Do you buy small MF (2-4 units) for cash flow or appreciation?

160 Replies

I know the unicorn property offers both great cash flow as well as future appreciation, but how often does that actually happen? Other ideals would be low crime rate area as well

Looking at small multi family properties (2-4 units).

I would not buy for appreciation because one change in the market can wipe out all that appreciation in a year or less. The crash of 2008 is a perfect example but there are smaller versions of that happening all the time. Cash flow is less volatile and more stable. If you hold on to the property long enough, you'll get both.

Agree with @Nathan G. completely. If the cash flow is great, the appreciation is just gravy on top.

Originally posted by @Patrick Menefee :

Agree with @Nathan G. completely. If the cash flow is great, the appreciation is just gravy on top.

 I have the opposite view..  cash flow is only to hold on while it appreciates.. buying a property you know wont appreciate at all over time to me is a waste of time and effort.. go for both find an area you have a pretty good idea that things will appreciate then let the tenant pay the house or property off while you make the real money on appreciation.. 

thats the other side of the coin.. in my mind the only reason to own rentals that just make a few hundred a month and never really appreciate over time other than tiny bit like 2 or 3%  which does not keep up with inflation..  then you need to scale big time and change your profession to landlord full time and scale it and run it like a business hands on daily.

@Jay Hinrichs you obviously want to buy in a market where appreciation is likely. I'm just saying you don't buy in a market where there's zero cash flow and you're only relying on appreciation. I've seen people buy homes that have a negative cash flow because they expect the appreciation to climb and then they can sell it for a profit. That's nice when it works but it's also very high-risk and more likely to lose. If you're Warren Buffet or Jay Hinrichs, you can roll the dice and probably win more than you lose. It's not a wise strategy for a beginning investor.

Originally posted by @Nathan G. :

@Jay Hinrichs you obviously want to buy in a market where appreciation is likely. I'm just saying you don't buy in a market where there's zero cash flow and you're only relying on appreciation. I've seen people buy homes that have a negative cash flow because they expect the appreciation to climb and then they can sell it for a profit. That's nice when it works but it's also very high-risk and more likely to lose. If you're Warren Buffet or Jay Hinrichs, you can roll the dice and probably win more than you lose. It's not a wise strategy for a beginning investor.

 OH i totally agree and we know where historic flat markets are and historic markets that see appreciation.. my thought is to invest in those that can pay for the asset and you have a better than average or almost a absolute that values will rise SIGNIFICANTLY over a 10 to 15 year hold period..   In my opinion in areas were there is no historic appreciation and the sellers know it the buyers know it.. all of BP knows it.. then the play there is Scale... Of course i was being the contrarian view this morning but it is something to think about.. Hate to see average investor tie up their 4 great mortgage slots on no appreciation assets only to make a few hundred bucks a month total cash flow if everything goes right.. ?  Bp is a cash flow / appreciation is gambling site i realize that just want to talk about the other side of the coin..  I know most wont listen to me and or agree with my thought process

Atleast with a given fixed cashflow I have a known variable that I can count on -with appreciation it’s hope and pray . I’ll take a cash cow anyway anyday 

@Thuy Pham-Satrappe

This depends on area and location. For multi units, Invest in areas that cashflow first with good appreciation potential.

In my area (in Los Angeles), properties appreciated like crazy the last few years... Rents have gone up too, except when your property is under “Rent Control” (Multi-Family) where rents can only go up to 3% per year on existing tenants. So unless you buy MFs that is vacant at purchase, cashflow can only work with a big down-payment.

I buy for cash flow and forced appreciation.

Eric

@Jay Hinrichs great feedback! Any advice on what type of properties or areas to buy? Homes in A and even B class areas all seem to just break even for cash flow. How can we find something that's likely to significantly appreciate? Thanks in advance!

@Thuy Pham-Satrappe

I ONLY buy 2-4 small MF, all in a very HIGHLY appreciating market, Brooklyn, NYC.

I have been doing this for the last 21 years.

In many cases, the cash flow starts out as ZERO.

HOWEVER, if you only want to do a calculation of the original purchase cash flow, you will tend to miss the whole strategy about investing in very large Metros like NYC.

When I bought one of my first properties 21 years ago, it was at Zero Cash Flow and rents were $500 per apt.

Today, that same 2 Unit building rents for $1,900 per apt and cash flows around $3k per month.

With the increased cash flow, the building's Valuation moved up from the original purchase price of $140k to $1.1 Million today.

Another missed profit generator in Real Estate seems to be the Mortgage Balance Reduction of a Fixed Rate Mortgage.

I think this is missed almost 95% of the time and I rarely see any postings about the Mort. Bal. Reduction as a profit generator.

Today, I buy buildings in the $1.5 to $2 Million price range. Even if I used a $1 Million Mortgage, had ZERO cash flow and ZERO appreciation, I will still make a Million dollars when the Mortgage Balance falls to zero. That is PURELY Math and pretty much GUARANTEED in the kinds of Markets like NYC as Real Estate values RARELY fall. If they every do, it bounces back and always goes higher.

BUT, again.... I implore the readers of this post to NOTE that I said you can get ZERO cash flow, Zero APPRECIATION and you will still make a Million dollars.

I'm completely baffled why, on a Real Estate forum like this, there are very little postings or articles that even mention the Mortgage Balance Reduction as a profit generator.

Depends on where we are in the cycle.  Cash flow plays right now...value plays at other points in the cycle.  And always adding value!

Real short answer to this one: yes.

@Jay Hinrichs thats an opinion I dont see often on these forums, but the more I read and run numbers seems like the way to go. Appreciation can blow cashflow out of the water and as long as you are cashflow positive you can hang onto it forever. Of course the rare unicorn with both would always be first choice...

Honestly, I would be out of this game without the monthly, positive reinforcement of cashflow. Where I am, the vast majority of 2 families purchased within the last 7 years cannot yield positive cash flow. 

3 and 4 units are likely going to be evaluated as businesses if you can demonstrate that they are cash flowing businesses. If not, then you are beholden to the market, unless they are in distress and a business person sees an opportunity.

I am in this as an active, income producing business. I am not in this as a speculator. 

I also do not rely on the market to appreciate my property, I force it as @Eric Mayer mentioned.

@Llewelyn A. I agree that mortgage balance reduction is a big benefit of REI that people often forget. Congrats on being blessed by the appreciation gods, and while I know it takes some skill along with luck to be in your position, I think it's harder to replicate than building strong cash flow. And while you can now say that you have a duplex that cash flows 3k a month, what do you say to those that may argue that the return on your equity on a 2 million dollar place is pretty low and would be better off elsewhere with a higher return?

@Jay Hinrichs

I definitely agree with Jay on this one...I buy properties that are cash flow positive and highly likely to appreciate...am not killing the cash flow, but these properties have great tenants, limited upkeep and low turnover and demand is much larger than supply, and the macro trends look like this will hold for awhile. And as Someone else mentioned I am paying them off.

It is not worth the work to manage all the properties for larger cash flow...if u want to got this route you need to think scales. Go big and get a good PM.

@Thuy Pham-Satrappe I think it is also important to consider buying for opportunity as well. What I mean by this is what opportunities or gains does the property offer besides appreciation and cash flow? I would always suggest buying for both, but look at the possibilities to pull out additional capital or equity via heloc on the property after a value-add play.

What if said HELOC was at 4.5% with bank and you were then able to lend to other investors 9-10% for flips or short term deals?

Evaluate the opportunity of what having additional capital could do to your goals and growth potential. Sometimes, cash flow might not be as good on a property but what if said property allowed or funded the purchase of another. Something to consider.

The diversity of responses here is fascinating.  People around the US are all playing their own game - for some, negative cashflow + appreciation is the only game in town, but it works.  For others, they would never buy a property that didn't cashflow and don't expect appreciation, and it works.

Maybe the lesson is to REALLY get to know your chosen market well and freely adapt your strategy to the market and to your own goals.  If you need cashflow for income, that will keep you out of some markets.  Per your previous post - class A and B properties already have most of the appreciation captured in the price - you'll do best at finding B- or C+ properties where you can force appreciation through property improvements and raising rents.  Good luck!

Originally posted by @Bill Goodland :

@Llewelyn A. I agree that mortgage balance reduction is a big benefit of REI that people often forget. Congrats on being blessed by the appreciation gods, and while I know it takes some skill along with luck to be in your position, I think it's harder to replicate than building strong cash flow. And while you can now say that you have a duplex that cash flows 3k a month, what do you say to those that may argue that the return on your equity on a 2 million dollar place is pretty low and would be better off elsewhere with a higher return?

when you reach a certain economic plateau  the idea of taking on more just to increase return diminishes  ..  what many times happens is investors get more conservative and take on less risk and want to minimize what they have since they already have enough to meet their goals or needs..  Most of the folks I work with or know that are what I consider very wealthy  IE 20 to 100 million net worth  last thing they are looking for is leverage to the eye balls  LOL.. most in fact own a majority of their real estate free and clear..  I know there are two schools of thought to this.. IE your build up phase your coasting phase and your retirement phase.  And in the better market its just a mathematical fact that those that bought props with little to no cash flow after a 10 to 15 year hold have made much more gain or real dollars or real equity than those that thought they needed a few hundred a month in cash flow but the value of the property never really went anywhere and since they are low end assets as it relates there market to exit is HIGHLY limited and totally limited to what the rents are.

Compared to those that may buy even in the same market but no cash flow A and B and exit is to homeowner big difference     

To me if your going the drip income cash flow model then the goal has to be some scale then paying them off so that at the end of 20 years of dealing with all of it.. you have paid for assets the quicker they are paid for the better off you are in my mind as you have a real asset not an asset leveraged to 75 or 80% which is NO equity really. by the time to do a home inspection and pay sales cost you may make a few bucks or you may have to bring cash to clear your loan.. I see lots of HUDS in my day job.. and sales cost in most assets at 200k and under are between 10 and 20% of gross .. 

@Llewelyn A. Hi! I’m a new to BP as well as real estate investing in the greater NYC area. Never thought to take that into consideration, at first glance it looks like a bad idea to try and invest in this market as a beginner. Thanks for that input!

Originally posted by @Dennis M. :

Atleast with a given fixed cashflow I have a known variable that I can count on -with appreciation it’s hope and pray . I’ll take a cash cow anyway anyday 

It is an interesting view but it certainly was not true in all markets at the Great Recession.  Detroit, Las Vegas, and many other markets had their cash flow vanish.  Some of those markets still have not had their cash flow recover.

Meanwhile, San Diego and San Francisco have not had a 10 year period without appreciation going back over 50 years.

I realize you could probably find cash flow markets that have not had a rent decline for 50 years but my point is that cash flow is not guaranteed and I list two large cities (there are many more but I chose 2 extreme cases) as a reference to my point.

Having positive cash flow today does not necessarily mean you will have positive cash flow 10 years from now. In general, homes purchased with high LTV in Detroit 10 years ago would not have positive cash flow today.

To me the track record on San Diego long term appreciation seems as likely as a city's track record of cash flow but I realize that the past is not always an indicator of the future (in both cases).

I have purchased cash neutral RE which has produced outstanding return.  Therefore, I fall into the camp that 1) cash flow is only a single item that is used to calculate return 2) Initial cash flow and actual cash flow are 2 different things.  The actual cash flow is the cash flow that is generated over the entire holding period.  In high appreciation areas, the cash flow typically increases over the holding period.  In zero appreciation markets, the cash flow typically does not increase more than inflation over the holding period.

Simple fact is if you judge a purchase on total return: the higher appreciation asset will produce a better return over a long term hold than a higher initial cash flow market that has no real appreciation.

I do not fear negative initial cash flow in high appreciation markets.

Originally posted by @Bill Goodland :

@Llewelyn A. I agree that mortgage balance reduction is a big benefit of REI that people often forget. Congrats on being blessed by the appreciation gods, and while I know it takes some skill along with luck to be in your position, I think it's harder to replicate than building strong cash flow. And while you can now say that you have a duplex that cash flows 3k a month, what do you say to those that may argue that the return on your equity on a 2 million dollar place is pretty low and would be better off elsewhere with a higher return?

My RE investments have been the San Diego equivalent of Llewelyn's Brooklyn RE investments so I will answer how I would respond...

You are still only using initial cash flow to determine the value of the RE.  There are multiple items that make up the total return.  The cash flow over the entire holding period should be used and not the initial cash flow.  The high appreciation market is likely (and traditionally has) produced the better cash flow over the long term holding period.  This is because market appreciation is typically followed by rent appreciation.  Then there is the return from appreciation, the return from equity pay down, the benefits of the tax depreciation, etc.

The investment that returned such an outstanding return can continue to produce an outstanding return as long as nothing has changed about the fundamentals.

Do not judge a buy n hold solely on its initial cash flow projection.  This is just one variable that is used to determine if an RE is likely to produce a good return.

Good luck

In leveraged real estate investment, G/L is the result of:

  • Surplus cash flow if any
  • Principal gain on your mortgage
  • Value-add play/market inefficiency at purchase or after
  • Price appreciation/depreciation
  • Rent appreciation/depreciation (and raising rents at purchase if applicable)

A prospective property should be deemed attractive if under a well constructed model and across a certain time period, it optimizes total income from the above better than other prospective properties.

Note the flip side of leveraged cash flow is leveraged CapEx, where a more accurate assessment of the latter may significantly reduce your projected cash flow.

Principal gain should be considered in relation to cash flow, it may be an "almost certain" gain in the long run only in strong markets, though still is an unrealized gain and remains unimpactful until the property is sold or the equity is extracted in some way.

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