High Appreciation vs. High Cash Flow... What's your pick?

119 Replies

@Matt Camilliere my vote is 1000% for #2 - cash flow is king in our world.  We are starting as a first generation of investors so we don't have the luxury (yet) of solely betting on appreciation.   We are only investing in cash flowing properties; we're also working on flips now but the focus is buying undervalued or distressed properties using today's market value for the ARV. We still don't invest under the assumption of appreciation alone, we're adding value to increase the value of the home.

Hope that helps!

Originally posted by @Matt Camilliere :

Hi BP Community,

Need your input!

Save to afford a project in Austin, TX? - High appreciation potential

Start buying rentals in Killeen / Copperas Cove / Harker Heights, TX? - Positive Cashflow, guaranteed rent if military tenants.

 Matt, I'm going to make the case for #1!

Over time, owning a good piece of property in a proven appreciating market will build more wealth than buying a cashflowing property with little hope of appreciation. Personally, I'd rather have 80% leverage on a good property in Austin that's appreciating reliably (given the facts on the ground in Austin) than a cashflower in Killeen.

I say "personally" because personal circumstances make the difference. I have a career outside of real estate that provides a healthy income. My wife also works, so we're dual-earners -- and we're both happy in our careers, too! We don't need cashflow right now, but we're excited about building wealth.

That's why we bought an expensive duplex in Los Angeles in an historical neighborhood just outside of Hollywood. If the property appreciates half as well as the longterm historical average, I'll be able to refi out my daughter's college tuition when she goes in 15 years. That's more important to me than $150/mo/door or replacing my W2 (because I own my business, so I cut my own W2, so I got no problems being a W2 employee!).

One other case to make for option #1: even if your goal is to replace your income, you might be better off letting your capital appreciate in an Austin property for a couple of years. Five or ten years from now, when you're ready to replace your income, sell the Austin assets and 1031 exchange them into a cashflowing portfolio in Killeen or anywhere else.

So, it really depends on your circumstances. What are your circumstances?

Also, I'm glad you're not somebody who equates appreciation with speculation. In Indianapolis or Cleveland, such may be the case. But in LA or Austin or Seattle, appreciation is real.

@Matt Camilliere option # 1

@Jonathan Schwartz put it perfectly:

Over time, owning a good piece of property in a proven appreciating market will build more wealth than buying a cashflowing property with little hope of appreciation.

When I started REI it was always about cash flow. I loved seeing my year end reports of $3000 net profit on a rental. However, I started to hear and read about these big REI players who track equity and wealth, not just cash flow. So I started tracking those results over time. The worst performing property I have owned in Austin has grown a minimum $10k per year in value. That's 3x the return I saw annually from my cash flow. I sold a rental this year that grew $100k in 5 years, the appreciation outpaced rent so quickly I opted to sell and redeploy the capital. That would be 30+ years of cash flow from one of my better cash flowing rentals. And the $100k can be tax deferred. Cash flow is undoubtedly terrific and I still buy for that purpose, but appreciation can be a powerful wealth generator.

Appreciation is always icing on the cake vs the tangible benefits of cash flow. I have spoken to agents and PMs in the Killeen/Harker Heights/Copperas Cove markets recently have told me COVID has inflated rental prices and also property appreciation due to reduced deployment and base reassignments which has increased the rental pool, tightened up the inventory, etc. Whether or not this is short term or long term is yet to be determined. Armed services members can also break lease at a moment's notice if they get reassigned and/or deployed. Best of luck!

I would much prefer number 1, as I don't want to have the tax burden today of a good cash flowing property.  However, long term appreciation is more speculative than immediate cash flow, such as good tenants locked up in long term leases.  But of course neither are guaranteed.  

Originally posted by @Mike De Lota :

Appreciation is always icing on the cake vs the tangible benefits of cash flow. I have spoken to agents and PMs in the Killeen/Harker Heights/Copperas Cove markets recently have told me COVID has inflated rental prices and also property appreciation due to reduced deployment and base reassignments which has increased the rental pool, tightened up the inventory, etc. Whether or not this is short term or long term is yet to be determined. Armed services members can also break lease at a moment's notice if they get reassigned and/or deployed. Best of luck!

 In markets like Killeen, appreciation is icing and cashflow is tangible.

In markets like Austin, appreciation creates wealth and cashflow is the buffer that keeps you from losing your investment.

Different markets require different strategies.

It is not always one vs one if looking at bigger picture. Many times high appreciation can turn into highest cash flow if rents are increasing. It might take more time to realize though. This could be also measured in total profits including ROE vs cash flow alone. This mostly depends on exact location either way or in other words if the location has no history of increasing values and rents, it might not be possible anyways and the investment is mostly a cash flow play option #2. 

<grabs popcorn>

I stopped by to see the latest installment of the holy war.  It's actually been quite cordial in this thread, which is more than I can say for most of these threads.

The answers is that it depends.  No investment is made in isolation and your personal circumstances dictate what is best along with how the investment's covariance with the rest of your portfolio.  A lot also depends on your desire to actively manage the property.  Squeezing out the cash flow you think you're getting on your class D property (ignoring what you ACTUALLY get) is far more management intensive than not screwing up leasing out a property near UT-Austin.  Is the extra effort worth it?  It depends.  

Most of the money MOST (not all, but most) real estate investors make is through appreciation, which is largely driven by the value of the land and not the improvements.  Squeezing out a few extra points investing in syndications passively to me is a better use of time than buying a lot of rental property and managing the hassles of tenants.  The former also spreads out costs of vacancies and yields superior cap rates.  

This is the ultimate question that you have to decide for yourself based on goals and risk appetite! 

#1 (Appreciation) is many many times more powerful than cash flow. This is especially true due to leverage. If you buy a $100k property with 20% down (leveraged 5 to1) and it increases in value by $5k you didn't make a 5% ROI, you make a 25% ROI! (5k/20k). I.e. the change in value is 5x'd because you are leveraged 5 to 1. This works on the way down too though! Which is why you need to be cash flow positive to ride out any bad times.

However, #2 (Cash Flow) is required to scale and stay alive. 

#2 (income replacement) is what will eventually make you financially free, but focusing on #1 first will get you there much much faster. 

So I focus on being in good areas where #1 is likely, but I also have the discipline to only buy deals that are cash flow positive. Buying below market value is key. You can earn 100% ROI in the first year with a deal where you for example put in $30k to get $60k of equity. Let's say it then appreciates by conservatively $7k per year, that is 23% ROI on your $30k investment each year before loan pay down and cash flow. For this I focus on Austin suburbs homes under $220k and target rent to price ratio of 0.8% and up. Austin homes may appreciate faster but defensively choose cash flow positive options to reduce risk. I have also invested in Killeen but even there cash flow isn't great unless you are off market. Or, buying low end properties that requires a lot of work to manage.

I would also caution that many deals that looks like they cash flow super well on paper, probably don't in reality. They are often in bad areas where it takes a long time to fill vacancies, or where you struggle to collect rent, your property gets damaged, and you have to evict sometimes. So even if you want to chase cash flow, I would not recommend going for maximum cash flow. I would look at cash flow relative to the stability and easy of managing that property. 

If you really want to go for #2 only you may want to look at states other than Texas that have lower property taxes. I would even argue that 1-4 unit residential is not ideal for cash flow due to inefficiency of managing and maintaining them. If you truly only care about cash flow it may make more sense to get into apartments, mobile home parks, self storage, car wash, etc. 

Originally posted by @Matt R. :

It is not always one vs one if looking at bigger picture. Many times high appreciation can turn into highest cash flow if rents are increasing. It might take more time to realize though. This could be also measured in total profits including ROE vs cash flow alone. This mostly depends on exact location either way or in other words if the location has no history of increasing values and rents, it might not be possible anyways and the investment is mostly a cash flow play option #2. 

Great thought here and I'm sure its often true. Unfortunately in Austin this is usually not the case. Since home values are rising faster than rents (yay appreciation!), property taxes are also rising faster than rents, so cash flow is not really getting better. 

 

I like long-term debt and my tenants paying my mortgage and expenses every month. If I get that, I don't need cashflow or appreciation to capture equity. Over the long-term, values WILL go up and rent WILL go up, even if it is just due to inflation, but the debt payment always stays the same and the outstanding balance will go down, so you end up with appreciation and cashflow as a byproduct anyway!

Hey Matt, I manage properties in Austin, but one of my investors recently picked up a property in Killeen and I agreed to manage it for him. My experience has been... Eye opening. The property is negative right now because we had to fix it up, but the tenants moved in recently and it should be cash flowing very nicely in a moment.

However, as someone who WAS also looking at buying cheap with quick cash flow in Killeen... I'm seriously reconsidering.

I recommend you stick to Austin. If you want to set up a call and walk through the case study I just mentioned, let me know.

Why not both? Why not buy one property that is cash flowing to hedge against the one that is not and is much more likely to build long term wealth ? I have never really understood the argument of either/or. We are fortunate to be able to do both in Texas.  

CASH FLOW over appreciation!

Cash flow affects your ROI and long term income as long as you hold onto the property.

Appreciation is like “Sugar on top” . Appreciation is out of your control. The market can go up, down or stay flat.

@Matt Camilliere First of all, why not both? Second, make sure you understand the rental market in Killeen/Harker Heights before going all in. It does cash flow well on paper, but also flooded with rentals and market can tank when Army deploys out of Fort Hood. Work on diversifying markets as a long-term strategy.