Cash flow or appreciation

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Cash flow or appreciation

Brandon Fuhrman
Louisville, KY · Member since 2020 · 80 posts · 31 votes

I am a new investor and looking to get into my first rental property. I have a few different opportunities but my question is: for your first rental property, would you want something that cash flows good with bad appreciation, or one that cash flows okay but in a higher appreciation area?

My goal is long term buy and hold, but with little to no cash reserves, the idea of using the equity in my first rental property to use for another property is enticing. But don’t want to bank on appreciation if something is cash flowing very well.

Of course, in an ideal world you’ll want both cash flow and appreciation but which would be better for your first or first couple of rentals? Thank you very much!

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Edward B.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
5y

@Brandon Fuhrman, Cash is King. Most people who go bankrupt do not do so because they owe more than they are worth. It is because they owe more than they can pay. They can't make their monthly nut. Unless you have a job that allows you to afford being cash flow negative, in the beginning I would focus on cash flow until you build up enough that you can make more speculative bets. Because appreciation plays are all speculative and should be left to experienced players who can afford to be wrong.

Yes, you will make way more money on appreciation in the long run, but it works both ways. It will wipe you out way faster and before you even get started if you bet wrong. 

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  • Kuriakos Mellos
    Member since 2020 · 132 posts · 90 votes
    5y

    Hey @Brandon Fuhrman welcome to the game!  I love Louisville! The best way you will see if you get any appreciation is at the inital price/deal you can find. The lower your costs on the property the better YOU can control what your cash flow will be. Minor updates, higher rent etc will HELP your cash flow.  Appreciation is nice, but uncontrollable and NOT guaranteed.  Ex: Who would of thought the whole covid pandemic would of arised this year.  That for sure has had an affect on appreciation growth in certain markets, while boosted suburban markets faster than normal.  

    14Reply
  • Amy KendallBusiness Member
    Real Estate Broker · Lehi, UT · Member since 2016 · 397 posts · 318 votes
    5y

    Welcome to the forums!  Cash flow is definitely important so that you don't risk losing your asset, but appreciation is where you can make some serious money that will increase your overall net worth.  If it's the difference of only $100-200/month in cash flow, I would rather have a property that has a greater chance of appreciation.  Just make sure you have your 6 month emergency fund in place.  That being said, I always bought my initial properties with cash flow in mind and the appreciation came along with it.  I'm not sure appreciation is quite as easy to predict as we might like to make it seem; so definitely don't overlook the importance of cash flow first.

    18Reply
  • Chico Ford
    Real Estate Agent · Prior Lake, MN · Member since 2015 · 42 posts · 63 votes
    5y

    @Brandon Fuhrman  I would totally agree with @Amy Kendall.  While on the surface I say I invest for cashflow.  The reality is to make wealth in real estate it is made mostly with appreciation.  But to understand appreciation you have to look at appreciation in at least two different ways: Forced Appreciation and Market Driven Appreciation.  I believe you have to buy the right property and drive forced appreciation through the buying strategy and rehab process.  Further, if you have purchased the right property in the right location you will enjoy the benefits of market driven appreciation.  While many residential investors don't look at Internal Rate of Return but if you understand it you know that 70% to 80% of the value of a property over 5 to 10 years is due to appreciation.  The reason many people talk about cashflow is because it allows investors to live off of it and leave their W2 jobs.  Further, many also use it for building additional reserves and to reinvest into other properties.  I hope that helps.  All the Best! 

    15Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
    5y

    @Brandon Fuhrman, Cash is King. Most people who go bankrupt do not do so because they owe more than they are worth. It is because they owe more than they can pay. They can't make their monthly nut. Unless you have a job that allows you to afford being cash flow negative, in the beginning I would focus on cash flow until you build up enough that you can make more speculative bets. Because appreciation plays are all speculative and should be left to experienced players who can afford to be wrong.

    Yes, you will make way more money on appreciation in the long run, but it works both ways. It will wipe you out way faster and before you even get started if you bet wrong. 

    30Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    Thanks @Kuriakos Mellos for your insight. Do you do a lot of investing in the Louisville area?

    1Reply
  • Kuriakos Mellos
    Member since 2020 · 132 posts · 90 votes
    5y

    I do not bud - I am mostly in Chicago but have some friends down in Louiisville.

    0Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Amy Kendall thanks for your reply! Yes I am very conscious with keeping cash flow in mind and don’t want to put all my eggs into the appreciation basket. On the Initial properties, it seems best to focus on the cash flow and appreciation when I’m a little

    More experienced.

    2Reply
  • Chico Ford
    Real Estate Agent · Prior Lake, MN · Member since 2015 · 42 posts · 63 votes
    5y

    @Brandon Fuhrman  I would totally agree with @Amy Kendall.  While on the surface I say I invest for cashflow.  The reality is to make wealth in real estate it is made mostly with appreciation.  But to understand appreciation you have to look at appreciation in at least two different ways: Forced Appreciation and Market Driven Appreciation.  I believe you have to buy the right property and drive forced appreciation through the buying strategy and rehab process.  Further, if you have purchased the right property in the right location you will enjoy the benefits of market driven appreciation.  While many residential investors don't look at Internal Rate of Return but if you understand it you know that 70% to 80% of the value of a property over 5 to 10 years is due to appreciation.  The reason many people talk about cashflow is because it allows investors to live off of it and leave their W2 jobs.  Further, many also use it for building additional reserves and to reinvest into other properties.  I hope that helps.  All the Best! 

    1Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Chico Ford thank you for your response. I am very much interested in the brrrr method which certainly drives up the force appreciation. Hard finding distressed properties in great neighborhoods for the market driven appreciation. Most distressed properties I see are in rough neighborhoods.

    0Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    Thanks!! @Edward B. Great information you provided with starting off and people not being able to make their monthly payments. I think I will focus more on cash flow and later focus on the speculation approach as you mentioned. Thanks very much

    1Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    5y

    I would just chime in here on keeping reassessments and property taxes in mind.  Some cities/states can reassess your property when/if it appreciates and then up your taxes, which then cuts into your cash flow.  So, yes, maybe the property appreciated beautifully, but then you get taxed like crazy on the appreciation.  Just something to keep in mind when evaluating property.

    I'm not the kind of person comfortable with leveraging a property to buy another property on and on.  That's just not comfortable for me.  Lots of people do it, so I'm not bashing it for other people.  But, for me, for a long-term buy and hold, I'd rather have the cash flow on a property that doesn't appreciate a lot - if - the property is in a state where I'm going to have to keep paying higher taxes every time it appreciates in value.  Whereas, if it doesn't appreciate, my taxes probably don't go up, but my rental income might actually increase.  At least my cash flow wouldn't be affected regularly by higher taxes based on the appreciation.  Hope that made sense.

    9Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Kuriakos Mellos awesome man, I have some family in Chicago but never been. Always wanted to plan a trip..

    0Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Sue K. Awesome information, I never really thought about the tax aspect of things. I am currently using a heloc on my primary home for the down payment on the rental property I am interested in. What are your thoughts on this? Will they tax the appreciation on this like you mentioned?

    1Reply
  • Mitch Messer
    Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Kuriakos Mellos:

    Hey @Brandon Fuhrman welcome to the game!  I love Louisville! The best way you will see if you get any appreciation is at the inital price/deal you can find. The lower your costs on the property the better YOU can control what your cash flow will be. Minor updates, higher rent etc will HELP your cash flow.  Appreciation is nice, but uncontrollable and NOT guaranteed.  Ex: Who would of thought the whole covid pandemic would of arised this year.  That for sure has had an affect on appreciation growth in certain markets, while boosted suburban markets faster than normal.  

    Yep, I'm with Kuriakos here: cash flow is reasonably predictable, while appreciation is absolutely not! (For reference, see 2007-2008.)

    By the way, Kuriakos, I can't DM here on BiggerPockets, but I can be reached via phone, text, or email. My contact info is below in my signature block (provided you're not on the phone app).

    2Reply
  • Khaled El DorryPro Member
    Casselberry, FL · Member since 2016 · 111 posts · 54 votes
    5y

    @Brandon Fuhrman it’s very hard and speculative to control appreciation as anything can happen and a property value soars 20% or tanks 10%. If you are looking to get in and out very quickly you are taking a risk this early in the game and you are better off flipping or wholesaling in my Opinion to make a quick cash turnaround. If you hold a property 10 years the odds greatly increase in your favor that it will appreciate and cash flow will self sustain it. I would advise to look for cash flow but at the end of the day it all depends on what your long term goals are.

    For me personally I want all my income from work to be replaced by the time I’m 45 so I buy and hold and look for good cash flow. That generally means I don’t consider appreciation at all in my math and despite that my 3 properties have appreciated cumulatively about $80K in the 3 years I’ve been investing. So I think as long as you buy in a good area appreciation in the long term will take care of itself. So 3 down and 37 to go for me (I have a duplex under contract)

    Welcome to the game and best of luck.

    1Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Mitch Messer thanks for your input, Mitch .

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    5y

    @Brandon Fuhrman

    I will say go for both if you can but It really depends on your short and long term goals.

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    0Reply
  • Account Closed
    San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
    5y
    Originally posted by @Brandon Fuhrman:

    @Sue K. Awesome information, I never really thought about the tax aspect of things. I am currently using a heloc on my primary home for the down payment on the rental property I am interested in. What are your thoughts on this? Will they tax the appreciation on this like you mentioned?

     What I mean by getting taxed more due to appreciation, I meant that if you buy the house for $100,000 and then it ends up worth $150,000 due to the market improving, then some states will say - yay!  Now, we will tax you on $150,000 value instead of $100,000 value.

    So, it would have nothing to do with your heloc.  The assessor's office that taxes you on the assessed value of your property doesn't care how big your mortgages are.  All they care about is the value and they tax you on the value.  Some places might actually only say your $100,000 property is worth $80,000 and only tax you on that amount.  Some will be more on top of it and tax you the full market value according to them.  Some are really aggressive that way, and you can end up with a tax bill that doubles in a year.  So, just do your research on that for wherever you're looking at investing.

    Somebody shared this recently and I bookmarked it.  It's a map of how the states rank for property taxes.  It's not conclusive, but it gives you an idea:  https://taxfoundation.org/rank...

    California has been a great place to invest because we had Prop 13.  I'm not sure how the new tax measures are going to affect that, that were just passed.  I need to research them.  But, historically, it's been great to invest in CA because we usually have good appreciation and no giant surprises regarding property taxes.

    3Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    Hey @Khaled El Dorry, thanks for your comment. My goals aligned right beside yours, getting enough rentals to replace my 9-5. Congrats on your recent closing, I had a chance to purchase a duplex but it sold within the hour of being posted. Best luck with your remaining units to achieve freedom!

    2Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Sue K. Thanks for the explanation, I’ll definitely give that map a look and see what I can find. Your respond has given me a lot to think about!

    1Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Wale Lawal Thanks for your response, Wale. Buy and hold is the way to go for me!

    0Reply
  • Casey Maeda
    Rental Property Investor · 港区, Tokyo · Member since 2018 · 61 posts · 42 votes
    5y

    @Brandon Fuhrman I have both in my portfolio and have to say I love the cash flow now rather than later. My strategy is use the cash flow generated now to reinvest those funds to compound that wealth. Whatever strategy works for you where you can sleep at night and meet your goals is the way to go - no right or wrong strategy

    2Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Casey Maeda great feedback, when you say you reinvest those funds into new compound investments, what do you invest in? More rentals? IRA?

    1Reply
  • Zachary Beach
    Specialist · Los Angeles, CA · Member since 2018 · 291 posts · 231 votes
    5y

    @Brandon Fuhrman

    It doesn’t need to be either or. Cash flow and  appreciation are not opposing forces.

    2Reply
  • Brandon Fuhrman
    OP
    Louisville, KY · Member since 2020 · 80 posts · 31 votes
    5y

    @Zachary Beach I see what you are saying. If deal # 1 had better cash flow but is a townhome so not so much appreciation, or deal #2 is a SFH with less flow but better appreciation which one would you chose?

    0Reply
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