Cash Flow vs. Equity Growth: What's more important?
I've invested in both Cash flow markets and equity returns markets for the last 15 years. The cash flow markets were in Kansas and Texas. The equity markets were in California. While the cash flow markets (Texas and Kansas) produced solid returns with good cash flow, the equity growth were modest. For example, homes that I purchased in 2013-2014 have appreciated 50-60% Texas. Respectable at best. Compared to California homes which appreciated closer to 80% during this same time period. The big different is that homes in California were about 5X the cost of homes in Texas and so on the front end they seemed much more risky. Investing in 1 California home of $750,000 created more wealth than buying 5 Texas homes for $150,000.
Cash flow properties are safer but I don't think investing in equity growth is "gambling" as many people state in REI forums. I think that if you can break even, investing in equity rich areas like the coastal areas might be the smarter long term play. Cash flow properties give you money to live on, but equity growth is what will really accelerate your wealth. I realize there are players on this forum who have gotten rich on just Cashflow investments alone. However, for the medium size investor, investing on equity growth might be the smarter long term bet. Your thoughts?
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@Dan K. the answer is going to be different for everyone based on where they are in life and their objectives. Think of cash flow and equity as the goose and the golden egg. For someone who wants long term cash flow and income then obviously cash flow markets are the better, especially if they are older. I've lived in CA my whole life so I have seen first hand the appreciation potential. Unfortunately, the barriers to entry are prohibitively high due to the high cost of real estate. I remember the days when people would brag that they only have a $200 or $300/mth negative on a rental property when home prices were going through the roof but it didn't work out so well for them in 2008, The big problem with investing for equity is that real estate goes in cycles (even in CA) and you can't control when a downturn will happen. It's actually possible to have the best of both worlds. As you mentioned, Kansas City is a good cash flow market but it has also been a good equity market. Rental properties that we were selling for $80-$85K 3 or 4 years ago now sell for $100K-$110K. Indianapolis has also seen a lot of appreciation. In fact, median prices in Indy are up over 10% YOY. It is possible to have both.