Sacramento, CA · Member since 2020 · 3 posts · 3 votes
I live in sacramento ca and am a first time investor. I’m looking in an out of state market where I see good potential cash flow but very low appreciation value.
Is it worth investing in a location where cash flow is good but appreciation is very low.
Many markets with low appreciation have rising property taxes due to a decreasing population that is increasingly becoming poorer. They are also often located in areas that experience weather extremes that cause high maintenance costs and utility bills. Rising insurance costs may also be an issue is some neighborhoods.
In short, the cash flow you project on Day 1 is not necessarily the cash flow you will receive on Day 365 or on Day 1,825 (5 years out). You need a bit of a crystal ball to determine if you will make any money in the end or whether you will end up supporting a liability out of your W-2 job's paycheck.
Not to mention without any appreciation your in most cases going to lose principal on the exit.. you wont have enough equity to justify a 1031 .. you would have to pay recapture and sales costs so both those numbers if they did not eat into your principal will surely wipe out whatever positive cash flow you may have enjoyed the first 5 to 8 years minimum.. who ever coined the term appreciation is icing on the cake needs to re think that one.. the money is made in appreciation in real estate either just market appreciation or value add.. thats my thought on it.. Now you can value add if your getting a SMOKIN deal buying a property that wont appreciate but you have TRUE built in equity not just zillow or fake equity.
@Juan Quezada that's kind of a broad question. Assuming the market has relatively good fundamentals, (ie a positive population growth, decent median income, ect) then yes, it can be very good. But it's also dependent on your goals. Are you more concerned with cashflow or want aggressive appreciation to make big profits and roll into other deals quicker? Typically speaking, areas with lower appreciation have more attractive prices so you can acquire more property with the same amount of money, which in theory, also spreads your overall risk buy not having all your eggs in one expensive basket.
Many markets with low appreciation have rising property taxes due to a decreasing population that is increasingly becoming poorer. They are also often located in areas that experience weather extremes that cause high maintenance costs and utility bills. Rising insurance costs may also be an issue is some neighborhoods.
In short, the cash flow you project on Day 1 is not necessarily the cash flow you will receive on Day 365 or on Day 1,825 (5 years out). You need a bit of a crystal ball to determine if you will make any money in the end or whether you will end up supporting a liability out of your W-2 job's paycheck.
Many markets with low appreciation have rising property taxes due to a decreasing population that is increasingly becoming poorer. They are also often located in areas that experience weather extremes that cause high maintenance costs and utility bills. Rising insurance costs may also be an issue is some neighborhoods.
In short, the cash flow you project on Day 1 is not necessarily the cash flow you will receive on Day 365 or on Day 1,825 (5 years out). You need a bit of a crystal ball to determine if you will make any money in the end or whether you will end up supporting a liability out of your W-2 job's paycheck.
Not to mention without any appreciation your in most cases going to lose principal on the exit.. you wont have enough equity to justify a 1031 .. you would have to pay recapture and sales costs so both those numbers if they did not eat into your principal will surely wipe out whatever positive cash flow you may have enjoyed the first 5 to 8 years minimum.. who ever coined the term appreciation is icing on the cake needs to re think that one.. the money is made in appreciation in real estate either just market appreciation or value add.. thats my thought on it.. Now you can value add if your getting a SMOKIN deal buying a property that wont appreciate but you have TRUE built in equity not just zillow or fake equity.
I couldn't agree more Jay. As long as the home is in a stable, or growing market then the homes price should at minimum match the rate of inflation which is targeted at 2% annually by the Fed. At even a modest 2% annually, that comes out to a 10% return on your money on a leveraged home with 20% down payment. A 2% gain on a 200k home is 4k, or $333 per month. If investors found a home that cash flowed $333 per month they would be excited, and yet they scoff at the idea of a home that increases in value by that same amount.
The only time starting cash flow is better than growth rate is if you are looking to retire immediately, or are someone who has an incredible deal flow system set up and is able to suddenly and rapidly scale from 0 units to 100+ units in only a few short years. And while those rapid burners do exist, I would say they are an extreme minority when compared to the total BP population.
I would rather have a home that is net neutral in cash flow on the day that I purchase it, but is in a desirable area with 3-5% annual growth, than a $200 per month cash flowing home in a different area that isn't likely to get any appreciation or worse yet will depreciate. Because with the 200/month home, that is likely all you will ever get, 5-10 years from now that cashflow will still be sitting at 200/month or very close to it since prices aren't going up. However that net neutral home will likely cashflow 100+/month after 2 years due to regular rent increases, and in 8 years I will have been able to raise that net neutral homes rent by about $5700 annually (assuming a 1500/month starting point for rent and 4% annual rent raises). This means that at year 8, my TOTAL cash flow over that 8 yr period from that 'net neutral' home actually surpases the total cashflow from that home that is still clunking along at $200/month.
This means I need to own less total rentals to achieve my financial independence number, managing an army of 200/month rentals quickly turns into a job of its own. The alternative is to hire it out to a property management company that eats 100 of your profits meaning you need to now double your number of properties to achieve the same results.
I doubt that many people will turn over their buy and hold portfolio faster than every 8 years, in which case your total cash flow is going to be BETTER from those appreciating homes, than you would have gotten in a different area with no appreciation but steady initial cash flow.
In addition to having more total cash flow, the value of your appreciating home will likely be roughly 37% higher after 8 years assuming the 4% annual gain, while your stable 200/month home is still worth essentially the same amount as it was 8 years ago. This means that I can sell my home for a profit if I want, where as with the 200/month home I will at best only break even, or worse yet I will need to eat several of those years worth of cash flow to cover closing costs plus recapture.
An 8 year outlook is very short when we consider that real estate is a truely long term investment. If we extend these numbers out past 8 years towards 20yrs, 30yrs, or 50yrs, then the numbers get ridiculous. I think most people are familiar with the fictional story of a person who asks to be paid 1 penny per day at his job, and double that amount each day for a month? While he earns only 1 penny that first day, on day 31 he makes over $10m on that day alone. The same rules apply to real estate, it's not how much money you earn today, its the growth rate of that money that matters. Growth rate is the ONLY thing that matters.
Appreciation isn't icing on the cake, appreciation is the cake, and its also the 7 course meal. Starting cash flow is the teaser appetizer that doesn't fill you up and instead just makes you hungrier for more.
Unless you think that national inflation will suddenly turn negative for some reason then appreciation in growing neighborhoods is a simple fact of life. If anything inflation in the coming years will likely be higher thanks to our swelling national debt which further helps those appreciating homes.
Betting on appreciation isn't gambling. The Casino House in vegas doesn't gamble, the individual at the craps table is gambling but the House isn't gambling. The House is using facts and basic math to guarantee it will make money in the long run. Sure the House may lose any one particular game, but play that game often enough and the House always wins. Likewise a home may temporarily go down in value due to a sudden economic shift, but in the long run the facts and basic math always win. Play the long game.
The population growth has not been increasing. It’s basically a flat line. That’s something else I was considering if it might be a problem to invest in a city with stagnant population growth.
@Juan Quezada listen to @Jay Hinrichs who in my opinion should be awarded with an honorary PHD in REI by the BP community. Jay speaks with the hindsight of decades of experience.
@Juan Quezada listen to @Jay Hinrichs who in my opinion should be awarded with an honorary PHD in REI by the BP community. Jay speaks with the hindsight of decades of experience.
Not sure about that have had my share of bummers :( over the years..
The appreciation math makes perfect sense to me. The bad thing is I am in an area of the state where appreciation is minimal, and I firmly believe in investing close to where you live. Not only that I am in a state that is losing population every day. So I wonder why so many people from the coastal cities are looking to invest in the center of the country where the rate of appreciation is so low?
I wonder if I should not rethink my position about investing close to home and go to the coastal cities to invest and sell my property here in the midwest to another OOS investor?
The appreciation math makes perfect sense to me. The bad thing is I am in an area of the state where appreciation is minimal, and I firmly believe in investing close to where you live. Not only that I am in a state that is losing population every day. So I wonder why so many people from the coastal cities are looking to invest in the center of the country where the rate of appreciation is so low?
I wonder if I should not rethink my position about investing close to home and go to the coastal cities to invest and sell my property here in the midwest to another OOS investor?
they buy because they drink the appreciation is icing on the cake non sense.. and because its cheap.
Thank you @Jay Hinrichs and @Ben Zimmerman. Your comments have caused me to reconsider my strategy. There are cities and towns relatively close to the very rural area I live in that have a decent rate of appreciation, although not what you would see on the coasts. That will be my focus from here on out.
@Juan Quezada I'm a broker in Fayetteville, NC. We have one of the best cashflow markets in the country. Historically we have poor appreciation, though I even expect that to change over the next decade. I would love to tell you more about it on a PM. Let me know!
You can't get rich on cash flow. You need cash flow like air to breath, but wealth is comming from principal pay down and from appreciation. Not from $200/door cash flow. Finding the right balaance between cash flow and appreciation is key, but you can dial it in where you need it. This is why most investors will shift their focus or business model as their ability grows to shift towards principal and appreciation.
Population growth is a tricky, because hard to measure. Milwaukee for example does not look good on paper on population growth, because we have some inner city neighborhoods that loose people and most of the growth happens in the surrounding counties, technically not Milwaukee. I believe it was the WSJ listed Milwaukee as one of the worst, but what they failed to understand the difference between Milwaukee propper and Milwaukee metro area.
For long term buy and holds, cashflow is the name of the game. Get enough of them to cover all your liabilities. You may not get appreciation but you will get your asset paid down over time so you should still be able to sell for profit most likely. Best of luck to you!
I would focus on selecting a property based on cash generated and safety in the asset. In other words select a property that you believe will hold its value and generate an adequate return. Any appreciation analysis is speculation in my view.
It all depends on what your investment strategy is. Milwaukee is an example of a market that experiences strong cashflow but will lack the appreciation. I'm a long term investor, so strong cashflow is important to me.
@Brock Mogensen you'll be pleasantly surprised! Median sales price in Milwaukee for a single family home in 2015 was $135,000 - now we are at $185,000.
When you look into neighborhoods you will find that good areas have outperformed the rough ones, but the tide has lifted all boats.
@Juan Quezada I'm a broker in Fayetteville, NC. We have one of the best cashflow markets in the country. Historically we have poor appreciation, though I even expect that to change over the next decade. I would love to tell you more about it on a PM. Let me know!
I hope you're right about a change (positive) coming to Fayetteville.
As someone in the military, you get access to some of the best financing products on the market!
Maybe something you could consider, is figuring out what market you want to invest in, and "move" there as your home base, and use a VA loan to buy a 4 unit.0% down is extremely hard to beat! As long as you can get $150-$200 per door, it's a solid way to go!
@Juan Quezada, If I can be of assistance, you're welcome to reach out. The investor community in East Baton Rouge is super supportive. I can hook you up with some wholesalers. Also, @Robert Leonard is a good contact. He has an Ugly House franchise.
@Juan Quezada I started out investing only for cash flow. Picking up $30k rentals that rent for $1200 per month. There is a time and place for this. I’m now interested in better areas and properties with appreciation growth. Milwaukee is a great market for both. All the best.
