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!
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.
personally for your first deal i dont think it matters. the reason i say this is i think the most important thing on your first deal is just to get in the game. yes getting the best deal in the world would be great. but some of the best deal you get are from being in the game and knowing people and the best way to know people is to already be in the game. i would say for your first one as long as you dont lose money you will be fine.
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
@Brandon Fuhrman
My approach was first to establish a floor where all properties must cash flow no exceptions, didn't need to be huge but it had to generate something positive.
Next I acquired properties in different markets:
Market 1 had high appreciation potential, but modest cash flow potential (California).
Market 2 had modest appreciation potential, but very strong cash flow (Ohio).
Has worked like a dream, a really very nice combination of appreciation and cash flow.
But I always required positive cash flow no matter where they were located.
BTW - Even my CA properties have solid cash flow, but if you were buying now that would be much harder to do. I bought in the 2010 time frame at massively lower pricing levels locking in very low property tax values which are by far my greatest expense of operation in CA. Without that lock in they would still cash flow positive but not by enough.
Rental Property Investor · Member since 2020 · 1 post · 1 vote
5y
@Brandon Fuhrman
Appreciation is very speculative because it’s completely dependent on value increases over time. It’s very much like playing the stock market in that respect. You buy a stock today and hope that by the time you’re ready to retire it’s worth a lot more. Fingers crossed it all works out.
On the other hand, cash flowing property is definitive and real. You can count it and you can count on it. You know exactly what you’re getting in cash flow each and every month. The property may or may not appreciate in value this year or the next, but you know for sure that as long as you have a tenant, you’ll have a certain amount of money coming in.
Personally, I invest. I don’t speculate. Invest for cash flow first. If there’s capital gains to be had, take that as a bonus.
Developer · Salem, MA · Member since 2018 · 83 posts · 68 votes
5y
@Brandon Fuhrman Welcome. Personally I look at cash flow, depreciation, and equity as the main drivers. Appreciation is icing on the cake. If you are buying in decent areas you should see some level of appreciation growth. Investing purely on appreciation especially at this point in the cycle I would consider pretty risky. As someone else said, cash is king. It will help you possibly leave your job or buy more property! Best of luck in your endeavors.
Developer · Miami · Member since 2020 · 32 posts · 9 votes
5y
Hi @Brandon Fuhrman, I just started 2 months ago and just like you with overflow of info.
Amazing feedback here and would just add. Cash in your pocket is peace of mind, dont quit your 9-5 (I have not) and follow your gut feeling even if you make a few mistakes.
I bought my 4th property (Multifamily: Buy and Hold) from a company that does BRRR and many more RRRR in Omaha. During the inspection walk the person in charge (no names here) told me: why would you buy in cash? you know, with $260k you can buy many properties and grow your portfolio and this and that and this and that....
I do everything thinking about my family first, second and third. Buying in cash felt like the right thing to do 2 months ago because if anything were to happen to me tomorrow, guess what: my family will have the cash flow to rely on (and not have deal with 4 or 5 properties out of state). I will always Incline in CASH first but then again: at the end, what is your priority in life?
My 2 cents...best of luck to YOU and ME ....LOL...This is crazy but so much fun....I am having a blast, hopefully you will too....
I agree with several people who have posted already on this thread. As a new investor cash flow should be your primary focus. Now this doesn't mean you purchase in a declining market just to collect cash flow but it does mean that cash flow should be your main focus right now, in my opinion. I have been flipping for several years now and my wife and I have started to put those profits into rentals for long term growth. We are starting in an area where the cashflow is extremely well but the value isn't really there along with no expectation of appreciation. We know what we are getting so there isn't a worry or concern with us. I honestly feel like an appreciation play is for more experienced an seasoned investors who have already been investing and have enough cash flow to cover there current lifestyle and more. With the appreciation you are actually gambling that the market won't take a turn for the worse. It can be very beneficial in many ways but always could be costly for the years you decide to hold the property waiting for it to appreciate. I would definitely go with the cashflow option for now especially as a new investor. My plan is to continue flipping while acquiring cash flowing assets until I can support my lifestyle on my cashflow. At this point in time I will then start taking more risk and be more aggressive with my investing to try for my profitable deals! Wish you well
Rental Property Investor · Winnipeg, MB · Member since 2019 · 3 posts · 1 vote
5y
@Brandon Fuhrman
From my own experience cash flow is the way to go. Get roi faster which will help you get the next property to eventually getting the properties you really want.
Appreciation is nice but isn’t guaranteed and if you’re more focused on cash flow appreciation will eventually come so I wouldn’t worry too much about it especially if you’re looking long term anyways.
Rental Property Investor · Wakefield, MA · Member since 2018 · 65 posts · 108 votes
5y
I agree that while starting and building up your portfolio, cash flow in your properties will help you stay in the game and keep your properties to continue growing. The appreciation would be nice when starting, and will definitely grow your wealth over time and can focus on it when your financial foundation is set. Seems like having a good defense with cash reserves or emergency funds will help a long way.
Endicott, NY · Member since 2017 · 14 posts · 3 votes
5y
Cash Flow is better. You never know what might happen in the world. Suppose there is another housing crisis or even a natural disaster or some unforseen economical issue that drives the value of homes down. If you invested a ton of money in hopes of appreciation and are not getting cash flow you will struggle if there is an unexpected housing crisis. Your money will be tied up and you would not be able to liquidate. That's too much of a chance. On the other hand, if you have cash flow those unforseen issues affect you less. Plus, as a previous poster said you can use the positive cash flow to reinvest and let it compound later.
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
5y
Your goal should be total return through a mix of cashflow and appreciation. The high cashflow higher risk area properties tend to have lots of problems you aren't expecting and real life don't cashflow that high. On the flip side I would also avoid areas like California where there is 0 cashflow but great tenants. I like A- or B class areas where you can have good tenants and stable income/growth.
One thing to look out for. Now that markets hot I am seeing many historically zero appreciation negative growth markets where properties are selling for 50% higher then they were 2 years ago. This is common all over Indiana. I expect these properties to see a huge loss of value if overall US market ever falls. These areas are being pitched by Turnkey companies all over BP.
Realtor · Jacksonville, FL · Member since 2019 · 95 posts · 87 votes
5y
I personally like the idea of finding a property in an appreciating area or area you forecast to appreciate. Becuase rents should increase as well. And in addition later down the line you can take out a HELOC to grow your business dependent on the amount of equity it builds to. Or you can 1031 exchange and continue to grow to more properties or a more profitable one in the future and defer the taxes. But there are also great benefits of immediate cash flow as well. Appreciation is my preference though and those are my reasons why.
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Robert Beardsley thanks Robert, I believe you are 100% correct. The best deals are from experience and getting to know people. The deals will definitely get better and like you said as long as it flows positively, I’ll be alright!
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Christopher Smith I really like that idea to have a combination of both a cash flow market, and an appreciation market but still positive cash flow. But definitely focus more on cash flow on the initial properties. Thank you for your recommendations!
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Eric Sullivan thanks for your comment, Eric. I’m starting to believe like you said; appreciation is icing on the cake.
Could you maybe explain in a little bit more detailed when you say you look at deappreciation and Equity as a driving decision? Are you looking for a property to deappreciate overtime?
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Justin Sullivan thanks for your feedback, Justin! Best of luck to you as you continue flipping and investing and taking on those higher risks. No risk, no reward!
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Henry Lazerow wow that is definitely something to look out of. When you say the high risk areas don’t cash flow because of problems, are these problems because of poor tenants?