. People saying they are cool losing 1k a month multiple years, honestly believing this is intelligent (break even in 2039). All in all itś a preference and opinion but wont be mine.
I have a property that is about ~$2k/month negative using 50% rule (which is fairly accurate on this property).
However between discount at purchase, value add, and appreciation is up ~$700k in 2.5 years. You think I have any concern about the negative $2k/month? I do not. I use the loss on this property against cash flow on other properties. I also used accelerated depreciation on this property to the tune of $605k, saving a couple hundred thousand in taxes. $2k/month negative on this property does not concern me. I do believe it will not have positive cash flow any time soon but I expect the appreciation over the long term to more than make up for the negative cash flow. Here is the math on the increase in value at this point in time ~($700k - $120k cost of value add)/ 30 months owned is $19k/month. Add >$200k in tax savings from the accelerated depreciation is $200k/30 months is another $6.6k/month if distributed across the current hold period.
I think I have done alright on this purchase despite being negative $2k/month in cash flow and not expecting positive cash flow for at least another 2 years.
Total return is my measure to determine if a purchase is a good investment. Cash flow is one part of that total return. It is also the only one that gets taxed annually which impacts its return.
Good luck
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
I always invest for appreciation.
But I never invest in something that I believe will negatively cash flow.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesAs you know, there's more to investing than Cap Rate. Deals, markets, are good or bad based on math. Math is more than the right side of the equal sign. The best math is found on the left side where the REI places themselves where their involvement is positive numbers. What I mean is this. Deals are made up of two things, the cost to the REI (their cash), and how someone or something else pays for the rest (the terms).
Quote from @Russell Brazil:
Quote from @Joe Villeneuve:
Investing in your own market, just because you know it, is also a bad idea if that knowledge tells you it's not a good market to invest in. A good market has both CF and appreciation history. If it lacks BOTH, don't invest there.
So your contention that low cap rate markets shouldnt be invested in? Only high cap rate markets?
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Dan H.:
Quote from @Mark Cruse:
Its just a matter of opinion if done correctly. The problem is, just like every other facet of real estate, people dont know what the hell they are doing. I never ever plan on going after negative cash flow. I know how to structure deals so I have some (even if low) while I am confident of vast appreciation. The lowest I could go may be break even, provided it will be short lived and I believe the appreciation will go through the roof. However, many are open to way beyond this this. I think its dumb to be hundreds of dollars under water for a drawn out, sustained periods. What they dont understand is with maintenance, vacancy, holding costs, repairs, turn over renovations and a thousand other things, many will never recover what they put in. Some of its emotional and they feel real cool and successful being in Class AB communities with decent tenants. I just dont come in to lose. However, the very experienced and grounded investors can figure out cap rates and multiple other carefully assessed characteristics to come out ahead. For instance, Iḿ sure in Congress Heights DC, you could get a property that is in distress; add value and accurately break even or lose a small amount for a short lived, precise degree of time. They know how to get deals, renovate, push equity, screen tenants and manage. Within a 5 year time frame they know how to be ahead of the curve by well over 100k and more. However, the conversations I often hear are silly and hard for me to comprehend. People saying they are cool losing 1k a month multiple years, honestly believing this is intelligent (break even in 2039). All in all itś a preference and opinion but wont be mine.
I have a property that is about ~$2k/month negative using 50% rule (which is fairly accurate on this property).
However between discount at purchase, value add, and appreciation is up ~$700k in 2.5 years. You think I have any concern about the negative $2k/month? I do not. I use the loss on this property against cash flow on other properties. I also used accelerated depreciation on this property to the tune of $605k, saving a couple hundred thousand in taxes. $2k/month negative on this property does not concern me. I do believe it will not have positive cash flow any time soon but I expect the appreciation over the long term to more than make up for the negative cash flow. Here is the math on the increase in value at this point in time ~($700k - $120k cost of value add)/ 30 months owned is $19k/month. Add >$200k in tax savings from the accelerated depreciation is $200k/30 months is another $6.6k/month if distributed across the current hold period.
I think I have done alright on this purchase despite being negative $2k/month in cash flow and not expecting positive cash flow for at least another 2 years.
Total return is my measure to determine if a purchase is a good investment. Cash flow is one part of that total return. It is also the only one that gets taxed annually which impacts its return.
Good luck
most of my best deals dont cash flow a dime.. never have never will but deductive reasoning will see some nice appreciation over time.. example for me Rohnert Park CA. bought 3.5 acres in 95 was not build able ( sonoma county would not perc) but the road leading to it just had a brand new interchange built and commercial project anchored by HOme depot. Paid 27,500.00 for it cash and let it sit.. mow the grass every few years pay the taxs 350.00 a year.. in 2020 sold for 2.2 million. So yes there is more ways to make a buck at real estate than worrying about making 100 a month or something .. I do a lot of land deals and they never cash flow .. the work involved is done at the court house and planning commission and figuring out the path of progress.. I get it that this is a land lord site and most folks would not even consider land as an investment But just pointing out there are other things to do in RE than rentals and worrying about cash flow and competing against buyers that are the majority of the investors because they are all taught the same thing CASH flow.
Nothing wrong with rentals and cash flow of course.. Just sayin.. There are other ways to make a buck in this industry. And dont get me started on Timber LOL.. They dont call them Timber Barrons for no reason.. - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes2y
Get your 'appreciation ' up front by purchasing below market value.
Then value add and/ or repurpose strategically to highest and best use for additional equity capture.
For example- median SFR here is high 400k. Long DOM nice houses after price drops of 6%+ are attractive, especially if they have full height walk-out 'basements' you can plex. Buy $475k, $35k conversion, $10k driveway widen for turn around, ARV =$650.
Don't buy and hope. Get it up front.
- Specialist · Charlotte, NC · Member since 2016 · 111 posts · 95 votes2y
@John MasonHi John… my little area of the planet, Charlotte, NC is also “highly tilted” for appreciation!
My #1 reason I buy for appreciation?
I call it LUMP SUM POSITIVE CASH FLOW!!
I can get big chunks of cash ($40,000, $20,000, $80,000 whatever,repeatedly every couple of years!!! ) in my hand quickly ✅✅✅✅WITH NO TAXABLE EVENTS!! HE loans & HELOCS❤️.
(Not so in the stock market, or FLIPPING HOMES! BIGTIME tax hits, owwww)
Now there are even EQUITY BUYING/sharing CO’s out there— UNLOCK, Hometap etc. That’s a big chunk of tax free cash with ZERO monthly payments!!
(Remember there’s no free lunch… they get repaid or refi’d in 10 years or the term you agree on.)
I’ve always invested in LOCATION LOCATION and APPRECIATION!!
I only buy ‘newer’ properties…
2000 & newer. Maybe back to 1995..
Older homes are money pits. One new roof is $12,000+ yikes. HVAC about the same. Those are hits & negatives I can’t deal with!
As long as I have a great tenant and a livable negative ~ $200/mo for me, I smile daily.
I bought a condo in 2018 $200,000
I’ve put $140,000 cash BACK in my pocket since then in varying home equity lines.
That jewel is still appreciating, and I’m older now… so I’m doing an EQUITY SHARE
.. I’ll post and let everyone see how that works out : o
Since 1980, Charlotte has been wonderfully dependable, predictable and never boring!!
- Investor · Miami · Member since 2020 · 70 posts · 34 votes2y
Anyone who got into the RE game after 2010 really hasn't been in the business long enough to experience a down cycle. RE has been an easy game for the last 15 years....
I started in 1990 and never purchased a property solely on appreciation...
If I cant make +/- 10% cash on cash there is no reason to risk $$$..
Values could be stagnant for several years ... and rents are leveling off ..
- Property Manager · Orlando, FL · Member since 2023 · 107 posts · 64 votes2y
I wouldn't say investing solely in appreciation is inherently good / bad, but to the people saying you can't rely on appreciation... yes you can, if your plan is long term. Housing always increases long-term. Even in 2008.... if you rode out 5 years of awful, you were positive year 6, solid in year 10, and way positive year 15. I think the key is to not overleverage or rely on too heavily on the appreciation. Market is very important, but I think the 3% appreciation on a $300,000 house is more valuable than the annual cash flow if your strategy is long-term.
- This is my attitude as well. I would consider something which negative cash slightly negate, that is cash flow after conservatively accounting for expenses is negative with but under the principal paydown in month one, but it would require the ability to do forced appreciation.
Quote from @Scott Trench:
I always invest for appreciation.
But I never invest in something that I believe will negatively cash flow.
When I am making comparisons against other investments I assume 3% appreciation (which about matches inflation). The town I live in had no appreciation for about 15 years then 10-15% yoy for the past 5. I suspect we might settle back into the no appreciation again, but we’ll see. Quote from @Engelo Rumora:
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.
You can however always live/survive of the cashflow.
Just my opinion.
Thanks>Also, you can't really live/survive off the appreciation unless you tap into a HELOC.
In my market refi is the primary means of extraction due to fixed rate. HELOC are best for short term due to variable rates. Seeing the extraction is typically meant for long term, refi makes more sense.I have never had a loan as long as 10 years because the appreciation in my market has always dictated extraction to maintain a leveraged hold. In addition, I know no active RE investor who has had a loan in my market over 10 years.
>"The numbers" from a cashflow standpoint will mean different things for different people.
I bet the people of Detroit prior to the grear recession thought the same thing Last I looked their residential rents still had not recovered from the Great Recession.
In my market there has never been a time span of 12 years without increase and the 12 years was after the Great Recession.
My belief is the reliability of each depends on the market. If you have cash flow in a market where employment is concentrated in a few industries (such as automotive, entertainment, tourism, etc) then the cash flow is at greater risk that more robust economies. Similar if your appreciation market is based on a single trait (such as tourism) then the appreciation is at greater risk. If the appreciation is due to great climate, no room for further development, robust economy, etc) then the long term appreciation is more likely.
Best wishes
- 2yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Quote from @Dan H.:
Quote from @Engelo Rumora:
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.
You can however always live/survive of the cashflow.
Just my opinion.
Thanks>Also, you can't really live/survive off the appreciation unless you tap into a HELOC.
In my market refi is the primary means of extraction due to fixed rate. HELOC are best for short term due to variable rates. Seeing the extraction is typically meant for long term, refi makes more sense.I have never had a loan as long as 10 years because the appreciation in my market has always dictated extraction to maintain a leveraged hold. In addition, I know no active RE investor who has had a loan in my market over 10 years.
>"The numbers" from a cashflow standpoint will mean different things for different people.
I bet the people of Detroit prior to the grear recession thought the same thing Last I looked their residential rents still had not recovered from the Great Recession.
In my market there has never been a time span of 12 years without increase and the 12 years was after the Great Recession.
My belief is the reliability of each depends on the market. If you have cash flow in a market where employment is concentrated in a few industries (such as automotive, entertainment, tourism, etc) then the cash flow is at greater risk that more robust economies. Similar if your appreciation market is based on a single trait (such as tourism) then the appreciation is at greater risk. If the appreciation is due to great climate, no room for further development, robust economy, etc) then the long term appreciation is more likely.
Best wishes
Thanks Dan,
Living of refi's is risky business IMO and something I would personally never do.
I also know of many investors in "your market" getting over leveraged and hoping for appreciation, only to loose everything.
And others that own and manage in Detroit for example that make a fortune.
Yep, they bang on doors in the heart of D class area's and collect rents in cash.
No appreciation, no rent increases and a strict cashflow play.
Seems to work well for them.
Each to their own I guess.
Much success - Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
Quote from @Engelo Rumora:
Quote from @Dan H.:
Quote from @Engelo Rumora:
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.
You can however always live/survive of the cashflow.
Just my opinion.
Thanks>Also, you can't really live/survive off the appreciation unless you tap into a HELOC.
In my market refi is the primary means of extraction due to fixed rate. HELOC are best for short term due to variable rates. Seeing the extraction is typically meant for long term, refi makes more sense.I have never had a loan as long as 10 years because the appreciation in my market has always dictated extraction to maintain a leveraged hold. In addition, I know no active RE investor who has had a loan in my market over 10 years.
>"The numbers" from a cashflow standpoint will mean different things for different people.
I bet the people of Detroit prior to the grear recession thought the same thing Last I looked their residential rents still had not recovered from the Great Recession.
In my market there has never been a time span of 12 years without increase and the 12 years was after the Great Recession.
My belief is the reliability of each depends on the market. If you have cash flow in a market where employment is concentrated in a few industries (such as automotive, entertainment, tourism, etc) then the cash flow is at greater risk that more robust economies. Similar if your appreciation market is based on a single trait (such as tourism) then the appreciation is at greater risk. If the appreciation is due to great climate, no room for further development, robust economy, etc) then the long term appreciation is more likely.
Best wishes
Thanks Dan,
Living of refi's is risky business IMO and something I would personally never do.
I also know of many investors in "your market" getting over leveraged and hoping for appreciation, only to loose everything.
And others that own and manage in Detroit for example that make a fortune.
Yep, they bang on doors in the heart of D class area's and collect rents in cash.
No appreciation, no rent increases and a strict cashflow play.
Seems to work well for them.
Each to their own I guess.
Much successNever say never. There is a scenario where I can see living off refi's: late retirement. But until then I agree with you, that's not a growth strategy.
I am a firm believer to grow your portfolio first wide, before you grow it deep. And to always reinvest 100% of the cash flow in either buying more assets or making improvements to you existing assets ("flip it to myself") for higher rents and asset value.
Of course that only works well if your assets are in at least decent neighborhoods. Investing in class D areas may feel like instant (cash flow) gratification, but will not get you very far. You can divide any city in 4 quarters by value A, B, C and D. The median price for my market Milwaukee is $225,000 (which BTW has doubled in the last 9 years), so anything below is C and anything below half the median (112k) is D.
I pulled numbers yesterday on every neighborhood for my next YouTube video and we have seen the highest % of median sales price increase YTD (the closest thing we have to measure appreciation) and the best neighborhoods are seeing the highest % - even though their median sales price is already the highest.
You can map that out by simply putting a hypothetical portfolio in the BP rental calculator and see what happens after 10 years to a cash flow portfolio or an appreciation portfolio. IMO there is a happy medium, but it's geared towards appreciation.
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