Appreciation vs. cash flow

29 Replies

Has anyone been successful buying a hip condo right downtown in an up and coming city at the price point of around $150-200k even though it is cash flow negative? Specifically, I am asking people who purchased for the sole intent of renting it out. Not people who purchased it as their primary residence and then rented it out once they moved away. I know that appreciation is a gamble, but if a city's economy is diversified and there is a finite amount of land in the prime location that is downtown/waterfront then chances are it should appreciate, right? I mean I am amazed at how expensive some condos are going for in places like Indianapolis and Boise for example compared to the prices just a few miles away from the city center. 

If you want to play appreciation with negative cash flow why not just buy in the Bay Area? I wouldnt do appreciation plays anywhere in the midwest. Maybe Seattle, Portland etc if you want a bit cheaper than Bay Area

Oh no. Let the great cashflow vs appreciation battle begin...

My opinion is to define your goals first. For me it was getting cashflow so I could leave my job as an engineer. So it was cashflow so I invested in no appreciation investments with cashflow.

I don't like condo's where I live, the condo fees are and can get pretty crazy. It's almost impossible to find a condo where after the mortgage and fees you can positively cash flow. If that's different for you then great. But if you're buying a condo and the rent doesn't cover mortgage and fees, you're HOPING that when you sell that you can sell the condo for greater than the orginal price you paid + mortgage interest + condo fees....  I just don't see it

I don't invest for "appreciation" ... If my money is in there has to be an immediate return.

Standard market ETF will generate 7% return. So if I'm in the ROI has to be greater than 7% or it's not worth it for the work I'm putting in it.

Account Closed, yes, the people who have had that success are the ones currently selling to negative cash flow investors (competing with owner-occupiers) - before the music stops.

Will you be the last one scrambling for a chair, if/when that happens? Good luck...

@Account Closed
I’ve noticed that too . Condos in Downtown Detroit ,Cleveland and Cincinnati ( over the Rhine ) aren’t cheap . I’ve seen many around $400k and up and then not too far away like you said places will be much cheaper . So it’s a lot different than the Bay Area or SoCal where the “cheap” areas start at like $500k for a shack and it goes up from there .
Median home price in SF $1.6 million now I recently read .

The thing is it seems these new trendy condos in Midwest cities start pretty high since they are new construction .. but I could be wrong. Some people are willing to pay a big premium for new construction.

Seems like it could work if you could rent out on Airbnb and have it managed remotely possibly.
Do you have an examples of some you are looking at ? I am curious .

Originally posted by @Joseph M. :

Cathryn Stauffer
I’ve noticed that too . Condos in Downtown Detroit ,Cleveland and Cincinnati ( over the Rhine ) aren’t cheap . I’ve seen many around $400k and up and then not too far away like you said places will be much cheaper . So it’s a lot different than the Bay Area or SoCal where the “cheap” areas start at like $500k for a shack and it goes up from there .
Median home price in SF $1.6 million now I recently read .

The thing is it seems these new trendy condos in Midwest cities start pretty high since they are new construction .. but I could be wrong. Some people are willing to pay a big premium for new construction.

Seems like it could work if you could rent out on Airbnb and have it managed remotely possibly.
Do you have an examples of some you are looking at ? I am curious .

in older mid west towns the condos are downtown walk to work and all the good resturants.. much of the D and F class is also urban core and will surround the down town areas or be pockets.. so yes you can have downtown hip and 1 mile away the HOOD.. just look at any Morris invest stuff he sold in INdy..  

Predictable appreciation is not a gamble or speculation. If you are unable to predict your future profit (IRR) within a certain degree of confidence, that's when it becomes speculative. If you invest in what you know well, both value or cash flow plays can be profitable strategies (regardless of what one-size-fits-all investors will tell you on BP).

Unless it’s a condo in a hot spot of a hot spot like NYC, SF, London etc, going CF negative might be a tough call. While in theory a downtown location should appreciate but maybe not. The local economy may underperform or if it does well then there may end up being extra supply in the market that keeps a lid on prices. We are actually seeing some of this in SF where rents are being capped by continued condo supply and appreciation has slowed down vis a vis SFH.

I had a condo in a gentryfying neighborhood of DC that was right around break even. I made about $70k on it. 

You might want to also look at rent growth.  Many times where property values are rising, the rent is also rising

Originally posted by Account Closed:

Has anyone been successful buying a hip condo right downtown in an up and coming city at the price point of around $150-200k even though it is cash flow negative? Specifically, I am asking people who purchased for the sole intent of renting it out. Not people who purchased it as their primary residence and then rented it out once they moved away. I know that appreciation is a gamble, but if a city's economy is diversified and there is a finite amount of land in the prime location that is downtown/waterfront then chances are it should appreciate, right? I mean I am amazed at how expensive some condos are going for in places like Indianapolis and Boise for example compared to the prices just a few miles away from the city center. 

We have all witnessed the major appreciation in the Bay Area, but that doesn't mean the same thing will happen in Indianapolis or Boise. I am not saying the property values won't increase, but not at the scale you witnessed in the Bay Area. Buy for cash flow and appreciation is just cherry on top at the end.

Originally posted by @Mike Dymski :

Predictable appreciation is not a gamble or speculation. If you are unable to predict your future profit (IRR) within a certain degree of confidence, that's when it becomes speculative. If you invest in what you know well, both value or cash flow plays can be profitable strategies (regardless of what one-size-fits-all investors will tell you on BP).

I cant even mention our IRR on certain deals folks would not believe it .. :)

Originally posted by @Lane Kawaoka :

Oh no. Let the great cashflow vs appreciation battle begin...

My opinion is to define your goals first. For me it was getting cashflow so I could leave my job as an engineer. So it was cashflow so I invested in no appreciation investments with cashflow.

 I have to agree here. If you don't define your goals up front, you're flailing in the wind either way. 

@Mike Dymski

@Jay Hinrichs

Account Closed

Mike, Jay, like both of you, I buy based on Internal Rate of Return (IRR) Analysis, not on calculations that only tell you what the current year return gives you.

I met a few BP members recently and showed them how large the Returns are and it's quite shocking. Those investing in Cash Flow ONLY calculations versus the overall return such as IRR don't realize how much money they are leaving on the table.

I don't blame them because it's just so easy to do those other simple calculations such as CoCR and to think that's the only thing you really need to know. 

The problem is that you don't know what you don't know until you learn something sophisticated and then you realize that the stuff you learned before just wasn't good enough to achieve MASSIVE returns.

I think the best kept secret is these more sophisticated calculations such as IRR.

The problem is even if I let the secret out of the bag, there will probably be 90% of Investors that will say it's too difficult to understand. And I agree! It really is difficult because it requires a mental and business shift of paradigm.

But like everything, if you put in quality work, you can get quality rewards.

Originally posted by @Mike Dymski :

Predictable appreciation is not a gamble or speculation. If you are unable to predict your future profit (IRR) within a certain degree of confidence, that's when it becomes speculative. If you invest in what you know well, both value or cash flow plays can be profitable strategies (regardless of what one-size-fits-all investors will tell you on BP).

But this is part of the problem with the majority of the pro-appreciation crowd. Many don't understand how to analyze market trends and economies. They simply see the arrow point up on a chart, and expect it to continue in that direction in order to justify a bad investment lacking cash-flow. IE simply searching out the data that justifies their decision/conclusion. Then again, you see the same thing on the cash-flow side, with folks ignoring long-term expenses in order to flex the numbers in their favor.

To expect that a condo purchased at a point in time in a prime area of a city like NYC or SF or London will likely be selling for a higher price in 10 years may not be speculation after all. History will be on your side, as long as you are wealthy enough not to care about cash flow or the sharp declines in value that might happen (only to recover) during the time period you hold your asset. The other end of the spectrum is buying cash flow assets in smaller towns in B, C, D areas for “consistent” cash flow incomes. Who is to say that those incomes will be consistent. After all during the recession the highest rates of unemployment were at the lower income and education levels. So the definition of speculation can go many different directions. The trick in the end is about buying well and buying lower vs comps. Money is always made when you buy and not when you sell.

Account Closed In my opinion, going for condos is risk itself alone before starting to talking about buying condos just for appreciation. There are thousands of people burnt in 07 with condos. 

If you like appreciation with negative cash flow, look into some hip area like Austin.

Originally posted by @Matthew Olszak :

But this is part of the problem with the majority of the pro-appreciation crowd. Many don't understand how to analyze market trends and economies. They simply see the arrow point up on a chart, and expect it to continue in that direction in order to justify a bad investment lacking cash-flow. IE simply searching out the data that justifies their decision/conclusion. Then again, you see the same thing on the cash-flow side, with folks ignoring long-term expenses in order to flex the numbers in their favor.

Well said.  Most of the value investors I know and that are on BP are not on the bandwagon just buying into hot markets.  And most of the cash flow investors I know buy in safe stable locations.  Reckless appreciation or cash flow investors are not on BP learning prudent strategies; so, I don't dedicate much mind share to obvious unsuccessful approaches.

This is how I break it down:

Cash-Flow 1st, then Appreciation if/when 2nd.

Why? I will explain:

If you buy a property for $100,000, and you get $500 a month in net cash-flow.

For me to sell it, I would need to have the appreciation to be AT LEAST 5 TIMES the yearly net cash-flow.

So if you are making $6,000 a year, then that would be $30,000.

So you are looking for someone to buy it for AT LEAST $130,000.

Why 5 times and not less/more?

You will spend months finding a new property, paying the closing fees, and reinvesting to buy another property and all this for maybe $5-8,000 worth. You just did a lateral moved! Helped someone else more, but didn’t appreciate your principal investment, which is your money and portfolio. So as an investor, you need to gain more out of a deal, you need to grow not stay in the same situation.

Originally posted by @Mike Dymski :

Predictable appreciation is not a gamble or speculation. If you are unable to predict your future profit (IRR) within a certain degree of confidence, that's when it becomes speculative. If you invest in what you know well, both value or cash flow plays can be profitable strategies (regardless of what one-size-fits-all investors will tell you on BP).

Excellent point about how cash flow and appreciation hinge on one's circle of competency. 

Not to derail the topic, but If I had to invest solely for appreciation, I wouldn't use RE, but stocks. The average person stands a much better chance of realizing significant appreciation without as much downside risk and transaction costs. The time, experience, and capital needed to make a hedged RE appreciation play is only feasible for a seasoned investor. 

Where RE returns really start to fires on all cylinders is through the combination of the four wealth generators and the fringe benefits. Not a lot can beat that combo in the long run.

I would never buy for appreciation, but would go against the grain and buy a condo if cash flow is right. Investors hate condos for good reason and that is a buying opportunity for finding a niche esp in the ultra hot market where nothing else is available. I bought 9 condos near downtown Dallas in Nov 2016 and they more than doubled in value since

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you