Rental income vs. Property appreciation
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
If you are still working towards financial freedom. Your property purchases better cash flow right out the gate or your going to run into stress.
If your cash flow is well above (like double or triple) your living expenses. Then buy what you want. Buy something you might enjoy owning for once.
I noticed a few people mention that anything will cash flow if you pay enough down. I don't believe this is a good way to evaluate a property. Run all evaluations the same so they are easy to compare. Even though I buy with cash, I still look with would cash flow if mortgaged at how it 20% down. Keep things simple. All professions like to "hype up" there profession to make them feel smarter. realist ate investing is definitely one example. This is a very simple, almost too easy business. We live in a rich country.
If you are responsible and unselfish enough to not dip into your own stash. If you have a reputation of doing what you say you are going to do and people know you can be trusted with large amounts of money. You cannot help but win.
If not, you will always be a 99%er.
Shawn Coverdell
Homes in the hood
I hope everyone had a great Thanksgiving. Thanks to all who responded over the last several days. You've all given me a lot to think about.
@Jermell Shavers... I completely agree with spreading $$$ around. I don't want all my proverbial eggs in one basket if I can instead put them in two or three.
@Michael G.... that's one concern I have with the rougher crowd of tenants. The areas that seem most interesting to me are C... maybe C- type neighborhoods. They are primarily renter-type towns and there is no shortage of tenants. My worry is if my ideal tenant would even exist in a bit of a rough neighborhood and if they do, how long it would take to find them.
@Eachan Fletcher... very wise words. I'm just beginning the journey but I have very large ambitions. I agree that positive cash flow can be a great tail wind to grow my portfolio. I'm definitely going into this with the plan to be the best landlord I can be.
@Ryan B.... I'll definitely check out Show 357. Thanks for the heads up! I hadn't given the thought of house hacking much thought until I saw your post. With my current living situation, house hacking isn't really an option. But surprisingly, my wife would be open to moving into a beat up two or three family in a town like Morristown or Montclair, fixing it up, living in part of it and renting out the rest. This could be a really interesting avenue to explore.
@Max T.... I'm trying! I look at what has happened in northern NJ over the last 20 years, what towns are on the up and up, what towns are slipping and what towns have yet to gentrify and there are opportunities to be had. It's just a matter of whether big money will also invest and if local government really wants it.
@Scott Kaczmarek... I love both as well! I just see how hot the market has been and how we lost over a decade of housing price appreciation from 05/06ish to 2015/16ish. Appreciation is never guaranteed.
@Account Closed... I'm planning and crunching the numbers looking at the worst case scenario. CapEx is definitely worked into the numbers. I'm definitely not looking at being a slumlord.
@Anthony Wick... I couldn't agree more.
@John Morgan... congrats on the success! I think now I'm leaning towards cash flow for the first property at least and then when the market pulls back, buying something in a better area in the hopes that I can realize that property appreciation.
@Shawn Coverdell... I 110% agree on the run up. I really worry the economy is peaking and it's overdue for a correction. I once heard someone say that if you get into a cab and the cabbie starts talking to you about an investment, it's time to get out. It happened during the tech bubble, the last real estate bubble, the bitcoin bubble and I worry it's happening again with real estate.
@Mary M.... I'm familiar with IRR. My concern is that all I can do is make an assumption what a property will be worth in a year, five or ten from now.
@Anthony Rosa... I haven't looked much in Bergen or Hudson County lately. I've only been looking at Essex and parts of Passaic. I'll definitely expand the search. Thanks!
@Ronan Donnelly... thanks for the advice. I'm really trying to weigh all options. One big thing on my list is the value add. I'm really looking at purchasing an under-utilized property and then doing everything I can to maximize that NOI.
@Max Vishnev, I'm trying to account for a market downturn that's why I really think I'm leaning towards stronger positive cashflow with weaker appreciation. This way, if the market heads south, I have some pad.
@Jerry Lucker... that's a very interesting avenue to look at. I've read and heard a lot about about seller financing but haven't given it much thought. Definitely something to keep in mind!
@Angelo Mart... thanks for the local perspective! I've even been looking at the Section 8 avenue in Orange and East Orange but the numbers just don't seem to make sense. I've looked at a few listings that need some work, crunched the numbers and wind up cash flow negative. Maybe I need some more creativity?
@Shawn Coverdell... since I'm looking at this as a strictly investment property, I have to put 25% down. Cash is definitely king (especially in this market).
@Allan Ringler I hope you get some sort of bonus votes from BP for how concise this is. Good work. I'm on the same page. I'd ask providers if rent rates stayed steady in their last downturn. People can preach cash flow all day, but if they're selling you on an A class area where there are builders on the next street.. what do you think happens in a downturn? Builders can't sell their houses so they list their brand new builds for rent and undercut the whole area. B and C class is safer for that reason, at least in OKC!
People say you make the money when you buy it but honestly you make the money when the title company writes you the check at closing! It all depends on your situation. How long do you want to hold? Can you hold that long without making a return on your money? Kevin O'Leary on Shark Tank says it best "Cash Flow". There are so many variables to your question and your own personal circumstances. The key in real estate is to get in and just get started.
@Allan Ringler the best advice I can give is to invest for cashflow and look at appreciation as the icing on the cake as the value of a home isnt static over time the property will appreciate and depreciate based on comparable sales (if you're looking at SFR or small multis) Investing in towns like Montclair sounds great but in practice its hard to cashflow without a huge downpayment or all cash purchase. East Orange, Orange, Newark etc tend to work out better in terms of cash flow (be careful of east oranges taxes) but you have to know the areas rental ranges and potential tenants, the cities vary greatly based on what ward/area you're investing in. Lastly when looking at expenses, cashflow etc take a look at numbers based on the year, not the month, and you'll be sure to stay out of hot water
I address this question daily with new clients and investors. Here's how i see it; investing is a continuum, there's appreciation on one end and cash flow on the other. Cash flow pays for your lunch, it buys you new tires, it pays for your gas. Appreciation doesn't do any of that, but it DOES create leverage and real wealth. People need both. Generally, I don't find people investing in high appreciation, negative cash flow markets, but people will invest in high cash flow, zero or negative appreciating markets. I have people call me all of the time who have invested in high cash flow-no appreciation markets and they are losing their shirt on maintenance, capex and turnover/reno expenses.
If you want freedom and wealth, find a balance. In a market with solid growth and appreciation you can find properties and opportunities with a bit of cash flow. Rent to high quality tenants, raise the rents steadily over time, continue to invest. In ten years buying a property or two like that will make you a millionaire with enough cash flow to quit your job and be free. There's no secret- patience, smarts and guts, that's it.
Best of luck!
@Victoria Stokes - I like both, but much depends on where you're at in your REI journey. Cash flow pays the bills and appreciation makes you wealthy. Starting out as you are I'd focus on cash flow. Once your cash flow pays the bills then I think you can focus on some appreciation plays.