While cash flow is great and I strive to cash flow as much as I can, in the long run could this strategy be less profitable than buying & holding in a market that will see high levels of appreciation? I hear folks talk about investing in the mid-west in high cash flowing areas, but in general (don't look at the last 2 years), these properties appreciate very poorly compared to "high appreciation" areas. I'm curious if any investors have a high cash flowing property in a low appreciation area that they purchased +/- 30 years ago as well as a no/low cash flowing property that they purchased in a high appreciating market such as Coastal CA, Orange County, San Francisco, Coronado Island San Diego, Lower Manhattan, Miami beach, etc., that was purchased around the same time. I'd be interested to see an analysis at the end of, let's say 30 years later to see when the dust settled which property made more money. Assuming that both properties were purchased at approximately the same time and sold roughly 30-years later. I know there are a ton of variables, but could it be possible that the obsession for cash flow is instant gratification and will actually profit less than a high appreciation property in the long run? Also, I'm not arguing against cash flow or saying that people shouldn't be focusing on it. This question is very specific to a long-term analysis.

I think I'm very highly qualified on this topic to share my experience. Here is a true story. A fiend, let's call him "Bob", and I invested at the same time, in 2004. He bought Cash Flowing properties in CT and I invested the same amount into a 3 Family Brooklyn, NYC property. We both spent about $200k for our Investments. This is an 18 year history of the comparison. Bob's CT properties cash flows approximately $1,000 per month for all of this time. My Brooklyn, NYC property didn't cash flow in 2004, but today, it cash flows $5,000 per month. Bob's CT Property did get some appreciation, but the increase is something like $300k more than what he paid for it. My Brooklyn, NYC property is worth $3 Million more than what I paid for it. The one issue that is not being talked about is where do you want to live? This needs to be factored in. Bob, unfortunately, in 2004, loved living in Manhattan. He rented an apartment for about $2k at that time when he made the purchase of his CT cash flowing properties. Bob thought it was great that his $2k apartment was being subsidized by the $1k cash flow he was making per month from these CT properties. HOWEVER, what Bob didn't take into account was the rent appreciation that would have eventually happened in NYC. Bob's CT properties did not significantly increase over the 18 years. HOWEVER, Bob's rent where he lived DID skyrocketed over the 18 years! Bob, who was paying $2k a month in Rent in Manhattan, is now pay $5k per month today. He went from a net of $2k rent minus $1k of Cash Flow to $5k rent minus $1k cash flow. In other words, Bob's impact to his living costs went in exactly the wrong direction. Not only that, Bob became priced out of the market in NYC. He could have afforded to buy a property in 2004. But today, that is completely impossible. Contrasting this with my own scenario, I am not only cash flowing $5k more than what I was in 2004, but my Appreciation is approximately $3 Million more. The theme here is that if you really want to live in a highly appreciating City, which now seems to be EVERY desireable City everywhere around the US and the world, from NYC to Austin, even cheap places in PA and the boondocks of Florida seems to be completely priced out for many of the CASH FLOW Investors here, you should FIRST buy in the place you want to live in forever. The problem with buying out of the area you wish to eventually settle roots into is that you may get priced out completely, even if you are building a cash flowing portfolio. Something to think about. Buy your first property, rental or otherwise, in the area where you are most likely to build your Roots. There is a huge difference between those of my family, 90% of them, that did not invest or buy their home in the area where they live, and myself. My Partners and I own 10 small multi-family properties in Brooklyn, NYC. This is where our families settled down. The 10% of us who bought in Brooklyn, are incredibly lucky. We secured our homes forever. WE cannot be priced out. The 90% is like "Bob". My advice, don't be like "Bob." At least buy the home you want in the area you want. Investor Llew

This is actually a more complicated answer. Here's why: As you grow your real estate portfolio, you no longer qualify based on your own DTI, instead on DSCR which based on the asset's own performance (local banks may differ slightly from DSCR private money; local banks are more like common sense lenders and may ask for your personal financial statements as well). Well, if you don't have cash flow, you won't be able to pull out max funds on a refi, which means you're leaving more money in the deal, and growing your portfolio slower. In a high cash flow market, you can take out max funds on refi, and grow your portfolio faster. In addition, in high cash flow markets, you might find deals easier because people care less about the price of their home or they just mess up their life more often. To give an example, say you buy a place in Austin for 450K and rent it out for 2750 a month, there is no way that a DSCR lender will let you take out 75-80% LTV on a refi. But if I purchase a place in Wichita KS for 100K I can rent it out for 1000 a month, I can take out 80% LTV on a refi with my local bank. Now do this over and over again for many years, I can grow my portfolio size at a faster rate than if I had invested in Austin. If the high appreciation market appreciates twice as much as high cash flow market, but you can grow the dollar value of your portfolio twice as fast in high cash flow market, then your dollar return attributed to appreciation is the same, but you would end up with higher cash flow in high cash flow market and about equal appreciation dollar, so high appreciation market is an illusion for BRRRR and could be detrimental. So in sum, cash flow and appreciation are a balance, tilting in favor of high cash flow markets.

If you can tell me what appreciation rate will be in the furture, what interest rates will be, what inflation rates will be, how much property taxes will be and how much capital gains rate will be going up, any new taxes the government can dream up, how the government will address $200,000,000,000,000 in unfunded liabilities they have run up and where the pandemics will be, I can provide you with the answer to your question. ;-)

Is cash flow overrated?

Victor SteffenBusiness Member

Investor · Austin, TX · Member since 2017 · 352 posts · 374 votes

4y

i think this is a "both / and" answer.

wealth is built through asset appreciation so I think it's important to hold those blue chip properties.

The problem is- without positive cashflow there's a ceiling on how many you can carry.

Buying a mix of both heavy cashflowing midwestern assets alongside your prime location assets means the cash yield from one will offset the negative cashflow from the other and let you hold for a longer period of time to see greater gains.

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Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

4y

I would say yes, it depends on your strategy. If you BRRRR and have nothing in the deal then as long as you break even you're winning

1 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Victor Steffen:

i think this is a "both / and" answer.

wealth is built through asset appreciation so I think it's important to hold those blue chip properties.

The problem is- without positive cashflow there's a ceiling on how many you can carry.

Yeah I agree, 100%. So then I guess the question would be how much greater is the return on a blue chip property 30 years later than the cumulative cash flow of a mid-west rental? if it is significantly better, one might be better off having less blue chip properties to equal the yield from more mid-west rentals.

One other aspect I forgot to mention is the tax implications, which further complicates the analysis.

0 Reply

Peter ShuttPro Member

Application Engineer at BiggerPockets · Canton, MI · Member since 2022 · 16 posts · 23 votes

4y

The problem is that you don't know which areas are "high appreciation areas" until the areas actually appreciate highly. It would be terrible to be losing money for 30 years only to find out that the area hasn't appreciated at all, or worse, negatively. It's analogous to picking stocks that will be winners, no one know for sure which ones they are until they win. You can know, however, which properties cash flow. But, YMMV if you have enough cash to take the risk, diversify etc.

8 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Peter Shutt:

The problem is that you don't know which areas are "high appreciation areas" until the areas actually appreciate highly. It would be terrible to be losing money for 30 years only to find out that the area hasn't appreciated at all, or worse, negatively. It's analogous to picking stocks that will be winners, no one know for sure which ones they are until they win. You can know, however, which properties cash flow. But, YMMV if you have enough cash to take the risk, diversify etc.

In the general sense I agree with your point. We have no way of knowing for sure which areas are going to have the highest appreciation 30 years from now. However, we can make some educated choices. For instance, coastal properties in SoCal have a finite inventory. We can't make more coastal land appear. Same with coastal properties in Miami, same with properties in NYC with views of central park, etc. There are a finite number of these properties that cannot be increased.

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

How can cash flow be overrated if the goal is to make money? Last time I checked, cash was still money. If you don't have cash flow, you have negative cash flow, which means you are adding to your cost.

Also, collecting equity in the same property is actually losing money.

Bottom line is this, negative cash flow costs you money, and equity build up in the same property (as in the closer that property gets to 100% equity) is in fact losing money...not making it. So, the combination of the two, is deadly...and bad math.

14 Reply

John McCann

Realtor · San Diego, CA · Member since 2021 · 5 posts · 6 votes

4y

Although I am unsure of the high cash flow property, here's my experience with working in Coronado, CA. I have discussed this with many of our owners that we manage properties for. Most of them have purchased the appreciating asset at least 20 years ago.

Since that time, not only have the values of homes here greatly increased but the rental rates have too. These owners are now holding these properties and cash flowing tremendously. They most likely would've outperformed any cash flowing properties that are in the Midwest/South. Therefore, I would definitely agree that many investors are too cash flow obsessive. However, cash flow properties almost guarantee that you will still afford the property in the next five years - so it is all bout risk! If you want to hold long term, appreciation markets that do not cash flow may end up cash flowing but will take at least 5 years to do so. Especially with the direction the market is currently going, it can be difficult for most to afford to take this large risk.

6 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.

Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.

At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.

Which property made more money for the investor?

1 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Greg R.:

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.

Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.

At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.

Which property made more money for the investor?

@Joe Villeneuve

0 Reply

Matthew McKee

Real Estate Coach · Boise, ID · Member since 2022 · 177 posts · 285 votes

4y

Quote from @Greg R.:

Quote from @Victor Steffen:

i think this is a "both / and" answer.

wealth is built through asset appreciation so I think it's important to hold those blue chip properties.

The problem is- without positive cashflow there's a ceiling on how many you can carry.

Yeah I agree, 100%. So then I guess the question would be how much greater is the return on a blue chip property 30 years later than the cumulative cash flow of a mid-west rental? if it is significantly better, one might be better off having less blue chip properties to equal the yield from more mid-west rentals.

One other aspect I forgot to mention is the tax implications, which further complicates the analysis.

It depends what you’re doing with that cashflow over the 30 years. Are you paying yourself or putting it back into your business? I would argue that the way in which you leverage that cashflow os more important than high appreciation v cashflow in a 30 year frame

4 Reply

Matthew McKee

Real Estate Coach · Boise, ID · Member since 2022 · 177 posts · 285 votes

4y

Quote from @Greg R.:

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.

Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.

At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.

Which property made more money for the investor?

On paper the cottage but there’s other factors than that like time/ease of management and property taxes/ utilities plus in the last few years some landlords weren’t getting getting paid at all I’m some high appreciating markets.

all I’m saying is with my crystal ball in the shop I’m not art enough to design a litmus test that foresees all possibilities and metrics to compare. Speaking for myself, of course.

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Can't answer any of this using the data your provided. Are these actual properties or just numbers you "free formed" together? If these are not actual deals, then there's no point in attempting to answer this.

You're missing a lot of needed info, such as what the down payments, what are the rest of the terms such as length of loan, what were the properties worth at the time of purchase, what out of pocket additional expenses were incurred over the time periods mentioned, what were the specific appreciation numbers (in dollars, not percentages) for each of the years for each property,...etc...

Define what "life of the loan" means for the accumulated cash flow for the 4plex, and how much per year. Also, what specifically does "didn't make anything for the first 5 years of the loan and made...from year 6 forward..."? How much per/each year?

Way too many missing pieces.

0 Reply

Larry Turowski

Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes

4y

Quote from @Greg R.:

Not sure if you understood the point of the post. I'm asking if anyone has real-life data so we can evaluate these scenarios.

Let's say back in 1990 someone were to purchase a a 4-plex in the mid-west for 200k. This same investor bought a cottage on the coast, let's say La Jolla San Diego for 200k as well. In this scenario let's assume that the 4-plex generated 700k cash flow over the life of the loan. Let's say that the beach house didn't make anything for the first 5 years of the loan and made modest cash flow from year 6 forward, totaling in 200k positive cash flow throughout the life of the loan.

At this point you can conclude that the 4-plex made 500k more than the beach house over the life of the loan through cash flow. Let's say that we go to sell and the 4-plex is worth 800k and the beach house is worth 1.7 million.

Which property made more money for the investor?

This is called internal rate of return (IRR). It’s a not so simple formula to figure out the return of your actual cash investment grew over time. It puts in in kind of savings account terms, that is, a savings account would have had to return X amount in compound interest to give you the same return over the same timeframe.

it allows you to compare unlike investments by putting them in savings account terms.

Looking BACK at an actual scenario, it can do a pretty good job of telling you what your return rate was. Looking FORWARD, it’s only as good as your conjectures, all those “let’s says” you had.

1 Reply

Joseph CacciapagliaBusiness Member

Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes

4y

One aspect you didn't mention is that the "appreciation" markets tend to have much stronger rent growth in the long run as well. I started off investing purely for cash flow, but over time realized the vast majority of my gains came from appreciation. I also noticed that my properties that started of as neutral cash flow in better areas caught up to my pure cash flow properties in just a few years.

Now I've selected a market that I expect to have strong rent growth and appreciation in the long run. However, I'm also pursuing STRs, rent by the room properties, and private notes to boost my cash flow in the short run. I don't want to support negative cash flow with active income.

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Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

I like a good mix of cash flow and potential appreciation. If you look at appreciation as a short-term gain it's different than if you hold onto the property ......

5 Reply

Eric Gerakos

Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes

4y

No.

2 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Joe Villeneuve:

Can't answer any of this using the data your provided. Are these actual properties or just numbers you "free formed" together? If these are not actual deals, then there's no point in attempting to answer this.

You're missing a lot of needed info, such as what the down payments, what are the rest of the terms such as length of loan, what were the properties worth at the time of purchase, what out of pocket additional expenses were incurred over the time periods mentioned, what were the specific appreciation numbers (in dollars, not percentages) for each of the years for each property,...etc...

Define what "life of the loan" means for the accumulated cash flow for the 4plex, and how much per year. Also, what specifically does "didn't make anything for the first 5 years of the loan and made...from year 6 forward..."? How much per/each year?

Way too many missing pieces.

Of course it's a hypothetical. I'm asking for real life scenarios from individuals who have lived this out. The scenarios are assuming similar loans for each, similar price, 30 year fixed loans and similar down payment & rate for each.

0 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Matthew McKee:

On paper the cottage but there’s other factors than that like time/ease of management and property taxes/ utilities plus in the last few years some landlords weren’t getting getting paid at all I’m some high appreciating markets.

all I’m saying is with my crystal ball in the shop I’m not art enough to design a litmus test that foresees all possibilities and metrics to compare. Speaking for myself, of course.

I agree. I would argue that the time/ ease of management would favor the beach house. Easier to manage a single tenant & 1 unit than it is 4. Less redundancy as well, but easier management and should be less maintenance as well.

1 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Joseph Cacciapaglia:

One aspect you didn't mention is that the "appreciation" markets tend to have much stronger rent growth in the long run as well. I started off investing purely for cash flow, but over time realized the vast majority of my gains came from appreciation. I also noticed that my properties that started of as neutral cash flow in better areas caught up to my pure cash flow properties in just a few years.

Now I've selected a market that I expect to have strong rent growth and appreciation in the long run. However, I'm also pursuing STRs, rent by the room properties, and private notes to boost my cash flow in the short run. I don't want to support negative cash flow with active income.

Thanks much Joseph, appreciate the insight.

1 Reply

Greg R.

OP

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

Quote from @Matthew McKee:

Quote from @Greg R.:

It depends what you’re doing with that cashflow over the 30 years. Are you paying yourself or putting it back into your business? I would argue that the way in which you leverage that cashflow os more important than high appreciation v cashflow in a 30 year frame

I get it... so you're saying that if the investor is smart with the cash flowing property that they can leverage that to get into more deals. When you combine the original cash flow property + the "child investments", they can be more valuable than the more lucrative single deal that takes longer to yield the returns.

2 Reply

Dominick Galinis

Real Estate Agent · Fort Lauderdale, FL · Member since 2022 · 24 posts · 23 votes

4y

It depends.

Do you absolutely hate your job and want to get out ASAP? Cash flow is king. Do you like/enjoy your job and see yourself there for 5-10 years? Cash flow is less important. (But still very important!) I think it depends on what your goals are/what you are trying to accomplish. As long as you have the reserves to handle a slight negative cash flow, if the property is in a high appreciating area, it might be worth it then, too.

3 Reply

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

@Greg R.

I understand your point... I don't necessarily have real life data that I'd like to post, but I do know some investments that doubled in value in about 15 years (a while back...) in a high value area and cost was neutral (cash flow neutral and VERY LITTLE maintenance required). So, it does become a matter of scale... If its doubles to say $750k, that's a "ton" of cash flow in 15 years --- $25k a year on a very simple straight line basis (not including tax considerations, etc..)

I agree that those "$100k" properties that are written about don't look they will appreciate much as alll...

Perhaps part of your dilema is trying to figure out the "right" investment approach for your needs. For example, I've seen new investors walk up to a "grey haired" investor asking how they are invested.. The old investor says he has so many doors with so much cash flow per door... The new investor immediately thanks him for the advice and runs off... I ask the grey haired investor, but how did you start? Oh, I bought sfh making sure the rent at least covered the expenses, and now that he is retired he needs the cash flow so redeployed all the wealth generated by this "old, tried and true" leverage and appreciate method for his retirement...

A similar example was a prior thread on BP, maybe a year ago... Posters were talking about their cash flow properties. One person posted how he has a $1mil rental in the San Francisco area that barely cash flowed. Replies came flooding in laughing at him to say the least... But, I resopnded, in 30yrs he will have $1m in equity PLUS whatever appreciation in that will come in that area. If you had to try to do the same with those "$100k" properties, that would be 10 properties with whatever hundreds of cash flow... I don't see the cash being taxed everywhere matching the appreciation --- which is a gamble, but real estate investing is speculation, or at least has been since colonial days in this country/region. Furthermore, that would be 10 kitchens, 10 hvac systems, at least 10 bathrooms, 10 roofs, etc. that would need to be addressed... How does that cash flow add up now??

All that being said, if what is available to you to invest is $100k units, then you have work with what you can get. For example, I prefer to self-manage my rentals and thus have only invested locally.

Hope that helps. If you every want to chat, feel free to send me a message.

2 Reply

David A Lisowski

Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes

4y

Appreciation is nice, but that's prospecting.

Cash flow provides income.

Income generating properties are more desirable.

Cash flow/income can be used to qualify in other deals, used to pay down debt faster, or saved for the next investment.

Well-run/managed properties that cash-flow will increase your appeal to potential investors for future deals.

3 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

4y

Another wrinkle: cash flow dollars from 30 years ago are worth 211% more than today, with the scale declining over time. So even using the hypothetical 1.5 million gain, the tax hit and opportunity cost over that time might easily negate any perceived advantage

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David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

Quote from @JD Martin:

Another wrinkle: cash flow dollars from 30 years ago are worth 211% more than today, with the scale declining over time. So even using the hypothetical 1.5 million gain, the tax hit and opportunity cost over that time might easily negate any perceived advantage

@JD Martin not sure I understand you… analysis should be the other way around. The cash flow will depreciate with inflation unless we have this sort of massive appreciating rental market — not very common. Meanwhile, a “well cash flowing” will still be taxed somewhat year over year (depending on the property’s financials and depreciation) . A capital gains are gnerallly taxed lower and only when you sell. If you 1031 that appreciated property into an income generating property for retirement, then you have all the wealth to generate income. Up to that time, no income tax…

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Is cash flow overrated?

Is cash flow overrated?

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