Rental Property Investor · Livingston, NJ · Member since 2016 · 7 posts · 7 votes
The question for you all... would you rather purchase a property that earns you positive cash flow month over month but very low property value appreciation or a property that barely breaks even every month with greater property value appreciation? This is the situation I find myself in. If I look at multi family properties in Morristown or Montclair, I'm lucky to find something where I can break even month over month but properties there tend to appreciate year over year. And the barrier to entry is very high. If I look at multi family properties in Orange or East Orange, it's much easier to find something that will cash flow positive month over month but these properties don't really appreciate in value year over year. The barrier to entry here is much lower. Ideally, I'd love to find something that will cash flow positive month over month, appreciate in value and doesn't require me to tap out my life savings just to get in. But then again, isn't that what we all want? What are your thoughts? Thanks in advance!
@Allan Ringler. I guess it depends on if you’re just starting out and what your goals are. My goals I would get the cash flowing property a huge debt service isn’t something I like to carry and honestly cash is king I started out with A or B class properties but I found my niche in 40k rentals and renting them out for 900+ a month where as my A or B class rents for 1100$ a month but it’s worth it I can buy two properties or 3 C classes for one A or B class. I’ll take the 3 C over the one A or B. 900x3=2700$ I’ll take that and they are much easier to acquire
@Allan Ringler. I guess it depends on if you’re just starting out and what your goals are. My goals I would get the cash flowing property a huge debt service isn’t something I like to carry and honestly cash is king I started out with A or B class properties but I found my niche in 40k rentals and renting them out for 900+ a month where as my A or B class rents for 1100$ a month but it’s worth it I can buy two properties or 3 C classes for one A or B class. I’ll take the 3 C over the one A or B. 900x3=2700$ I’ll take that and they are much easier to acquire
Everyone here is going to tell you something along the lines of "cash is king" or "cash flow is queen" (I think I got the phrases right?)
The problem with the C class properties that no one tells you is the rougher crowd of tenants you are likely to face. In my experience I took the route of "tougher barrier of entry" to ensure I was purchasing properties which would get in the middle of cash flow and appreciation. Finding that sweet spot is really the trick, atleast for me.
I've sacrificed a degree of cash flow (still positive, just not the ideal numbers people on this forum look for). But the area is thriving! People are lining up at the door to live in this city. These are the types of factors I measure when sacrificing optimal cashflow.
Best of luck! I do not think there is a right answer here. It all comes down to preference (as it often does).
I think you're going to get a lot of replies along the lines of "depends what your goals are" and, why that's strictly true, let me try and offer something a little more:
If you're new to investing then a positive cash flow property will give you a great tailwind to grow your portfolio, and lower your risk for your first few units. Your success is also more a function of your execution as a landlord, you're not going to succeed or fail based on the overall market movement.
It does seem like if you want to invest in Morristown, Montclair, or even Bloomfield - areas you'd expect to experience more appreciation than the Oranges - you're going to need to get creative in order to generate positive cash flow, e.g. live with roommates, Airbnb a subunit, or rent out a unit by the room.
Appreciation vs. cash flow is kind of an age-old question here... I recommend checking out the most recent episode of the podcast (Show 357) for an interesting take on it that I hadn't heard before. Cash flow is a more "defensive" play that allows you to pay your bills, whereas appreciation is a powerful means of increasing your net worth and generating long-term wealth. Which you'll prefer depends on your personal situation.
@Craig Curelop's new book on House Hacking introduced me to the concept of Net Worth Return on Investment (NWROI), which allows you to consider the money you're saving on rent as kind of positive cash flow. If you're anything like me and currently spending an egregious amount on rent, house hacking a property with fairly negative cash flow can still generate a significantly positive NWROI, even without factoring in appreciation. Banking purely on appreciation feels too much like speculating to me, but if I can realize 30%+ NWROI via a house hack with an expected appreciation of 0%, then that starts to look a lot more compelling, especially when I do have the expectation that the property will appreciate (and as long as you're willing to deal with the intangible negatives, like reduced flexibility, property management, dealing with tenants, etc.).
Having said all that, I presently have a property under contract in Morristown which is rented for 1% of the purchase price and cash flows well, but that's because one of the units is a 5BR which is rented by the room - a very unusual, risky, and potentially high-maintenance situation. It remains to be seen how (if?) this deal will go, but I feel like even in a worst case scenario I'm still doing considerably better than if I was renting (albeit with a lower QoL) and I will hopefully have the safety net of appreciation to bail me out if things go extremely poorly.
If I wasn't house hacking, I would not be considering properties that do not generate positive cash flow. For future properties I am not planning to house hack, I will definitely look more closely into the Oranges and well as Newark and Jersey City.
@Allan Ringler - I can’t speak to your market, but I’ll throw my $.02 in on the cash flow vs. appreciation. In short I love both! Cash flow properties can pay for your daily life and appreciation properties can make you wealthy. As for which one to invest in, I like to invest in cash flow first to pay for daily life then invest to become wealthy. It depends where you’re at in life. Good luck!
@Allan Ringler I like to think of appreciation as a cherry on the top, it's a nice little extra surprise if you get it but I don't base my deals on appreciation alone. Cash flow you can actually count on. I purchased a property in Texas when I first started and before I knew about these things and yes It did appreciate in a hot market and I have since sold it but I had a lot of money tied up in it and for 3 years it barely made me any money on a monthly basis. like close to breaking even if you calculate cap x, vacancy etc. Luckily being a newer home it had no repairs, little maintenance and was fully occupied.
This is a simple math problem. 2% of property value @ 4:1 leverage is a 10% return on money invested. You’ll never get genuinely wealthy on cashflow. That said, you’ll need cashflow to hold long term unless capex isn’t your thing... in which case over the long term appreciation will suffer as the property itself falls into disrepair.
30 year fixed rate mortgage with monthly cash flow. If market has a downturn, you have a fixed rate mortgage with monthly cash flow. Everything else is speculation.
Good question. I invest in both. 4 of mine cash flow pretty good but appreciate a little slower. They are easy to manage so far, so I’m enjoying the cash flow. The other 4 are appreciating more, but breaking even with 15 year loans. I would try both and enjoy some cash flowing good and enjoy some just breaking even.
First, you are probably going off of Zillow or basically MLM listed properties. Multi family properties are being sold by investors. They are looking to make money too. Secondly, this is a record run up on property values. This is as good as it gets for a "sellers market", not so good for buyers.
Your first concern should ALWAYS be cash flow right out the gate because that is the banks concerns. They want to see income. increasing income, you will not get increased credit limits. in other words you will hit a dead end. Do you want a couple properties increasing in value, or do you want dozens of properties increasing in value?
Cash flow is why you buy, equity just happens.
If this were blackjack (a suckers game), would you hit on 19?
there are ways to quantify this.... look into what IRR (internal rate of return) means and how to calculate it.... then, you can plug the numbers in and figure out for yourself which is the better return !
In general, I prefer appreciation because it makes money whether its vacant or not. Everything can cashflow and it depends on your down payment. Appreciation can bring you to the next level. Keep in mind the taxes too. Bergen county has high axes which can make a deal not worth it.
How about 2 family homes in Bergen County- Jersey City, Hoboken, Fort Lee, Dumont?
Hi @Allan Ringler, congratulations on starting down the path of investing in multi-family. You will find people on BP who have been very successful in every niche of real estate investing and within every strategy within the different niches. What I would suggest is to spend a disproportionate time on what your ultimate goals are and that way you can work backwards to see which strategy gets you there fastest.
One unique aspect of multi family is that the assets are substantially valued off the Net Operating Income so in order to see appreciation you should have an achievable plan for increasing income and decreasing expenses. With more expensive/lower cap rate properties you can get greater capital appreciation for each incremental dollar of NOI.
For lower cost/higher cap rate properties you will need to focus more on acquiring and retaining high quality tenants and you will likely need to spend more in ongoing repairs.
I think that if you really dig into the details (I.e. underwrite) a decent number of different classes of properties you will get a bit of clarity on what strategy is best for you.
Just to add my two cents to the many great replies here...
"Barely breaking even" can quickly and easily turn into "losing a little bit" of money every month (overestimating rents, underestimating maintenance and cap ex, higher-than-expected vacancies, just to name a few examples). And what happens if you end up with a property that not's cashflowing (or worse, losing money every month) and there is a market downturn? Suddently, you're stuck with a property that's not cashflowing AND not appreciating in value -- or in the worst-case scenario -- losing money every month and declining in value.
So I think the best advice is to focus on properties that would cashflow from the start and not bank on appreciation, at least not with a near-term time horizon. That way, when the next downturn comes, you can hold onto the property and collect the positive net cashflow until property values recover.
I believe there are better plays as a real estate investor rather than solely buying a property on the speculation its going to appreciate. It could as easily go the other way.
I’m in favor of cash flow over appreciation. I purchase lower value properties - they cost less but rent well. After many years of renting them I sell on contract and get many more years income being the ‘bank’. My calculator said that’s the way to go and it’s proven itself after many years.
@Ryan B. Same here. I really enjoyed episode 357. Very good show. It summarized my exact investment experience in the past. In an expensive area like CA, appreciation is almost guaranteed to outperform cash flow in the long run.
@Eve Cao There are two general assumptions that most believe will occur in the near future: 1) The market is due for dip in the next few years 2) Interest rates will likely rise over the next few years. No one can be sure about either, but that’s what most of us believe is coming sooner than later. So at this moment in time, you may want to focus more on cash flow. If we are possibly at the peak of the market and home values begin to fall, you may be looking at years to get back to current value. On the other hand, if you can get a 5-7 fixed rate in the mid 4’s and in 3 years time we are looking at rates in the 6% + range, cash flow would become tougher, especially in a downmarket. Personally I’d still look for both, but just some general thought on why cash flow might edge appreciation when buying in 2020.
Cash flow is a function of how much money you put down..... the very same property,with the same rent and expenses will cashflow far more if you paid cash than if you did a 3% down loan.....
Folks need to learn to run basic investment calculations like IRR and PV to really understand what is happening
I think at this point in the market grabbing something that cash flows is a safer play. Because we're due for downturn something that appreciates might be at top value right now. When we take the hit the appreciation that you've been excited about is gone. Higher risk areas in markets that don't typically appreciate a lot might be the best sweet spot for you. Those areas in those more stable markets MIGHT see appreciation, but they're cash flowing right now as well. Win win?
Depending on where you're investing you may not have a choice, really. Obviously, cash flow seems to provide more benefits than appreciation and is less uncertain. But in a booming market, it seems like people got rich thanks to appreciation more than cash flow per door. But will it continue? Who knows. So that's why I think it's fine staying open to both angles depending on your market. Always do the math, with fair assumptions and assess if the opportunity matches your criteria.
I see you are from Livingston NJ, I am own a real estate firm in East Hanover. I currently perform real estate appraisal work in both Morristown and Montclair frequently. Both market area are currently horrible for investors. If you are banking on appreciation you are in the wrong business. Both of those towns are extremely maxed out on appreciation and I do not see either one of them increasing anymore. If you purchase now in hopes of them appreciation, odds are you will be paying more than they are worth with minimal cash flow and HIGH taxes. The upside is if and when it is paid off you will be sitting on a solid piece of property but that is 30+ years down the road. Cash flow month over month but very low property value seems to be a better approach East Orange is a better bet, sounds crazy but i know investors that purchase cheap East Orange, rent to section 8 and cash flow strong. Overall, North Jersey is no longer a good investment. Way too inflated, no cash flow, high entry barrier = bad deals. I own a few rentals in North Jersey I purchased during crash, at this point I am looking aggressively out of state