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

Rental Property Investor · Member since 2018 · 15 posts · 28 votes

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.

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Jon Schwartz

Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes

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.

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Michael Ablan
Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Matt Camilliere - I'm in a high cash flow, zero appreciation market.
My recommendation is to do both.
The cash flow portfolio will help you weather the storm. Your appreciation play portfolio will make you rich.

2 Reply
Jonathan Soto
Lender · Newark, NJ · Member since 2016 · 695 posts · 252 votes
6y
cash flow cash flow cash flow. you can't predict future on appreciation, dont bet on it
1 Reply
Brian G.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
6y
@Matt Camilliere why not both?
0 Reply
Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y

Lots of way to skin this cat, right?
I understand, but its about a degree of confidence in your ability to forecast what'll happen.
One other item I forgot is that Killeen may be throwing off a lot of cash each year compared to Austin. Even with your assumptions, you' may need to wait until a sale to realize the CapGains part of it in Austin.
I don't know how to handle the tax part of it since you'd get tax shelter easily on opeating income (assuming you leverage).
Anyways, I appreciate the feedback. I get the same discussion with clients all the time.
If it helps to compare, if I look at the micro-market that is Portland, you used to pay top dollar for Portland Proper (and Bend), now since there's an activist City Council, I can almost guarantee there'll be deflation. However, 2nd/3rd level markets are now in demand with better cash flow and the promise of better appreciation (they are a lor cheaper than Portland $/unit) for the near future.

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Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
Originally posted by @Michael Ablan:
@Matt Camilliere - I'm in a high cash flow, zero appreciation market.
My recommendation is to do both.
The cash flow portfolio will help you weather the storm. Your appreciation play portfolio will make you rich.

Not fair - The discussion was either/or :)

0 Reply
Cody Emily
Rental Property Investor · Member since 2018 · 24 posts · 5 votes
6y
Depends on the part of your journey you are in. In the beginning I would go for cash flow but later on in your journey you would want that cash flow to funnel into appreciating assets. So I'd buy rentals for a bit and then once you got that steady income and net worth start buying into huge appreciation areas.
0 Reply
Josh Walker
Investor · Norman, OK · Member since 2017 · 75 posts · 53 votes
6y
@Matt Camilliere - it depends on where you are in your financial journey.
I am a huge fan of cash flow. Strong day 1 cash flow can greatly de-risk an investment. This also creates more financial safety overall if you run into unexpected financial difficulties. I see cash flow as the foundation that must be established before you focus on appreciation. There is a place for appreciation in a portfolio, however, having it as the main metric in a deal adds a lot of risk.
Also - while difficult, you can find both. I believe that it is worth the hunt to find opportunities that can provide both.
That’s a long winded way of saying ... a bird in the hand ...
1 Reply
Bharat D.
Cedar Park, TX · Member since 2020 · 7 posts · 0 votes
6y
@Matt Camilliere, I prefer cash flow
0 Reply
Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
6y
@Matt Camilliere. A little bit of both. A diverse portfolio is best
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1 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
Both. My market is pretty expensive so I buy MF for cash-flow and nice houses below market value for appreciation.
Whichever way you go, don't pay retail.
3 Reply
Marty Minor
Member since 2018 · 2 posts · 0 votes
6y
2
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Joshua Fortner
Member since 2020 · 3 posts · 3 votes
6y
I would say it ultimately depends on your financial position. Once you build adequate cash flow with low expenses, start acquiring more appreciating properties. I would reccomend both for resilient success. Id say first work on acquiring cash flow properties, if you cant cashflow a property you probably shouldn't be making that investment period. Both options should be used if your more in need for income then cash flow. If you have already built adequate passive income to overcome your expenses, then id reccomend adding appreciating propeties to your portfolio mix. Im a noob but this is what makes logical sense to me correct me if you see holes thank you.
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
6y
Originally posted by @Andrew W.:
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.

No doubt, this works best when taxes are fixed or very low. I once did a comparison TX vs CA, same everything except factored taxes and over time this became a 6 figure difference plus or minus on just one sub 500k property. Essentially CA supplements your property taxes. The effects of prop 13 or low taxes can be significant when total profits is your bottom line.

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Robert Eyers
Property Manager · Austin, TX · Member since 2019 · 60 posts · 53 votes
6y
@Matt R. so you recommend CA over TX? I'm curious to hear your opinion on a "renter friendly" vs "landlord friendly" states. The tax angle has never been a top priority for me, but you have me thinking. Its ironic since TX is a MOSTLY tax friendly state.
0 Reply
Account Closed
Real Estate Investor · Burnet, TX · Member since 2017 · 29 posts · 17 votes
6y
If I had to pick one, probably appreciation. My first investment property was essentially cash flow neutral but I got huge appreciation. Sold that to buy another house with great cash flow. Around the same time, bought another for appreciation. Rinse and repeat. Now have 2 of each and I think I’m done for the time being. I’m semi-retired, not looking for the Big Bang, just trying to diversify and still grow my portfolio. Plus I actually enjoy real estate, as opposed to investing in stocks which mostly gives me indigestion.
1 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
6y
The best is areas with a mix of both. Atleast some positive cashflow with a lot of appreciation.
0 Reply
Melanie Dupuis
Investor · North Bay, Ontario · Member since 2019 · 221 posts · 99 votes
6y
Hey @Matt Camilliere, why not have both? If you invest in secondary markets, you can force appreciation through reposition and renovation. This will ensure that you are forcing that appreciation, all while cash flowing at the same time! Best of both worlds. You can also use the cashflow each month to help with renovations costs, which will end up giving you that higher appreciation, and refinance. Your income-producing asset will be an ATM: Cashflow every month, and then a refinance every 3-5 years.
1 Reply
Kevin McGuirePro Member
CTO of BiggerPockets · Seattle, WA · Member since 2019 · 178 posts · 178 votes
6y
@Matt Camilliere Others have covered the decision matrix and as noted it depends on your goals and other financial circumstances, but I’ll throw my in 2c, which is that cash flow manages risk but appreciation builds wealth.
My decision process is in this order:
1: I ensure cash flow is sufficient to cover operating expenses, vacancy budget, cap ex budget, and has a higher cap rate than the mortgage. This manages risk; the business will remain cash positive and not require me to feed it from W2/savings. Since my portfolio is for retirement, my goal is > 4% cap rate which matches safe withdrawal rate but of course there’s no actual withdrawals so it manages risk of running out of money.
2: Tenant pays mortgage which builds equity. I may extract equity later through sale or refi.
3: Hopefully property will increase in value but I didn’t model it in since past returns don’t indicate future. That said, I think it’s a lot of work to only make a few percentage spread on the mortgage rate, why be so leveraged then? You’d think I’d be focused more on cash flow given my retirement goal but leveraged appreciation is how wealth gets built and that’s the long term game changer.
1 Reply
Jared Sutherland
Rental Property Investor · Scottsdale Arizona · Member since 2020 · 43 posts · 15 votes
6y
@Bryan Noth what areas do you recommend closer to downtown and closer to MW side of town?
1 Reply
Kenneth Fantes
Rental Property Investor · Miami, FL · Member since 2019 · 13 posts · 4 votes
6y
@Matt Camilliere Hi cash flow 100%. With high cash flow you are protected if any hiccups in the next 24 months the for sure you are goin to have some impact, everybody is going to have an impact.
But definitely cash flow
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
6y
Originally posted by @Robert Eyers:
@Matt R. so you recommend CA over TX? I'm curious to hear your opinion on a "renter friendly" vs "landlord friendly" states. The tax angle has never been a top priority for me, but you have me thinking. Its ironic since TX is a MOSTLY tax friendly state.

No recommendations, just observations over longer time frames. Some areas have higher property taxes that inflate overtime, other areas have fixed rates that deflate overtime. These can be huge hidden differences if you hold longer runs. As far as LL laws these are also factors perhaps less than taxes idk. Consider certain areas have a lot less evictions on average, or if the area has more evictions one might have to factor these expenses as well. If you are basing your investments on the ease of eviction perhaps also check areas where these are not typical, good school areas etc. Good luck!
0 Reply
Bryan Noth
Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Jared Sutherland North Austin in general has a lot of options, extending up into Round Rock and Cedar Park. SouthWest has been a terrific spot also for value growth. And then I like the East side as well, just as long as you stay in the path of progress and not too far out. Often comes does to price point and expected hold time for the investment when selecting.
0 Reply
Jared Sutherland
Rental Property Investor · Scottsdale Arizona · Member since 2020 · 43 posts · 15 votes
6y
@Bryan Noth Austin is one of the markets I am looking at. I will synch up with you when I am ready to jump into something there. Thanks!
0 Reply
Nic S.Pro Member
Danville. CA · Member since 2017 · 313 posts · 221 votes
6y
@Matt Camilliere cash flow. It protects you for market fluctuations. Appreciation is great but more of a nice to have.
1 Reply
Alvin Sylvain
Los Angeles · Member since 2018 · 466 posts · 471 votes
6y
I want my money now. Appreciation can be expected and is probable but it's only a dream that might not happen. You can put your hands on cash flow.

Appreciation is "nice to have" but not a hard requirement. Cash Flow is a hard requirement.

I understand there are some expensive markets where Appreciation is King and Cash Flow is a Dream, rarely realized. I can't afford those markets.

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