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.
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Zachary Beach thanks for your feedback. Yes it seems as long as you buy in a desirable location, you can force the appreciation and have a little more control rather than banking on just the market appreciation side...thank you for your advice!
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
5y
@Casey Maeda
If a person doesn't have sufficient mental faculties or emotional durability to succeed in the securities markets that's fine, many others do and have done so very handsomely.
I've done very well in both areas (securities and real estate) so I stand as proof you can be successful in both assuming you possess the requisite talents.
Admittedly most don't, perhaps you are one of them.
@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.
@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?
Well the 3 things we look at are cash flow, depreciation, and equity. Equity really is a by product of making payments or once improvements are completed what is my equity position going to be in the property. This benefit really relates to a refinance opportunity. Depreciation is the tax benefit as we all know. At my company Sullivan Capital we make decisions on how many flips to how many holds based on a balanced strategy. So we want to make sure we have enough depreciation to off set the capital gains for both us and our investors. We use cost segregation studies and make decisions on what we do to a property in regards to renovations around this idea (as well as maximizing cash flow). This is part of our pitch to investors. We look at real estate as less of a transactional 1:1 investment or deal by deal, and try to look at it as a holistic long term strategy which executes flips for multiplying cash, and holds for cash flow, depreciation (offset gains from flips), and equity. Which real estate for most people is very transactional. As a disclaimer we work with a tax firm who specializes in cost segs and tax planning for serious real estate investment groups. We don't do it ourselves.
We also account for depreciation benefit as apart of our underwriting when looking at a deal from all angles. I have been sent a lot of multi family deals that do not take this into account which I personally think is a misstep.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
5y
From a pure investment perspective all that matters is IRR. Its the sum of cash flows plus appreciation over a given period. It also includes a discount rate but you can ignore that for simple comparisons. Now in a more practical sense cash flows matter if you are dependent on them for your income. And highly negative cash flows need constant input of capital, which also impacts IRR negatively. If you are in the wealth accumulation stage, go for the best IRR possible with some positive cash flow. While people say appreciation is not guaranteed, neither is cash flow. Both have their own risks.
Rental Property Investor · Lehigh Valley, PA · Member since 2017 · 200 posts · 191 votes
5y
I recommend the opportunity to buy into a high appreciation area/property. If you can sustain some years with ROI ranging from negative to 1-3% you then can later leverage the equity to do smaller flips or BRRRRs in those higher cash flow areas.
If all go well you'll come to the decision point to pay down the loan and have a very nice nest egg you can continue to borrow against or use the 1031 Exchange tool and leverage those capital gains into purchasing many cash flowing properties.
A clear answer doesn't exist. It all depends on what goals you have, your knowledge, skills, and abilities, and a holistic view of your portfolio.
Do you make $50k a year, have $40k in expenses, and want to augment/escape your W2? Then you should probably focus on cashflow and gain some wealth through paying down the mortgage over time.
Do you make $300k/yr in your W2 and need a place to the piles of money you have siting in a bank account? Then buy for appreciation and cover the cash short fall out of your W2 income while at the same time paying down the loan.
The answer to your question is a function of your goals and 'why?' for investing in RE.
All that being said, what isn't talked about a lot on here is rent growth. Rent growth and appreciation have some strong correlation. So, on average if you buy a property in a place that people want to live, not only will the value of the home go up, but so will the rents. That means, if your rents start off negative, but since your costs are mostly fixed, but the rents go up, your cash flow has no choice but to go up.
Real Estate Broker · Lakeland, FL · Member since 2011 · 305 posts · 181 votes
5y
Always invest for cash flow, that way if the market turns you are not left stuck holding the bag. Appreciation is the icing on the cake the trick is to find a property that cash flows well and will appreciate over time.
Investor · Tampa, FL · Member since 2017 · 589 posts · 251 votes
5y
I believe it will depend on what your long term strategy is and if you are in an emerging market. Here in Florida price per unit is high so you could bank on appreciation more so than cashflow depending on the deal. Now this changed per property but overall it will adjust. Best of luck to you!
Flipper/Rehabber · Denver, CO · Member since 2015 · 134 posts · 61 votes
5y
Seriously? If both are equal cash flow. Can use tax loopholes to help lighten the tax burden. One is a huge gamble you are riding on hope and the other is a gamble that has worked for over a 1000 years+
Would you rather play roulette or count cards in blackjack? Both are gambling
Investor · Commack, NY · Member since 2020 · 7 posts · 18 votes
5y
Hey Brandon, Great timeless question! It depends on your situation. If you can cover a cash-flow negative property with funds from your day-job or savings account, then it can still be a good deal. Assuming we're not talking about more than a couple hundred dollars a month. My first property was and still is a cash-flow negative property in Cincinnati, 13 months and counting, and I'm still super happy I purchased it. That said, it only loses about $200-250 a month - and I can cover this with my teaching income. In that time my appreciation has flourished, and the loan pay-down has given me a decent equity bump. so on paper it's pretty much a wash. Tack on my tax savings when I file this year, and I'll be ahead of the game. There are investors out there who will only ever buy a cash-flowing property - and that is fine, as your mental state post-deal is just as important as the deal itself. That said, looking at property strictly through the lens of cash flow completely discount the three other wealth generators that make investing in real estate so totally awesome (appreciation, tax savings, loan paydown/equity build up)! Also, I have to disagree with Amy above about having 6 months reserves per property. 3 months is adequate. Good luck! Joe
Both. If i have to sacrifice either one on a purchase I am walking away.
And guess what.....all of my properties are in the Louisville market so it is very possible.
If you would like to talk with an investor that has built a small portfolio here in Louisville i would be glad to have a cup of coffee together. And I have nothing to sell but just love talking property.
Property Manager / Licensed Realtor · Toledo/Columbus, OH · Member since 2019 · 244 posts · 262 votes
5y
Hey @Brandon Fuhrman, Welcome to the investment game! I hope you like numbers :) I have been investing since 2012, I currently invest in Akron and Cleveland Ohio as well as Tampa Florida. In my experience, I found that my earlier investment properties were just to get me in the door, my learning steps. As time came and left, I learned that cash flow (At least for me) is what I am looking for. If you are looking to purchase and hold for 5 years and sell, appreciation is going to be your cup of tea. I also believe, it depends on where you are investing.
My Tampa properties appreciate very nicely, even in the not so good areas. However, my Akron and Cleveland properties, have not appreciated very well (And those I have had for almost my entire investment career). My Tampa properties have appreciated VERY nicely. Toledo, where my stomping grounds are, have the same diverse neighborhoods, some cash flow very well and do not appreciate, and others can provide both cash flow AND appreciation.
I am sorry for the long post, if you want to hop on a call I am more than happy to do so :)
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Michael Deering thanks for sharing, one of the best things there is in real estate is so many opportunities and options to do so much, thanks for your comment.
Louisville, KY · Member since 2020 · 80 posts · 31 votes
5y
@Bill F. Great info, Bill! I’m glad you brought up rent growth because that is important to look at and I wasn’t even thinking about it, thank you for sharing!