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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CP Chou
Real Estate Agent · Austin, TX · Member since 2008 · 58 posts · 26 votes
6y
@Matt Camilliere for this scenario, Austin on a househack SFH or duplex if you're occupying. Otherwise the best duplex numbers you can find around the metro. If you want strong cashflow go to a proven vacation rental market that's even covid proof (yes they exist).
The best is to pull numbers for last 3 years and see for yourself in the two scenarios you’re considering.
0 Reply
J. Mitchell Bernier
Lender · Southwest Georgia · Member since 2017 · 315 posts · 278 votes
6y
@Matt Camilliere
I think the answer to your question all stems from where you start. If you at like me, starting out with the low money down strategy then you need the cash flow to scale quickly. However, if you have the capital, it would be financially irresponsible to not take advantage of the appreciation potential in major markets and maybe not get the cash flow others are getting.
0 Reply
Max T.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
6y
@Matt Camilliere
House hack a 2-4 unit in the appreciating area. Your future self will thank you.
0 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
6y
Cash is king, but I would not buy any property I didn't believe would appreciate in some fashion. My preference is to buy where I can add value to force appreciation.
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3 Reply
William C.
Weehawken, NJ · Member since 2020 · 11 posts · 8 votes
6y
@Matt Camilliere Both please... and I’ll take that with the unicorn my daughter would love to have :). Not copping out but, for me, the questions on both would be - how much and by when. Then I could normalize the returns to compare and make an informed decision.
1 Reply
Killian Ankers
Professional · New York City, NY · Member since 2016 · 9 posts · 6 votes
6y
@Matt Camilliere
Cash flow will keep you afloat. Will it make you a lot of money? Only if you have a lot of houses. And that’s not an easy thing to acquire.
Buy a few good long term rentals with good price appreciation and decent cash flow. I’d rather have ok cash flow and good appreciation any day. Why? Because good tenants rent in good appreciating neighborhoods.
But overall, buying diversity should be the goal. Have a couple of good cash flowing properties and a few more lower cash flow but good appreciating (hopefully) properties.
1 Reply
Julian R.
Rental Property Investor · Ewa Beach, HI · Member since 2013 · 31 posts · 10 votes
6y
@Matt Camilliere
Both. Start with cash flow until you build a healthy net worth by your definition and then you can look at some appreciation plays
1 Reply
Trevor Turnbow
Member since 2020 · 7 posts · 2 votes
6y
@Matt Camilliere don’t ever buy military or school only generated locations... military camps have moved before. Schools have closed before.
Austin is a hub. It’s big and it’s appreciating fast! Study San Fransisco, Los angelos, and other big cities.
If you aren’t cash flowing you aren’t looking at the right deal
0 Reply
Allan C.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
6y
If markets remain efficient and you are in it long term, it shouldn't matter. Those that argue one over the other definitively do not understand how to factor uneven distribution of cash into IRR calculations. Like any other investment, if you have ability to invest in either CF or appreciation, then you should diversify your risk and pursue both.
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Storm S.
Real Estate Agent · Santa Barbara, CA · Member since 2016 · 518 posts · 283 votes
6y
@Steve Morris my vote is number 1, number 1 is where you make the real money. Any property will cash flow depends on your capital structure. I’m looking for the highest possible total return. Your typically going to get that by looking for appreciation. Cash flow is just icing on the cake. For example in commercial real estate as long as your in a strong market and cap rates don’t decompress by some extreme amount appreciation is roughly predictable by predicting how much rents will increase by over your hold period. Some conservatives assumptions can lead you to a rough estimate on what a property will appreciate to.
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Aaron Lemieux
MA · Member since 2020 · 3 posts · 3 votes
6y
@Matt Camilliere As a beginner in all of this i would say cashflow. But i mean if you're cash flowing $20 000 a month already then maybe aim for appreciation. Its really all down to what your goals are!
1 Reply
Ryan Proffit
Saint Joseph, MO · Member since 2018 · 401 posts · 244 votes
6y
@Matt Camilliere
Buy something 5+ units, you can make your own appreciation, as well as cash flow.
0 Reply
William Behring
Investor · East Falmouth, MA · Member since 2014 · 13 posts · 1 vote
6y
At my age (67) all I want is cash flow. I also regret not focusing on cash flow at age 20.
0 Reply
Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
Originally posted by @Storm S.:
@Steve Morris my vote is number 1, number 1 is where you make the real money. Any property will cash flow depends on your capital structure. I’m looking for the highest possible total return.
Sorry, in Portland proper, I've got a lot of guys from LAX that overpaid in 2017/18. Some are trying to sell these and taking a hit on price.
A lot of the properties are break-even deals, so the worst of both worlds.
I'll paraphrase Warren Buffett and say that you make your best return when you buy. You buy based on returns today. If you have great returns today, the price will adjust in your favor.

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Raul R.
Rental Property Investor · New York City, NY · Member since 2017 · 493 posts · 386 votes
6y
@Matt Camilliere
Ideally I want both but if I can only pick one in our current environment and my current situation I would want appreciation to increase my equity much quicker..
Cash flow is great but if you have a bunch of tenants without jobs or stimulus checks your cash flow will stop or decrease and if your State doesn’t allow you to evict your options are limited..
For me having a lot of equity / high appreciation is a great insurance policy it provides options during hard times. My reserves are good but I know if I lose my high paying W2 job I can sell some of my properties if needed. This is why obtaining good assets is so important provides options.
Everyone situation is different if I had a low paying W2 I would have a diff opinion..
0 Reply
Mike Singh
Member since 2020 · 23 posts · 8 votes
6y
@Matt Camilliere #2 all the way , cashflow will always be there for you while appreciation is like betting on a roulette table .
1 Reply
John Clark
Member since 2018 · 1k+ posts · 1k+ votes
6y
If a property isn't appreciating then I want to know WHY it isn't appreciating. Some people are okay with C/D neighborhoods. Others aren't. I can tell you right now, however, that A/B neighborhoods with stagnating property values aren't going to stay A/B neighborhoods very long. As we all know, property class indicates the type of tenant you wind up getting.
I'm not talking about getting crazy bubble appreciation like Vancouver, Canada or or San Francisco, but the steady, constant , appreciation that comes from a well maintained, solid community with competitive advantages over other places (near mass transit, etc).
So a lack of appreciation is a warning sign and I have to ask myself; "Do I want to be in this neighborhood (or city)?"
Appreciation isn't something to buy for, it's something to buy into. Use it to help select the neighborhoods you want to invest in. Try to cash flow in areas that are on the cusp of appreciation.
2 Reply
Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
Originally posted by @Raul R.:
@Matt Camilliere
Cash flow is great but if you have a bunch of tenants without jobs or stimulus checks your cash flow will stop or decrease and if your State doesn’t allow you to evict your options are limited..
If it has lousy cash flow now and in the foreseeable future, why would it appreciate as much?
0 Reply
Lucia Rushton
Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes
6y
@Matt Camilliere. Cash flow every day
1 Reply
John T.
Investor · New York City, NY · Member since 2017 · 15 posts · 2 votes
6y
Cashflow, always for me. That said, I have not yet sold a rental property so I have not experienced the high of getting a fat check at closing. But that feeling in the last three days of the month when next months rent starts rolling in ... Does not get old.
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Bryan Beal
Rental Property Investor · Greenville, SC · Member since 2019 · 115 posts · 264 votes
6y
@Matt Camilliere when I first started I was all about appreciation - I had a high paying W2 job and was thinking long term vs short term cash flow. After I really got into REI, I realized how crucial positive cash flow is. Appreciation is wonderful but it can't be your only attraction - cash flow will be your bread and butter as you begin (and grow) your REI adventure. Good luck!
1 Reply
Carlos Gonzalez
Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
6y
@Matt Camilliere
This is how I see cash flow and appreciation personally.
One buys an investment property after one has made their due diligence that you’ll be cash flowing positive since day one, at least on paper. Maybe you won’t because sometimes you gotta pay something expensive in the property, you get the idea. But in the end of the day you know that the cash flow is paying for the property issues and then some so you’re safe.
The appreciation is based on projections and is cyclical depending on the health of the state and national economy. If you know this then you’re ahead of the curve, literally. Investors have bought expensive positive cash flowing properties in the peak of the market then they experienced a depreciation on the market when the state or national economy is not healthy. At that point investors are protected because of the cash flow other investors not protected by a healthy cash flow suffer and the banks will get their assets back plain and simple.
Professional investors look for historical prices to see how much the assets were sold the most at their peak and will look closely at the state economy to see if the local economy can withstand higher prices, rents, etc.
Here in Phoenix I look for cash flow and recently have paid close attention to appreciation because well we became the number one city that has experienced the most appreciation value in the country in the last 4 years but more steep in the last 2 years. This COVID 19 has helped Phoenix somehow and we welcome it, real estate is hotter than even here and don’t see when is slowing down.
So to assert your question about cash flow VS appreciation I say it depends on what you want You can pursue both as well. Not option is better than the other one as long as you are hitting your goals. If you’re pursuing cash flow in an appreciating area then you are lucky because you’re doing your research but keep in mind that at some point the appreciation will become depreciation and the cash flow will be your cushion unless you decide to sell your assets before you’re deep in the water.
Hope that helps.
1 Reply
Dennis Maynard
Real Estate Broker · Los Angeles, CA · Member since 2018 · 307 posts · 146 votes
6y
Know thy self, Know thy market, Know thy goals.... Always remember, if either appreciation or cash flow turns south temporarily from I don't know, a global pandemic as example, can you hold it. Have a backup plan.
0 Reply
Olga Daisel
Member since 2020 · 69 posts · 25 votes
6y
@Aaron Gordy
Aaron, any cash flowing in Austin? I am interested in Multi, but they seem to be very rare finds.
0 Reply
Johnny Wolff
Rental Property Investor · Kansas City, KS · Member since 2015 · 45 posts · 29 votes
6y
@Matt Camilliere - think you should look at the net worth increase you'll see for each investment when you combine appreciation + mortgage pay down + cash flow. Even in "high cash flow" markets, we're talking about a couple of hundred bucks a month per unit. Hard to imagine that actually increases your net worth more than properties in Austin.
I bought 3 props there in 2015/2016. Best investment decision I ever made. That investment allowed me to start my company by giving me access to $100K just a couple years years later.
One note: Do you have a stable income that can handle some carrying costs of Austin properties? that's important.
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