Real Estate Broker · Mililani, HI · Member since 2016 · 217 posts · 253 votes
This seems to be a widely held mantra here. If you buy in a high appreciation market, you're not investing, you are speculating. That's not something I have ever heard here in Hawaii. Probably because it's not true! Hahahaha. If you know anything about Hawaii, you know to buy as much real estate as you responsibly can. This has been true since the late 1800s. But what does history know? I've been investing since 2002! ;)
A closer look at Hawaii. In 1950 the median price of a single family home was $12k. The median price is now $760k. So in 67 years Honolulu has averaged just over 6% appreciation per year. I would image areas like Los Angeles and San Francisco would show similar data.
During the recent recession, most areas in Honolulu dropped around 15%. Cumulative! These seem to be pretty solid figures. In 67 years annual average appreciation of 6%, and only a 15% cumulative drop during the worst financial crisis of our time. Is 67 years not a large enough data set to have confidence replace speculation?
If 67 years of sales history can't be relied upon, then neither can rent history. If calculating future appreciation is speculative, then so would calculating future rents, or any rents for that matter. That's ridiculous.
In other words, just because we've seen something happen for 67 years, doesn't mean it will happen again? Wow! Then why even invest? I mean speculate. :)
(This is not about appreciation vs. cash flow. Both are great. This is about using data to make educated investments and to help dispel poor advice.)
I certainly didn't expect there to be much posting in this thread.
The majority of BP Investors that NEED cash flow because they can't afford to invest for Appreciation bias their minds to the stable and higher return of Appreciating Markets.
I recently posted about one of my properties that Returned 160% per year ROI for 17 years to demonstrate that if you used your intellect and take into account Future Value, implying calculating Appreciation Rates and future economics, you can take advantage of it and make spectacular results.
Why the prices of these assets are too high for the average Investor alone, Partnering becomes the skill needed to Invest in those markets.
Instead of having a good conversation about it, postings about taking Appreciation into Account (or as I like to say, taking Future Value calculations into Account), which implies knowing your future economics, is non-existent.
INSTEAD, most of the posts will boil down to a calculation on Cash Flow NOW, which is the 1st Year Cash Flow. And it stops there. No thought about the Future.
Funny, when I used to teach about Real Estate in NYC and talk about why you need to take into account the future economics, I emphasized it by using the animal kingdom.
If a Squirrel knows that he needs to gather nuts before the winter, implying that he is preparing for the future, why don't most of us Investors look to calculate the amount of nuts we need for our future winters?
Anyway, I don't expect this thread to grow at all! Only 5% of the people seem to get rich and 95% will remain on the other side.
I have seen the "Appreciation vs. Cashflow" threads pop up on this site since before the crash in '08. I can tell you that the tone of the threads during a down market cycle is a lot different than it is when you are in the late innings of a strong run-up. Everyone looks smart when their investments have doubled in value in a short amount of time, but some really smart people also got wiped out during the last crash that saw asset values crater in what are being described as appreciating markets.
It's the same thing with investing in businesses (i.e. stocks). Obviously everyone wants to be in on hyper-growth tech companies like the next Google, but I sure wouldn't put my entire nest egg in a highly volatile sector/asset class where buying at the wrong time could crush me. It also also makes sense to buy the boring, blue chip assets as part of your portfolio that spin off a steady dividend (rent), even though they don't have large upside. It insulates from downside risk.
So, I don't disagree at all with investing for appreciation, I disagree with the approach of investing only for appreciation. Keep some steady Eddie assets as part of your portfolio as well as some dry powder to go along with the properties that are in appreciation-driven markets.
Yes, some people who bet on appreciation loss their shirt in 2008. However, those people did not have the correct bankroll for that type of investment.
Basing your option on the market from your view from Hawaii or San Francisco tends to be as reasonable extrapolating an opinion based on your experience in Detroit. Your suffering from your own confirmation bias. It may end up being correct, or not, but it's definitely suspect.
I agree that the original poster is making some of the same mistakes as he is criticizing. If someone buys a negative cash flow property and bets on appreciation it is not reckless.
I apologize, I'm not sure I understand. I can't find where the original post discussed negative cash flow?
Your post is below. Your argument is that a low cash flow house is better than a high cash flow house because the low cash flow house will have more appreciation. Based on this logic, a negative cash flow house would be a better investment than a low cash flow house. However, you state below that you agree with someone that negative cash flow is reckless. I don't think it makes any sense. However, this irrational thinking could be explained by humans tendency to be loss averse.
"Agreed. Investing in a high appreciation market with negative cash flow is reckless. Which I think @Llewelyn had a good point on; partner up. Find a way to invest and not go negative each month. There are ways to do it."
Thanks Adam. Unfortunately, I still can't seem to find where my original argument compares any type of cash flow situations, or implies that one cash flow is better or worse than another, or even mentions cash flow at all. But I don't want to take up too much of our time and get lost in the bottomless pit of online back-and-forth.
I wanted to thank everyone for participating in this discussion. There has been a helpful array of perspectives branching out into various fringes of the topic. Lots to learn here, thanks to your willingness to take the time to participate. Aloha.
@Llewelyn A. Thank you so much! Your explanations cover all possible scenarios which is great for newbies. I will need to run my numbers as I was thinking of taking a cash out refinance on this paid off property to pay down the principal on another investment property, which I bought at much higher $385K last year, for 20% down, 30 yr loan rented at $2200 a month.
@Llewelyn A. Thank you so much! Your explanations cover all possible scenarios which is great for newbies. I will need to run my numbers as I was thinking of taking a cash out refinance on this paid off property to pay down the principal on another investment property, which I bought at much higher $385K last year, for 20% down, 30 yr loan rented at $2200 a month.
Your rent to cost ratio 0.57%. You likely require a favorable rate for this to not be cash flow negative. Did you run the cash flow numbers including PITI, cap expense estimate, maintenance estimate and vacancy estimate?
This purchase likely is relying on appreciation (rent and property) to provide a good return.
I am not saying this is a bad investment but hope you ran the numbers and are aware of its cash flow. I purchased a property in 2014 that was cash neutral. I knew it had forced apppreciation opportunity via rehab and I expected it to have both short term rent appreciation and short term property appreciation. It has performed better than my projections.
In my market today I still have confidence of short-term rent appreciation but have no confidence of short-term property appreciation. Fortunately, similar to the OP, the long term appreciation in my market is significantly above inflation going back more than 50 years. Therefore I am very confident of long term property appreciation in my market.
Hopefully you ran all the numbers and properly calculated the appreciation opportunities.
@Nate R. Circumstances for a "job replacement" does not value and play well for regular earning individuals, you need to make sufficient money but have less time to manage a property in order for appreciation investment to work. If you keep siphoning and couldn't maintain the upkeep, then you are better off doing a regular $100/door income that has no to little appreciation. It is like playing stock market, you either go for skyrocket/angel company or government bonds.
Basing your option on the market from your view from Hawaii or San Francisco tends to be as reasonable extrapolating an opinion based on your experience in Detroit. Your suffering from your own confirmation bias. It may end up being correct, or not, but it's definitely suspect.
I agree that the original poster is making some of the same mistakes as he is criticizing. If someone buys a negative cash flow property and bets on appreciation it is not reckless.
I apologize, I'm not sure I understand. I can't find where the original post discussed negative cash flow?
Your post is below. Your argument is that a low cash flow house is better than a high cash flow house because the low cash flow house will have more appreciation. Based on this logic, a negative cash flow house would be a better investment than a low cash flow house. However, you state below that you agree with someone that negative cash flow is reckless. I don't think it makes any sense. However, this irrational thinking could be explained by humans tendency to be loss averse.
"Agreed. Investing in a high appreciation market with negative cash flow is reckless. Which I think @Llewelyn had a good point on; partner up. Find a way to invest and not go negative each month. There are ways to do it."
Thanks Adam. Unfortunately, I still can't seem to find where my original argument compares any type of cash flow situations, or implies that one cash flow is better or worse than another, or even mentions cash flow at all. But I don't want to take up too much of our time and get lost in the bottomless pit of online back-and-forth.
I wanted to thank everyone for participating in this discussion. There has been a helpful array of perspectives branching out into various fringes of the topic. Lots to learn here, thanks to your willingness to take the time to participate. Aloha.
This was the quote I was referring to
"Agreed. Investing in a high appreciation market with negative cash flow is reckless. Which I think @Llewelyn had a good point on; partner up. Find a way to invest and not go negative each month. There are ways to do it."
@Dan H. Thanks so much for your input. I was not aware of any of the calculations at the time I bought it, since it was a newer property for the area for the price in the high 3's and was already rented out , I was going by two rules, one that the rent is taking care of the mortgage and second the supply/demand rule that if I needed to sell it at any given time, I will be able to get my money out and re-invest. Also, my spouse is not a big fan of rehabing bec of time crunch. The value has gone up to $436K (Zestimate) since last year and its well within what these SF homes are selling for. I feel so much more confident and educated after joining BP. I hope I will make smarter investment decisions going forward.
@Dan H. Thanks so much for your input. I was not aware of any of the calculations at the time I bought it, since it was a newer property for the area for the price in the high 3's and was already rented out , I was going by two rules, one that the rent is taking care of the mortgage and second the supply/demand rule that if I needed to sell it at any given time, I will be able to get my money out and re-invest. Also, my spouse is not a big fan of rehabing bec of time crunch. The value has gone up to $436K (Zestimate) since last year and its well within what these SF homes are selling for. I feel so much more confident and educated after joining BP. I hope I will make smarter investment decisions going forward.
Your profit is an example of what the OP was indicating but he was indicating long term but for it to be true long term it has to be true in many short terms (certainly not all). Basically in a year you may have been slightly cash negative but your market appreciation has been ~$50K. At 20% down your initial investment was likely ~$85K (including closing costs) and you made ~$50K market appreciation since last year. In addition, you have had equity pay down that, with the current low rates, is significant. That is a very good ROI even if you were losing a few hundred a month with negative cash flow (I am not saying you were negative cash flow as I do not have many of the numbers but you were at risk of being negative cash flow). You did great!
In addition you have learned a lot. On the next purchase you will know more and be more accurately able to project cash flow. You will know how to deal with tenants. You will likely have some trusted contractors for various repairs. You will likely have a better understanding of leverage. This will help your next purchase to also be successful.
@Llewelyn A. I really appreciate your input! I’ve read most of your forum posts and find them to be excellent. I am working towards replicating your achievements.
Above, you state that proper economic analysis of an area/market includes analyzing industries that provide jobs in the market, the migration of people into the market, and things like checking with city planning for approved projects. What else would else you would recommend to be able to predict rent/property appreciation within a market?
What analysis would you recommend to narrow down a market even more to a zip code or neighborhood level? With the goal of acquiring properties in A neighborhoods that will attract the best tenants and have both rent growth and property appreciation. Basically, is there anything else you’d recommend to be comfortable investing in a property where perhaps you are cash flow negative initially but you have very high confidence that within 3-5 years you’ll be cash flow positive each month as well as see the property value grow significantly?
I really need to have 3 major projects within my target area that is about to start or has started already.
As an example, I bought in the Clinton Hill/Fort Greene Area starting in the year 2003 in Brooklyn.
There were 3 major projects that were being developed very close. 1) The Barclay's Arena 2) the rebuilding of the World Trade Centers and 3) Steiner Movie Productions in the Navy Yard.
All are multi-Billion Dollar projects. BUT, because I don't know if they any would fail to be built, I could not depend on any one of them. However, because there were 3, if only one had been built, there is no doubt there would be really great appreciation.
As it turned out, all 3 of them were built or is in some part of almost finished.
The Clinton Hill/Fort Greene Brooklyn area skyrocketed and those 3 projects definitely had a positive impact on all of North Brooklyn resultant appreciationi.
Real Example:
2003 in Clinton Hill - bought for $890k it is now worth close to $3 Million
2004 in Clinton Hill - bought for $590k (plus $275k reno) now worth $2.4 Million
2008 in Clinton Hill - bought for $1.2M (plus $500k reno) now worth $2.8 Million
This is all INSPITE of the 2007/8 financial crisis.
But again, this is NYC. If these projects were in Detroit, you would not have seen this kind of appreciation. The Big 3 Automotive Manufactures were too much of a barrier to economic growth to allow for future apprecation like above.
Now there are other things happening which are increasing economic activities that are local to Brooklyn. For instance, there is the closing of a major train line called the "L" line. It's a "Bigly" popular line. It's predicted to close for about 1.5 years. But knowing Government estimates on Construction, it is most likely to be 3 years.
The pain that Williamsburg, a very popular mecca for Gentrifiers, will suffer, will cause renters and property owners who are distraught and frustrated to move out to other nearby areas along a different train line. So I have been buying along those other train lines and will reap the rewards along the way.
The effects are already happening even though the "L" line closure is still about a year away.
Hopefully all of this make a lot of sense. Those who believe that it is impossible to predict the future should look at Squirrels. They seem to know that if they don't put their nuts away for the Winter that they may not survive!
But you can also see there is a lot of things that are local to your specific area as well as the economics that are involved.
On a more Global scale, Events that will impact NYC is the Climate Crisis. Puerto Rico had been devastated. They are also a bankrupt Commonwealth. Our Government is resisting helping.
NYC has a huge Puerto Rican population. If, and believe it will happen, Puerto Ricans feel that it is unsafe and that they won't be supported by the Government, it is likely there will be a population migration from Puerto Rico, where there are currently 3.4 Million people. Some % of them will move to NYC. It will cause an increase demand, probably starting with Washington Heights, Manhattan which is a Puerto Rican enclave. BUT, it will cause a wave of demand all across the NYC.
Anyway, I'm sure the readers of this post have read enough! But it's really important to understand what affects the future of your Cash Flows and Values!
It makes a lot of sense to look at areas that have major projects. Off the top of my head I know here in UT Adobe is supposedly planning to build another huge commercial building with a bunch of jobs coming too. UT’s population is expected to double over the next 30 years and most of that will happen in the county where I live as well as neighboring counties. I’m going to start researching other projects in the pipeline.
As far as Puerto Rico goes, I think there’s already been a pretty large exodus of people moving off the island even before the Hurricane. Good luck and thanks again!!
@Dan H. land in the path of progress also is negative cash flow as IN NO Cash flow.. but properly position home runs.
a few of mine.
4 acres Rohnert Park CA.... paid 27k for it in 93 cash.. just sat there.. but there was a freeway interchange leading to it and Home depot shopping center one bloCK OVER.. when I bought it it was ag land.. and un build-able ( would not perc) well city moved out we are now in the city zoned mixed use resi.. and Graton casino is right across the street.. currently on the market for 3 million.. if I don't sell it I will build it out..
720 acres Timber but the front 120 was zoned for 10 acre lots.. and timber was too young to harvest at the time.
paid 1.8 cash no cash flow.. 3 years later sold off the 10S for 2.2 million so recouped.. held remaining timber land did 4 harvests over the years for about 100k net each.. then sold the remaining tree farm to Stimpson for 2.2 million.. Never cash flowed a day in its life LOL at least monthly.
44 acres Washington county Oregon... option 4.4 million put up 100k so far.. looks like Toll Brothers is going to come in and give us a big check for this one.. probably 2million profit.. 2 year hold.. on 100k no cash flow.
110 acres Washington county Oregon.. optioned it for 5.5 mil in 2009 ( freaking crazy I had no business doing this in the downturn).. put up 250k non refundable option.. paid 125k a year payments for all these years.. So NO CASH flow just money going out.. working on master plan.. preliminary valuations 60 million plus.. ( I have partners.) but I control 42 % of it.. So no cash flow big bucks put into it.. but big pay day ...
So more than one way to make money in this business. now could I have bought an apartment with the money I put up for this 110 acres you bet.. I could have bought a 2 or 3 million dollar building made 100 k net a year instead of spending it .. but never have a potential 30 mil upside.. so yes speculation and gambling thats what we do.. but we also use our noggin to buy the right properties.. not just some rental house and hope for the best.
@Nate R. Circumstances for a "job replacement" does not value and play well for regular earning individuals, you need to make sufficient money but have less time to manage a property in order for appreciation investment to work. If you keep siphoning and couldn't maintain the upkeep, then you are better off doing a regular $100/door income that has no to little appreciation. It is like playing stock market, you either go for skyrocket/angel company or government bonds.
Or something in-between. I like the dividend growth stocks -- or in RE cash-flow + appreciation.
@Dan H. land in the path of progress also is negative cash flow as IN NO Cash flow.. but properly position home runs.
a few of mine.
4 acres Rohnert Park CA.... paid 27k for it in 93 cash.. just sat there.. but there was a freeway interchange leading to it and Home depot shopping center one bloCK OVER.. when I bought it it was ag land.. and un build-able ( would not perc) well city moved out we are now in the city zoned mixed use resi.. and Graton casino is right across the street.. currently on the market for 3 million.. if I don't sell it I will build it out..
720 acres Timber but the front 120 was zoned for 10 acre lots.. and timber was too young to harvest at the time.
paid 1.8 cash no cash flow.. 3 years later sold off the 10S for 2.2 million so recouped.. held remaining timber land did 4 harvests over the years for about 100k net each.. then sold the remaining tree farm to Stimpson for 2.2 million.. Never cash flowed a day in its life LOL at least monthly.
44 acres Washington county Oregon... option 4.4 million put up 100k so far.. looks like Toll Brothers is going to come in and give us a big check for this one.. probably 2million profit.. 2 year hold.. on 100k no cash flow.
110 acres Washington county Oregon.. optioned it for 5.5 mil in 2009 ( freaking crazy I had no business doing this in the downturn).. put up 250k non refundable option.. paid 125k a year payments for all these years.. So NO CASH flow just money going out.. working on master plan.. preliminary valuations 60 million plus.. ( I have partners.) but I control 42 % of it.. So no cash flow big bucks put into it.. but big pay day ...
So more than one way to make money in this business. now could I have bought an apartment with the money I put up for this 110 acres you bet.. I could have bought a 2 or 3 million dollar building made 100 k net a year instead of spending it .. but never have a potential 30 mil upside.. so yes speculation and gambling thats what we do.. but we also use our noggin to buy the right properties.. not just some rental house and hope for the best.
I did a land purchase once (6 acres with a nice view). It did not work out that well for me. In fact it is my worst performing RE purchase. I did not lose money on it but the return probably barely exceeded inflation. I considered keeping it forever but the sale was to make it open space so while I made in effect no profit the land is now open space forever (good cause?).
I know some people who have purchased land for less than they got paid, after the purchase, for the timber rights to part of the land. The person who sold the RE obviously did not know how to get cash flow from it but my acquaintance did.
I definitely can see land being a good appreciation play but it is not an area were I feel I have an advantage and my one attempt was not exciting (exciting could be a big gain (things done right, luck, etc.) or a big loss (lessons learned), mine has no story: bought it, held it a long time (~25 years), sold it for a profit that when taking inflation into account was very small)).
I suspect you had some idea that the land examples above had a decent probability to increase in value. What gave you this belief? How hard it is to find such opportunities? You have been at this a long time and seem very good at it. Does it take a lot of the knowledge you have acquired over the years to identify such opportunities? does it take a lot of time to identify the opportunities?
@Dan H. jobs and city growth path of progress.. not to hard to follow those whats hard is actually buying the property knowing your going to feed it or just sit on it.. But done right this is where is see the biggest profits in real estate made.. the one I am buying in Washington county for 4.4 that family owned it and farmed it for years probably paid less than 50k for it.. Same with the one I optioned at 5.5 million owned for years.. and hopefully my grand kids will be saying grand pa was smart he bought this stuff years ago and now we are going to get fat trust accounts.. thanks grandpa. LOL.. but of course I don't need rental income I make money in other areas of real estate that are more fun to me than landlording.
