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.
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- 2yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
@Dan H. UPDATE: rents really never dropped in Detroit after the Great Recession.
Only property values did.
This is pretty much true of the majority of the USA.
Detroit values now pretty much exceed their pre-crash highs and have exceeded it in many Neighborhoods:)
Logical Property Management4.9460 Reviews - 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Drew Sygit:
@Dan H. UPDATE: rents really never dropped in Detroit after the Great Recession.
Only property values did.
This is pretty much true of the majority of the USA.
Detroit values now pretty much exceed their pre-crash highs and have exceeded it in many Neighborhoods:)
its a wild market.. when I first started lending there in 2002 for west coast BRRRR buyers my appraisals would come in at 120 to 150k .. For houses that by 2008 to 2010 went down to 20 to 40k I know I had to liquidate a few and take some pretty big loss's there.. But same thing happened in ATL PHX FLA Vegas etc.. I would be intereted to know what the values were in the mid 80s I suspect they were 100k or so for the same houses. - 2yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
You can change the year. If you bought a house in 2010 for 300,000. In 2024 it is worth $360,000 did you gain value? Not cash.
Disregard did it cash flow, tax deductions. This is purely an appreciation question.
.
Did an analysis on some land we bought in 1993 for $500 per acre. In 2022 it was worth $7,000 per acre with natural appreciation. We did not gain any value. Cash yes. $7,000 in 2022 was worth the same as $500 in 1993 in purchasing power for land in our area.We subdivided and sold for $50,000 per acre with “forced” appreciation.
I don’t think even appreciation in real estate is worth it unless it is forced. Again, cashflow and tax benefits add to the value add discussion.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Henry Clark:
You can change the year. If you bought a house in 2010 for 300,000. In 2024 it is worth $360,000 did you gain value? Not cash.
Disregard did it cash flow, tax deductions. This is purely an appreciation question.
.
Did an analysis on some land we bought in 1993 for $500 per acre. In 2022 it was worth $7,000 per acre with natural appreciation. We did not gain any value. Cash yes. $7,000 in 2022 was worth the same as $500 in 1993 in purchasing power for land in our area.We subdivided and sold for $50,000 per acre with “forced” appreciation.
I don’t think even appreciation in real estate is worth it unless it is forced. Again, cashflow and tax benefits add to the value add discussion.
Its amazing land deals in the path of progress are some of the most lucrative deals one can do .. but very few investors do them or think of them.. As they are so focused on day one cash flow.. But I get it this is a rental property heavily bias site so thats to be expected from this group on BP.. As your finding out with your Timber plays .. there is just so much more to RE than buying a rental. ! - Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes2y
i always thought high appreciation areas like CA must be appreciating at 12-15%+ per year. But the examples of high appreciation I've seen posted come out to 6-8% per year. When you look at the purchase and sale prices the increases look huge, but when you calculate appreciation over the years the property was held they come out to 6-8%.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes2y
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?
If you want to continue to buy properties an issue to keep in mind is your debt to income ratio (and DSCR). At some point you won't be able to get additional financing if your properties have negative cash flow.
- 2yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Quote from @Marcus Auerbach:
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.
Thanks Marcus,
I wish I will live long enough to see the retirement age haha
I'm hoping to officially retire by age 40 and would sure need quite a lot of equity to live off from a refi standpoint just in case I live to see 60+ years hehe - 2yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Quote from @Jay Hinrichs:
Quote from @Henry Clark:
You can change the year. If you bought a house in 2010 for 300,000. In 2024 it is worth $360,000 did you gain value? Not cash.
Disregard did it cash flow, tax deductions. This is purely an appreciation question.
.
Did an analysis on some land we bought in 1993 for $500 per acre. In 2022 it was worth $7,000 per acre with natural appreciation. We did not gain any value. Cash yes. $7,000 in 2022 was worth the same as $500 in 1993 in purchasing power for land in our area.We subdivided and sold for $50,000 per acre with “forced” appreciation.
I don’t think even appreciation in real estate is worth it unless it is forced. Again, cashflow and tax benefits add to the value add discussion.
Its amazing land deals in the path of progress are some of the most lucrative deals one can do .. but very few investors do them or think of them.. As they are so focused on day one cash flow.. But I get it this is a rental property heavily bias site so thats to be expected from this group on BP.. As your finding out with your Timber plays .. there is just so much more to RE than buying a rental. !
Jay,
Have had my eyes peeled on land and learning as much as possible.
Still early days for me in this venture but 100% agree with you.
Love the concept of hoarding land and the question for me is how to cashflow from it?
Farmers maybe?
Wind turbine leases?
Will keep digging at it 🤓 - 2ySamuel DioufBusiness MemberReal Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
Quote from @Joe Villeneuve:
Prime 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
The negative cash flow is still going towards equity in the property.. So as long as you're making decent money, it's like putting $200 into a savings account that will grow your cash at insane amounts, especially because you bought the appreciating property using leverage.
Reafco - Samuel Diouf528 Reviews - 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIt's equity you are buying, just like the DP. It's not gain, it's cost. All you're doing is moving cash that was in your bank account, that was liquid, and could be used for anything (including investing), and moving it to a location where it would cost you to use again.
Quote from @Samuel Diouf:
Quote from @Joe Villeneuve:
Prime 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
The negative cash flow is still going towards equity in the property.. So as long as you're making decent money, it's like putting $200 into a savings account that will grow your cash at insane amounts, especially because you bought the appreciating property using leverage.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Eric James:
i always thought high appreciation areas like CA must be appreciating at 12-15%+ per year. But the examples of high appreciation I've seen posted come out to 6-8% per year. When you look at the purchase and sale prices the increases look huge, but when you calculate appreciation over the years the property was held they come out to 6-8%.
keep in mind the starting point is far higher than most areas.. and appreciation will go in spurts.. My home in Lake O here went from 500k to 1.5 in 10 years just got my tax bill.. so not sure what % that is but its still 1 mil in equity And I suspect it probably peaked to a great degree .. compared to say areas that price points were 80k and they went up 10% a year for 10 years granted they made some upside equity about 100k to 120k but not nearly as much in real dollars. - Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes2y
Not at all.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes2y
It depends on the situation, but I love the appreciation play as long as the property is AT LEAST breaking even!
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes2y
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
If you are up 700k in two years, by far, you should be cash flowing. For the sake of argument lets assume you are up by that much; depending on how much you forked over for value add, wouldnt it be intelligent to cash out now and reallocate those resources? That 2k you are happy to lose will be at least near the 100k mark soon and will most likely be much more. I have a mixture of Class D, C and B. I have never come close, nowhere in the ball park of losing cash flow. Over time, every last one has seen moderate levels of appreciation. Id prefer to make some money along the way and cash out my appreciation as a retied old investor. My goodness, your faith in the wishing will must be strong as hell. That pot of gold you are eye balling for 2060 is only a few natural disasters, recessions, market melt downs, health problems or unexpected emergencies away from expurgation. I do wish you the best; honestly.
Just not the flavor of investing that fits my style!
Quote from @Mark Cruse:
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
If you are up 700k in two years, by far, you should be cash flowing. For the sake of argument lets assume you are up by that much; depending on how much you forked over for value add, wouldnt it be intelligent to cash out now and reallocate those resources? That 2k you are happy to lose will be at least near the 100k mark soon and will most likely be much more. I have a mixture of Class D, C and B. I have never come close, nowhere in the ball park of losing cash flow. Over time, every last one has seen moderate levels of appreciation. Id prefer to make some money along the way and cash out my appreciation as a retied old investor. My goodness, your faith in the wishing will must be strong as hell. That pot of gold you are eye balling for 2060 is only a few natural disasters, recessions, market melt downs, health problems or unexpected emergencies away from expurgation. I do wish you the best; honestly.
Just not the flavor of investing that fits my style!
I perform conservative underwriting but using the 50% formula it is a negative almost $2k. I will say there are units under performing on this property (different story). If I did the calculation using market rent using 50% rule it has very modest positive cash flow (~$500/month).
I spent $160k on the value add which is reflected above in the monthly gain. I expect to be cash neutral in 2 years. So I believe ~$36k more than I have already had. Not sure if your $100k estimate was total (in which case it is probably pretty accurate) or remaining (I will have a lot less than $100k remaining if I do not refi and have potential to be near cash neutral in less than a year if desired). My rents increased just over $1k/month this past year. There is no way it will be significantly over $100k negative cash flow total unless I refinance.
I would have done BRRRR, but my loan rate is less than half of current rate (just a hair above 3%). Typically I try to maintain close to 70% LTV but this property is probably at a little under 50% LTV. I have ran the numbers. if appreciation is good, I will have been better of doing a refi even with the resulting increased negative cash flow. With average appreciation it is a wash. With below average appreciation the lower rate and better (but still negative) cash flow is best action.
I purchased 2 RE at the same time, both at 8% below what appraisal was (the contract was written such that what ever it appraised for my financing I was purchasing at 92% of the appraised value). Both had value adds and had significant market appreciation (near 20% market appreciation on top of the value add and purchase discount). I have made same choice with both to keep my just above 3% loans (to not refinance at this time). As indicated if there is high appreciation, my decision will have been the wrong one but I still win because there was high appreciation. If the appreciation is below 5%, I made the correct decision and will be glad I did not refi at over double my rate. I am comfortable with my choice but I would not question someone who decided to refi and extract some of the equity to be more leveraged (I may have made decision to refi if I had any need for the money). by the way I have not refinanced anything since the rates doubled and my LTV is getting further from my 70% LTV goal.
I made over $20k/month on this purchase. Over $25k/month if I include the tax savings from the accelerated depreciation. This is after accounting for the negative cash flow and cost of the value add. Seems like a fine purchase, but maybe you believe otherwise.
The other purchase I made at the same time has done about 50% on the return (less value add, less market appreciation value, but not cash negative) and about 30% as well on the tax savings from accelerated depreciation. So over $10k/month return using 50% rule, ~$2k/month tax savings from accelerated depreciation. So ~$12k/month over the hold including the tax savings from the accelerated depreciation so far but not an example of negative cash flow (because it is about cash neutral) but still an fine investment.
I cannot find good cash flow properties that can produce these type of returns. in part because most good cash flow properties are in cheaper markets where I cannot achieve same level of return from value add and in general do not have same level of market appreciation.
I have purchased with good timing and poor timing. My worst appreciating property has appreciated $2700/month over its long hold (that had 2 significant down cycles including the Great Recession). This is a modest 3/2, 1120' SFH. I suspect there is no cash flow anywhere on high leverage single unit that can approach this and this is by far my worst. I have 3 that have done better than $10k/month over their hold including the 2 listed above.
I can go back as far as price records go back in my market and the longest period without gain was ~12 years after the Great Recession. So what you refer to as pot of gold has always been there so far for any hold over 12 years (a little deceiving as in inflation adjusted dollars it was a year or so longer). But let’s say it is not a virtual certainty and does not happen. I have already extracted 8 digits from my RE and all loans are non-recourse. If the values fell to $0 tomorrow (will not happen) I still have the 8 digits I have extracted.
Because I have enough cash, I can choose to leave ~$1m of value in these 2 properties at the lower rate rather than refi at the higher rate. As indicated, if I needed the money I would refi and extract ~$700k (at 70% LTV).
The cash flow of a few hundred a door may be needed by some starting out, but in all other cases the concentration should be on total return. After you reach such a point that cash flow is not needed, minimizing cash flow for other gain can produce best after tax return.Good luck
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 success>Living of refi's is risky business IMO and something I would personally never do.
I consider it low risk because 1) most cash out refi are limited to 70% LTV. 2) most loans are non-recourse. You have just reduced your maximum Loss. If there is earth quake and property falls into ocean or anything else that brings value to $0, you can at most lose 30% of property value 3) most investors do not irresponsibly spend the all the extracted value. They typically invest much of it providing a diversified holding. 4) in my case and some others, I have huge reserves. In other words at 70% LTV, I am not close to over leveraged. I come close to having resources to have 0% LTV if desired but due to non-recourse I would not need to cover due to item #2.
Interesting that you would think lower LTV is lower risk option. I have the opposite belief for the reasons listed above.
Note on your market with no appreciation, no rent growth, etc that if the appreciation/rent growth is not matching appreciation, in appreciation adjusted dollars it is declining. With enough time this decline can be significant.
>I also know of many investors in "your market" getting over leveraged and hoping for appreciation, only to loose everything.
In my market this has not occurred since 2008 meaning there has not been a single year of YOY that has not appreciated. Not once in the last 16 years. check out the stats for San Diego.
By the way I believe you can succeed in both markets (high cash flow/low appreciation & low cash flow/high appreciation) but best odds are if you are intimate with the market.
Good luck
- I have crazy debt to income ratio (~$75 owed for each $1 income) in part because I intentionally minimize income. I have yet to not get a loan at market rates.
Quote from @Eric James:
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?
If you want to continue to buy properties an issue to keep in mind is your debt to income ratio (and DSCR). At some point you won't be able to get additional financing if your properties have negative cash flow.
there are a lot of loan products available. I suspect most investors find by the time f/f conventional is unavailable they have other options.
best wishes. - Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes2y
Quote from @Dan H.:
I have crazy debt to income ratio (~$75 owed for each $1 income) in part because I intentionally minimize income. I have yet to not get a loan at market rates.Quote from @Eric James:
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?
If you want to continue to buy properties an issue to keep in mind is your debt to income ratio (and DSCR). At some point you won't be able to get additional financing if your properties have negative cash flow.
there are a lot of loan products available. I suspect most investors find by the time f/f conventional is unavailable they have other options.
best wishes.Ok, okay a few links to them here.
- 2yEngelo RumoraBusiness MemberInvestor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
Quote from @Dan H.:
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 success>Living of refi's is risky business IMO and something I would personally never do.
I consider it low risk because 1) most cash out refi are limited to 70% LTV. 2) most loans are non-recourse. You have just reduced your maximum Loss. If there is earth quake and property falls into ocean or anything else that brings value to $0, you can at most lose 30% of property value 3) most investors do not irresponsibly spend the all the extracted value. They typically invest much of it providing a diversified holding. 4) in my case and some others, I have huge reserves. In other words at 70% LTV, I am not close to over leveraged. I come close to having resources to have 0% LTV if desired but due to non-recourse I would not need to cover due to item #2.
Interesting that you would think lower LTV is lower risk option. I have the opposite belief for the reasons listed above.
Note on your market with no appreciation, no rent growth, etc that if the appreciation/rent growth is not matching appreciation, in appreciation adjusted dollars it is declining. With enough time this decline can be significant.
>I also know of many investors in "your market" getting over leveraged and hoping for appreciation, only to loose everything.
In my market this has not occurred since 2008 meaning there has not been a single year of YOY that has not appreciated. Not once in the last 16 years. check out the stats for San Diego.
By the way I believe you can succeed in both markets (high cash flow/low appreciation & low cash flow/high appreciation) but best odds are if you are intimate with the market.
Good luck
"By the way I believe you can succeed in both markets (high cash flow/low appreciation & low cash flow/high appreciation) but best odds are if you are intimate with the market."
100% agreed and there are many ways to skin a cat (Sorry to the animal activists) haha
Having the intimate market knowledge as you mention and an end goal will keep an investor on the path forward.
Time is a beautiful teacher and will eventually reveal what strategy was best.
Much success - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
Property values are up 40% over the past couple of years in many locations, which means 100+% return on levered real estate from appreciation alone. I imagine the people who don't believe in appreciation have not experienced appreciation or are not comfortable with identifying growing areas. I personally force appreciation by adding value.
- Member since 2024 · 1k+ posts · 351 votes2y
Any market which has a thriving vacation industry and also other diverse booming industry, has world class beaches or great natural parks and is near to many tourist locations should do well :)
- Scottsdale, AZ · Member since 2017 · 21 posts · 18 votes2y
Reading about actual humans in this thread, accepting and justifying negative cash flow as a mechanism to invest in real estate, tells me everything I need to know about the current state of the rental real estate market.
It's almost as if every single podcast full of veteran investors for decades, all of those golden rules of thumb/pearls of wisdom/rules to mitigate risk, are tossed out the window all for the sake of chasing a yield.
I feel like I need to take a shower after reading this nonsense. So many of you are going to get wacked as inventory keeps growing MoM / YoY while the fed keeps their rates higher for longer. God speed.
- Been doing this 3 decades. Apparently I been on BP nearly 9 years. On the cash flow vs appreciation my stance never changed. Even before my first purchase that had negative cash flow I indicated I would have zero issue purchasing a negative cash flow property.
Quote from @Grant Tyler Short:
Reading about actual humans in this thread, accepting and justifying negative cash flow as a mechanism to invest in real estate, tells me everything I need to know about the current state of the rental real estate market.
It's almost as if every single podcast full of veteran investors for decades, all of those golden rules of thumb/pearls of wisdom/rules to mitigate risk, are tossed out the window all for the sake of chasing a yield.
I feel like I need to take a shower after reading this nonsense. So many of you are going to get wacked as inventory keeps growing MoM / YoY while the fed keeps their rates higher for longer. God speed.
2.5 years ago I did exactly that (purchased a property that my underwriting showed to have significant negative cash flow) and it is my highest monthly return at far over $10k a month over my hold period so far. There is a decent chance by a year from now the property will be worth $1m more than I paid for it.
I suspect you and I are at different points in our RE investment journey. There is nothing wrong with that.
however to be closed to appreciation being a viable option to such an extreme that you refer to it as “nonsense” demonstrates a closed minded approach.
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.
best wishes in your journey. - Scottsdale, AZ · Member since 2017 · 21 posts · 18 votes2yBuying negative cash flow properties dependent on a W2 income is playing russian roulette with a large magazine. The magazine size in this analogy depends on 1) the stability of your W2 income industry/company and 2) the number of properties one owns that they have to fund from that W2 into perpetuity. The more properties, exponentially more risk for disaster.
Quote from @Dan H.:
Been doing this 3 decades. Apparently I been on BP nearly 9 years. On the cash flow vs appreciation my stance never changed. Even before my first purchase that had negative cash flow I indicated I would have zero issue purchasing a negative cash flow property.Quote from @Grant Tyler Short:
Reading about actual humans in this thread, accepting and justifying negative cash flow as a mechanism to invest in real estate, tells me everything I need to know about the current state of the rental real estate market.
It's almost as if every single podcast full of veteran investors for decades, all of those golden rules of thumb/pearls of wisdom/rules to mitigate risk, are tossed out the window all for the sake of chasing a yield.
I feel like I need to take a shower after reading this nonsense. So many of you are going to get wacked as inventory keeps growing MoM / YoY while the fed keeps their rates higher for longer. God speed.
2.5 years ago I did exactly that (purchased a property that my underwriting showed to have significant negative cash flow) and it is my highest monthly return at far over $10k a month over my hold period so far. There is a decent chance by a year from now the property will be worth $1m more than I paid for it.
I suspect you and I are at different points in our RE investment journey. There is nothing wrong with that.
however to be closed to appreciation being a viable option to such an extreme that you refer to it as “nonsense” demonstrates a closed minded approach.
I suspect if we polled only users with over 8 digits of RE or over 8 digits of net worth the question of what they would prioritize cash flow or appreciation, the appreciation would win in a landslide. Something for you to ponder especially if you believe my prediction on the results of such a poll.
best wishes in your journey.
I suspect that you likely have not been in a position of losing your W2 income while attempting to support a mortgage. I have. It was stressful, and it was only one property. I can't imagine the stress/anxiety of positioning myself in such a way where I am reliant on a W2 income to buoy n > 1 properties, keeping them afloat month after month despite receiving a W2 income, hoping and praying life circumstances don't force a liquidation, especially in a rapidly changing market where appreciation is not a guarantee as supply continues to pile up and major metro STR markets continue to find equilibrium.
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