What Makes a Rental Property Worth Holding for 10+ Years?

Question

Besides appreciation, what factors make you confident a property belongs in your long-term portfolio?

Cash flow?
Location?
Tenant demand?
Something else?

Joe Villeneuve · Answer

Start with a property worth $400k when you buy it.  Put 20% down ($80k) and you have a property that is worth 5 times what you pay for it.  Remember, a cash flow property means your cost is the cash you put in because the tenant is paying for the rest each month.

Now say the property appreciates 20% over some time period.  That means the property is now worth $480k, and your equity went up to $160k.  Sounds good right?  Not so much.

The equity in your property is what you the REI is actually paying for the property.  That equity is frozen cash,...your cash.  The part you get from appreciation is a gift, but it is still a cost to you.  Here's why.

Your initial equity is your DP.  You are physically paying for it.  The appreciated equity adds to the cash value (still frozen though), but also adds to your cost.  When that equity increased from the appreciation, it increased at a 1 to 1 ratio with the PV increase.  Every dollar the property increased in value, so did the equity.  When you bought the property, that ratio was 1 to 5.  For every dollar of equity, there was $5 worth of PV.

Let's take this property now after the 20% PV increase.  The new PV is $480k, and the equity increase is $160k.  That's a new ratio of 1 to 3.  That means your equity is now buying $3 of PV for every $1 of equity.  You're losing money.

That equity should be buying 5 times more in PV, or $800k in PV.

Jaron Walling · Answer

Lee, he is probably referring to ROE (return on equity). Unless the rental income scales up at the exact same rate as your equity grows, the overall ROE will naturally decline over time. This is one reason investors choose to cash out refinance, sell, or 1031 exchange.

Lee Burns · Answer

I always appreciate your posts more than you know.  I never thought from this perspective!

Joe Villeneuve · Answer

Actually, I think the opposite of your initial statement regarding equity.  I think what would make me keep a rental property for 10+ years would be if it cash flowed and "didn't" appreciate.  If the property was cash flowing and appreciating, I probably wouldn't keep it 10 years because I'm losing money.

Lee Burns · Answer

Could you give an example?  I would think cash flow + appreciation would be a great thing

Mackaylee Beach · Answer

The right location can significantly impact a property's potential for appreciation and rental income. A well-chosen location often means access to good schools, employment opportunities, public transportation, and amenities, all of which attract tenants and increase demand.

Cash flow is another critical factor. Properties that generate positive cash flow provide a steady income stream, which can help cover expenses and increase your investment's overall profitability. It's essential to analyze the property's potential to generate consistent rental income that exceeds your monthly expenses.

Additionally, the property's condition and potential for value-add improvements can be a deciding factor. Properties that require minimal repairs or have opportunities for upgrades can enhance returns through increased rental income or appreciation.

Jaron Walling · Answer

Location, fixed rate debt (especially if it's low interest), condition/age/type of construction, and quality of tenant pool.

Jim Johnson · Answer

For me, it's a combination of factors rather than just one.

A property is much easier to hold long term if it has consistent tenant demand, predictable operating costs, and reliable cash flow. Those are the things that make it easier to weather different market cycles.

I also pay attention to how easy the property is to operate. If it attracts good tenants, has manageable maintenance, and doesn't require constant attention, that's a strong sign it belongs in a long-term portfolio.

Appreciation is a nice bonus, but I don't like relying on it. I'd rather own a property that performs well today and still has the potential to appreciate over time than one that only works if values keep climbing.

J Castro · Answer

From a lender's perspective, appreciation is certainly a nice benefit, but it's not what gives us confidence in a property over a 10+ year hold.

What we like to see is a property with consistent, sustainable performance.

Some of the biggest factors include:

• Strong and stable cash flow that comfortably covers the mortgage and operating expenses.
• Healthy debt service coverage (DSCR). Properties that generate enough income to support the loan tend to perform much better over time.
• Location with long-term fundamentals, such as population growth, job creation, quality schools, and diverse employment opportunities.
• Consistent tenant demand with low vacancy rates and realistic market rents.
• Well-maintained property condition. Deferred maintenance can quickly erode both cash flow and value.
• Experienced ownership. Investors who maintain adequate cash reserves and proactively manage their properties are generally more successful through market cycles.

One thing we always remind investors is that markets will fluctuate. A property that's purchased based on solid fundamentals—not speculation—is much more likely to remain a strong long-term asset.

If a property can continue to perform through changing interest rates, market corrections, and economic shifts, that's the kind of investment both lenders and investors feel confident holding for the long haul.

Adam Tafel · Answer

Cash is King

What Makes a Rental Property Worth Holding for 10+ Years?

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