Proponents for appreciation strategy?
Rental Property Investor · New York, NY · Member since 2017 · 300 posts · 168 votes
Proponents for appreciation strategy?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes@Rob Beardsley look no further than were you live.
my first house was in Milpitas Ca I paid 79k for second was in Palo Alto I paid 183k. for third house was in Silverado up at Napa ( recent bad fire just missed it) paid 420k for it.. and 2 homes in Portland Oregon one went up 400k in 5 years current house went up 600k in last 4 years ( although I built this one from scratch so 150 to 200k is forced appreciation.
Land I own in Rohnert park CA 4 acres I paid 27k for in 1993 ish on market for 3 million.. Tree farm in Oregon I paid 1.8 million for took 2 million in timber off of and sold for 2.7 million allin 10 years time.. so on and so forth.
there are simply many ways to make money in real estate appreciation being one of the major drivers for wealth if you can't scale sufficiently with cash flow. Or don't care to be a landlord.. but I know many in the landlording business that have gotten both.. most anyone who bought apartments 10 years ago have cash flow and appreciation..
39 Replies
- Turnkey Investment Provider · Kansas City, MO · Member since 2015 · 1k+ posts · 116 votes8y
I've been in real estate for several years and I believe Appreciation is a great play.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Rob Beardsley look no further than were you live.
my first house was in Milpitas Ca I paid 79k for second was in Palo Alto I paid 183k. for third house was in Silverado up at Napa ( recent bad fire just missed it) paid 420k for it.. and 2 homes in Portland Oregon one went up 400k in 5 years current house went up 600k in last 4 years ( although I built this one from scratch so 150 to 200k is forced appreciation.
Land I own in Rohnert park CA 4 acres I paid 27k for in 1993 ish on market for 3 million.. Tree farm in Oregon I paid 1.8 million for took 2 million in timber off of and sold for 2.7 million allin 10 years time.. so on and so forth.
there are simply many ways to make money in real estate appreciation being one of the major drivers for wealth if you can't scale sufficiently with cash flow. Or don't care to be a landlord.. but I know many in the landlording business that have gotten both.. most anyone who bought apartments 10 years ago have cash flow and appreciation..
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Why is it no one doubts that inflation happens yet so many are skeptical when we call the same economic force appreciation?
District Invest Group546 Reviews - Investor · Menifee, CA · Member since 2015 · 534 posts · 216 votes8yHere in California you can have both for sure. ITS ALL ABOUT YOUR PURCHASE PRICE! Get that discount from the start when you purchase and you will have instant cash flow. Market and put in the work to find the good deals and you will have cash flow always and appreciation for the tax free refinance again and again over time.
- Specialist · Denver, CO · Member since 2017 · 60 posts · 137 votes8y
@Account Closed It's not totally apples to apples in your example, to buy the preferred stock you need the $150k in cash, the same property in Memphis can be bought for $30k or less. Your gain may still be minimal from an appreciation perspective, but any returns you do realize are much larger (percentage wise) than that same or greater growth in the stock. Your greater point is still valid, but an argument can definitely be made for both sides.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes8y
Here is a real life example.
Around 2004, I bought a property for approximately $890k in Brooklyn, NY and had very little monthly cash flow.
TODAY, That property is now worth close to $3 Million and Cash Flows around $5k per month.
I'd like to Contrast that with a friend of mine, Steve.
Steve bought approximately the same Value of properties, but for Cash Flow in Bristol, CT.
He has been making $1k Cash Flow for the past 13 years.
The Value of his properties, which was similar to mine when I first bought, bearly move up, probably around $100k more.
His Cash Flow never really grew, mostly because the Property Taxes kept climbing with any increase in rent in his area in Bristol.
The Biggest problem that Steve had was that he lived in NYC.
In 2004, his apt that he rented was renting for $2,000 per month. TODAY, Steve's rent is over $4,600 per month.
If you think about it, Steve's rent moved up by $2,600, which is $1,600 MORE than the $1,000 he was making in Cash Flow from his Bristol, CT properties.
IN OTHER WORDS.... STEVE is actually LOSING cash flow by NOT buying his NYC Apt and instead invested in a Cash Flowing area where there was NO Apprecation.
So what's the lesson here? If you are RENTING in a high appreciating area, that mean your Rent will be moving UP over the years. If you buy in a stable Cash Flow area where the Cash Flow does not meet your rent increase.... YOU ARE LOSING.
I hope the readers of this post understand the risks that are involved by this scenario, which actually happened. To mitigate the risk, if you intend on living in a high appreciating area, you should first consider owning with a 30 year fixed rate Mortgage to lock in your "EQUIVALENT RENT" and prevent yourself from being Priced out of the Market.
Had Steve actually bought his Apt here in NYC in 2004, he would have locked in his monthly payment AND also made about $1 Million or so in Appreciation. BUT it's not all that bad....... at least he made $1k per month for 13 years..... so that's $1k x 12 months x 13 years = $156k in cash flow.... or is that bad in considering he could have saved $1,600 x 12 month x 12 years of rent payments and $1 Million in Appreciation? You decide.
Steve had to eventually leave NYC and rent in another cheaper area.
- Rental Property Investor · New York, NY · Member since 2017 · 300 posts · 168 votes8y
All brilliant responses and @Russell Brazil great quote!!
- Rental Property Investor · New York, NY · Member since 2017 · 300 posts · 168 votes8y
A major takeaway for me here is that completely ignoring appreciation may not kill you but certainly hinder overall returns. On the other hand, buying on the premise of appreciation is speculative and dangerous. How do you all incorporate appreciation in your investment philosophy/thesis and underwriting?
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes8y
Investors might consider that market appreciation is 100% passive and cash flow is 100% work. Someone spends energy for the cash flow part to happen. One can watch the grass grow and still get appreciation.
My personal take is normal rei landlording is a big hassle/liability. If you are unable to experience appreciation you might miss out on best part of REI, passive wealth creation.
Good luck!
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes8y
Originally posted by @Rob Beardsley:
A major takeaway for me here is that completely ignoring appreciation may not kill you but certainly hinder overall returns. On the other hand, buying on the premise of appreciation is speculative and dangerous. How do you all incorporate appreciation in your investment philosophy/thesis and underwriting?
It all is considered high risk. Speculating on cash flow can be very dangerous too. Employer leaves town ( see the abandon properties across the nation) and your cash flow vanishes. Now you are really stuck.
As far as overall speculation, the locations that historically appreciate are already known as are the ones that don't. Really should not require very much speculation on what the future holds longer run. The rates of appreciation or lack of are published to account for any thesis.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes8y
I had a conversation awhile back about this subject. It was comparing two cities. One city was loaded with properties priced the same as 20 years ago and the other city did not have one property priced the same...not a single one (all the dirt had appreciated). Which leads into possible redevelopment.
When the actual differences are measured on those redevelopment stages, these can be 8 figure concerns on the same original investment prices of 20 years ago (400k). This actually happens. Now ask yourself again if you think appreciation matters?
Good luck!
- Rental Property Investor · Warrenton, VA · Member since 2016 · 126 posts · 58 votes8y
Why not incorporate both strategies? Buy properties that cash flow in appreciating markets?
I know it's easier said than done, but it can be done.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8yMatt R. We will see this more and more in L.A as there is a push for more density. Someone bought a small building decades ago and it just brought the in some side income and then they start building new luxury condos or townhomes on the same block your land value goes way up. I used to live in Hollywood and my block was all older 50s or 60s apartment buildings but now there are several brand new buildings where those old buildings used to be . Best and highest use . Only really happens where land is scarce. I just saw one company is building 3 large buildings ( on different sites ) in the Warner center area . The valley is going to become higher density for sure. Prices have gotten super crazy on the Westside so many are priced out even if they have good paying jobs .
- Member since 2016 · 13k+ posts · 12k+ votes8y
"Rents have also gone way up as well"
I understand the high level of appreciation however it is extremely rare (practically unheard of) that rents keep pace in those markets and as such cash flow decreases it does not increase as a result of appreciation.
In the example value at $890K rent to break even would be about 8K per month. With appreciation making the value 3M rent would need to be 27K per month. Pretty sure we all know that is not the case.
The opportunity value alone on a property with high appreciation is costing most investors far more than any property could produce in rent. When a property has high appreciation and you do not pull out the cash you are losing not making money from your investment.
Truth be told speculative investors do not understand the value of money. All they ever see is the dollar signs created by appreciation they seldom ever actually see any money.
Appreciation is only a word until the money is accessed which most will never do.
- Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes8yYes I know what you mean. I know some with equity are refinancing to get cash out to put towards properties with a higher cap but I know a bunch of landlords aren't . In L.A at least there are a bunch of mom and pop landlords many of whom inherited a small building or two and they are paid off and they are just comfortable living off the rents that come in . Rents are high enough to support their lifestyle and turnover is very low for most of them if they keep rents a bit undermarket. I don't think many of them even do the calculation of what their return might be if they had to buy the property at today's market value.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes8y
Originally posted by @Joseph M.:
Matt R. We will see this more and more in L.A as there is a push for more density. Someone bought a small building decades ago and it just brought the in some side income and then they start building new luxury condos or townhomes on the same block your land value goes way up.
I used to live in Hollywood and my block was all older 50s or 60s apartment buildings but now there are several brand new buildings where those old buildings used to be .
Best and highest use .
Only really happens where land is scarce.
I just saw one company is building 3 large buildings ( on different sites ) in the Warner center area . The valley is going to become higher density for sure.
Prices have gotten super crazy on the Westside so many are priced out even if they have good paying jobs .Yeah, city of LA is favoring this now. Some of 50s 60s stuff is prime. I know of a recent 10 unit 50s style that traded hands. Dude has over 1000 units and said he knows he over paid for current as is cash flow value, not sure of sale price around 4 million is likely, although it grosses 20k mo. The thing is, at a redevelopment stage (condos) it is worth north of 20 mil? and that is just at today's across the street values.
I went to open house yesterday, condo across from Wholefoods. Forget about it, in the 5 mins I was there, I could tell there were 3 buyers going offer on it.
I read a few days back, LA Times I think. LA was 350,000 units short of what would be considered normal inventory. That is an upside down inventory scenario today that is virtually politically impossible to resolve in our lifetimes. So these revelopment future options are very real in LA.
- Member since 2016 · 13k+ posts · 12k+ votes8y
"they are just comfortable living off the rents"
Makes no scenes at all. They have no concept of the value of money and would make greater returns with no hassle if they sold the properties and put all the cash in a investment fund.
With all that equity they are losing more potential income every year than they could ever come close to making from rent. Weird.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes8y
Originally posted by @Thomas S.:
"they are just comfortable living off the rents"
Makes no scenes at all. They have no concept of the value of money and would make greater returns with no hassle if they sold the properties and put all the cash in a investment fund.
With all that equity they are losing more potential income every year than they could ever come close to making from rent. Weird.
Perhaps and some of the mom pop smaller LL types are not super sophisticated sure. In the example of the 10 unit above, she paid 900k in 2000 and sold for my guess is 4 mil ish in 2017. She was making over 2% in LA yesterday and in a location that was always in high demand, easy to rent and easy to raise rents. She never updated, original 50s kitchens, bathrooms and even floors ( hardwoods) seriously not one red cent to update in 17 years, even with all that she did just fine. This is not all that uncommon in LALA land. Now others might say she was a brilliant RE investor still. The next guy we shall see and I am sure he knows exactly what he is doing when compared.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes8y
@Rob Beardsley For what it's worth, I think you can make the argument that appreciation could be a useful tool if you don't need cash this moment. If I buy a property in some horrid Cleveland suburb for $50K and I make a great cash-on-cash return then I get taxed on that. If I'm 45 years old and in the prime of my earning power I might not need that extra income today nor do I want to pay a high marginal tax rate on it. If I were to use that same money as leverage in a "break-even" deal given rents today then I get to have someone else paydown the mortgage and hopefully have appreciation work magic over the next 20 years. If it really is an appreciating market then rents will rise along with value. When I hit 65 and want to retire I have something that has a.) cash-flow, b.) the opportunity to refinance and pull cash out, and/or c.) something that I can 1031 into something more "cash-flow friendly" for my retirement years when my marginal tax burden won't be as high.
That said, I think of the real challenges for a lot of investors is that they would have to be able to make it through a "bad time" if they bought a property with no, zero, or negative cash-flow. Both fiscally and emotionally that can be tough to stomach. One of the benefits to (at least) moderate cash-flow is that even if rents drop 20% you can still break-even. Those zero-cash-flow properties that are/were purchased for appreciation will start to slowly (or quickly) bleed cash.
- Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes8y
Originally posted by @Thomas S.:
"Rents have also gone way up as well"
I understand the high level of appreciation however it is extremely rare (practically unheard of) that rents keep pace in those markets and as such cash flow decreases it does not increase as a result of appreciation.
In the example value at $890K rent to break even would be about 8K per month. With appreciation making the value 3M rent would need to be 27K per month. Pretty sure we all know that is not the case.
The opportunity value alone on a property with high appreciation is costing most investors far more than any property could produce in rent. When a property has high appreciation and you do not pull out the cash you are losing not making money from your investment.
Truth be told speculative investors do not understand the value of money. All they ever see is the dollar signs created by appreciation they seldom ever actually see any money.
Appreciation is only a word until the money is accessed which most will never do.
You really think most people in appreciating markets never sell or refinance their properties and just die with them?
You also make the mistake that others do in low value markets and assume expenses inflate at the same rate as rents. A refrigerator costs the same for an apartment in a low rent city as it does in a high rent city. You can't generalize using simple formulas.
You have to be able to reasonably underwrite for commercial real estate even small multifamily. There is a lot more to consider for an investment than the expected initial cash flow and it does a disservice to potential investors to blindly push them into the perceived highest initial cash flow investment as the sole factor to consider.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Cash flow properties can be low hassle and appreciation plays can be reasonable to predict. There are lots of ways to make a profit in real estate investing and anyone who says their way is the only way is just describing their limitations, not yours.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes8y
Thomas: I would really have appreciated that you had tagged me into this discussion so I can clarify what you DO NOT UNDERSTAND.
I'm not sure where you are coming up with your numbers, "In the example value at $890K rent to break even would be about 8K per month." Let me CLARIFY so that you don't pull numbers out of a Hat.
I have put together a spreadsheet which will explain the numbers for you:
In 2004, the property was purchased for $890k, down payment of $240k, and Mortgage of $650k. The payment was $3,948.
Each apt was rented around $1,500 with Storage around $900 for the apts, total Revenue was around $5,400 monthly and expenses around $1,283. The NOI for the year was around $49,400. Minus the Debt Service, it cash flowed around $169 per month.
The Cap Rate at Purchase was around 5.55%
Back in 2004, this location was not really a good location. There were several areas that were known drug locations including a corner literally 100 yards away that even had a drive by shooting!
TODAY, the neighborhood, Clinton Hill, Brooklyn, is MUCH more popular and demand is much higher than it was in 2004. It is MUCH more safer and while there is still some drug activities, it's been cleaned up and there are GREAT options for Cafes and Restaurants that you would feel comfortable and save which are upscale.
Rents increased by more than double, but some of the expenses had significant increases.
Today's NOI of $9,550 per month or $114,600 per year gives a cash flow of around $5,600 per month.
The neighborhood Cap Rate also moved down dramatically as you would expect as the neighborhood gentrified, from 5.55% to around 4%.
If we Capitalize the Value using the NOI and Cap Rate, we get around $2.865 Million, which is approximately similar to comparable properties.
I have put together a very light spreadsheet so you can understand the numbers and highlighted the Cash Flow and Cap Rate so you can see it.
I tagged both Joseph, Andrew and Matt because both had interest from the previous discussions.
"Truth be told speculative investors do not understand the value of money. All they ever see is the dollar signs created by appreciation they seldom ever actually see any money." <---- honestly... you believe what you are saying here?
I've been doing this for 20 years. I've had students that did fantastic, one that made $2 Million in appreciation on a similar property like this one.
In Canada, from what I understand, Toronto did Fantastic with Appreciation too!
If in your mind the money isn't real, then think of it as that. Doesn't bother me. It lowers the competition I already have from very savvy Investors.
My Wealth Manager would also beg to differ and when you reach a certain Net Worth (notice, Net Worth and not CASH FLOW), doors that were previously closed are now open to you.
I have been using Equity Loans for all future investments. So basically the 1st Investment rolled into the 2nd Investment, and so on and so on. The ROI is phenomenal.
It seems to me you have never done 10 year pro-forma business plans which helps you put in the assumptions such as 6% Appreciation Rate, 3% rental Increases, 5% Expense increases, etc. And have it calculate your return based upon ALL the future cash flow. BTW, these are VERY conservative numbers. The Appreciation Rates I have been getting is more like 11% to 12%. But I only use Conservative rates.
Now, you can say I have been getting lucky. But luck has two elements, 1) Preparedness and 2) Opportunity. There is a famous quote, "Luck is when Preparedness meets Opportunity." If you have the Opportunity but are not Prepared, you cannot get lucky. If you are Prepared, but DO NOT RECOGNIZE the Opportunity, you cannot get lucky. That's the problem here..... Recognizing the Opportunity in order to increase the probability of getting "Lucky."
I have done this 7 times in 20 years, each property has returned similarly like the one modeled above. My partners and I are in contract for a $1.890 Million 3 Family in Prospect Heights, Brooklyn, that we analyzed will be $3 Million within 10 years CONSERVATIVELY. It will most likely be $3 Million in 5 years and $4 Million or more in 10 Years. This will be the 8th in our portfolio.... most of the money was borrowed from Equity from the other real estate purchases.
What I find to be very speculative is the assumptions many investors have that cash flow always remains the same. I know for a fact that during the Financial Crisis, some personal friends of friends had invested in properties that were cash flowing, but that cash flow stopped very suddenly. That doesn't happen in very low vacancy areas like NYC to the extent that it does else where.
At the time of the financial crisis, I owned 4 multi-family properties. While the value may have dipped, the rentals were all occupied and life continued even though Wall Street was Ground Zero of the financial crisis and within 5 miles! How many Investors could say that they were virtually unaffected by 1) The Stock Market Crash of 2001 where Nasdaq lost 66% of it's value that year, 2) The 9/11 Terrorist Attack in NYC where my Properties are located 3) the Great Recession. And I have come out WAY ahead of most Investors.
Really, you cannot know a good Investor until that Investor can survive a down turn. I've survived 3 MAJOR ones without a scratch and in fact, increased my Assets Under Management to approximately $16 Million and soon to $18 Million.
Matt: is absolutely correct. A refrigerator costs the same for an apt in either a low or high rent city. Toilets, Appliances, etc. Not much difference.
Matt is also correct that expected initial cash flow and making your decision based on that is a HUGE disservice to investors. But again, that's fine for me because it keeps competition away even when I try to open their minds to take into account all the future cash flows for the next 10 years using intellectual guesses that are conservative. Even the Mortgage comes into play. when you take out a 30 year fixed rate $1 Million mortgage that disappears in 30 years, you make $1 Million / 30 years = $33,333 per year in the Mortgage reduction. Imagine owning 10 properties like that and you increase your Equity by $333k per YEAR.
Andrew is also correct. Having a high weight towards Appreciation versus higher Cash Flows means you can shelter high marginal tax rates. After a while, when your investment income goes up so that the taxes are significant, building wealth needs to shift. If you have enough Cash Flow to live the way you want, why do you want to make more in taxable income rather than increase in Equity which is not taxed until you sell... IF YOU EVER SELL.
I also want to mention that other than 1031 Exchanges and capital gains exclusions, when heirs inherit property (not sure which properties per se), they can also get a stepped up basis, eliminating the huge tax that would have been due had the basis not been stepped up. However, I'm not an Accountant and this won't come into play for me as I don't have children.
I just want the reader of this post to understand that if you really find something I said to be unbelievable, TAG ME and I'll explain it. But don't just post and NOT tag me, that's a bit inconsiderate.
I do want to thank everyone, regardless of their opinion, because this discourse enriches all of us.
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