Investor · San Antonio, TX · Member since 2013 · 88 posts · 44 votes
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?
@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.
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?
Each is appropriate in it's own portion of the real estate cycle as long as they are in compliance with your goals.
For me the states I invest in are equally important to the type of investment. Texas good . . . California bad
@Account Closed California is not landlord friendly and a higher tax state. Aside from that why is California bad?
Heheheheh you need more? Sorry, maybe you haven't read the Constitution.
Amendment 4 - Protection from Unreasonable Searches and Seizures
The right of the people to be secure in their persons, houses, papers, and effects against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched and the persons or things to be seized.
Amendment 14 - Rights of Citizenship (Ratified July 9, 1868)
All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws.
Yeah, I guess it's just a bunch of words on paper.
California Courts: "Freeze" on Eviction Lawsuits
On 4/6/20 the California Judicial Council adopted Emergency Rule 1,
which placed an eviction "moratorium" or "freeze" on California courts.
Unless necessary to protect public health and safety, an
eviction case (residential or commercial) can't proceed either while
Newsom's N-44-20 state of emergency remains effective or for 90 days
after it ends-even if the eviction is not COVID-19 related.
Local City and County Eviction "Moratorium" Ordinances
Pursuant to Newsom's executive orders, over 150 cities and counties
enacted local eviction moratoriums. Most of these moratoriums protect
tenants experiencing COVID-19 related financial hardships, and many give
tenants time post-emergency to repay missed payments. Some moratoriums,
like Oakland, Alameda County and San Francisco, are true eviction
moratoriums, meaning landlords generally can't evict tenants during the
emergency even if the failure to pay is unrelated to COVID-19. And, those landlords cannot evict tenants who couldn't pay because of COVID-19 hardships even after the emergency ends.
Some cities and counties have also instituted total bans on rent increases (e.g., Oakland, Concord, Eureka, San Jose, Santa Ana, West Hollywood, Contra Costa County), meaning landlords cannot increase rent at all. See the chart below for more information.
If a Local Ordinance Doesn't Exist, Doesn't Apply, or has Expired.
If your city or county hasn't enacted any eviction protections-or it
doesn't apply to your situation or has already expired-you still have
some protections under the temporary eviction freeze in the courts. But
your landlord can still file an eviction case against you-it just won't
go forward until 90+ days after the state emergency ends
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?
If you can afford negative cash flowing asset in a good landlord state it may be a good move. Most people can't afford to lose money every month and wait for it to appreciate. An area like KC may see 10-30% appreciation and great cash flow and low money down and landlord friendly. So I think it is more about what to can afford and your long term strategy - both are great strategies if you buy in the correct locations.
@Alex Olson. Agree that it depends on ones cash position.i see that your from KC. I purchased a couple properties in Johnston county. Purchased for $400,000 in 2014 and it’s likely worth $660,000. Cash flowed well and I have no complaints and I still own it. 55% appreciation in 6 years.
However looking back i would have done better having purchased in a higher equity market like California. As long as It was cash flow neutral , the same property would have returned a lot higher equity.
What I’m personally finding out from experience is that Cashflow , although highly regarded , is slightly over rated. Conversely appreciation ( or “gambling “ ) is looked down on more than it should be. perhaps that’s the slant on this forum or the cash flow people are more vocal.
@Alex Olson. Agree that it depends on ones cash position.i see that your from KC. I purchased a couple properties in Johnston county. Purchased for $400,000 in 2014 and it’s likely worth $660,000. Cash flowed well and I have no complaints and I still own it. 55% appreciation in 6 years.
However looking back i would have done better having purchased in a higher equity market like California. As long as It was cash flow neutral , the same property would have returned a lot higher equity.
What I’m personally finding out from experience is that Cashflow , although highly regarded , is slightly over rated. Conversely appreciation ( or “gambling “ ) is looked down on more than it should be. perhaps that’s the slant on this forum or the cash flow people are more vocal.
Thanks for your response.
I think your point is very valid. But cash flow neutral in CA is hard to come by...and tenant laws could crush your break even point. Also most people simply can't see forward with a property that hopes to break even every year but knows it will appreciate. You have to be wealthy, most often, to make this leap. If you want more help on KC let me know :)
@Dan K. Generally speaking if you can't find both in your properties (which is ideal) I think cash-flow is more important early on in one's investing (if they are not a high income earner) so their income can be increased. This can accelerate one's savings rate and ability to reinvest. Later on in one's investing journey I think equity growth is more important which generally means buying more desirable and more expensive properties yielding greater safety and bigger overall profits or IRR in a portfolio. My $.02
@Dan K. I think this completely depends on the individual's goals. If an investor is looking to generate passive income to quit their 9-5, then they likely will value cash flow over the equity appreciation upside. If the person loves their career and is looking for a retirement supplement and to create long-term wealth (and can eat the negative cash flow/has the cash reserves), then I think the equity play makes a lot of sense. I personally think it's best to diversify across multiple markets. I personally invest in the Kansas City area for the combination of cash flow and some equity appreciation, but also plan to invest in the Seattle area (where I live) for the long-term equity growth.
When you just look at the total numbers, maybe the one in CA made more money. Assuming your goal is to eventually spend the money made from the investments, if you just rely on equity build up, once you spend it, it's gone, and you have to start all over again and will take years. If you have good cash flow, even if you spend it, next month you'll get more. That said, I do believe in the importance of building up equity, especially if you use that to buy more properties. At least that's my strategy.
@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.
@Mike D'Arrigo. Thanks for your response. Since you live in Cali you’ve seen first hand what appreciation does. my point is that as long as you have a cash flow neutral or slightly positive property in California the equity growth is hard to match. Even during the worst downturn in 2008, while home prices plummeted , rents stayed about the same and eventually rose so I was able to hold onto that property without issues.
Example : paid for property for $500,000 that broke even in 2005 with rents , at the height of the real estate market. I definitely over paid. Rent was $2600 but it paid for all expenses and netted me $40 a month.i consider this cash flow neutral. market crashed in 2008 but I contiene to hold the property. Home price dropped by 40% however rents never dropped. In fact they continued to go up.
Property is now worth 1million despite going through the worst recession ever. rents are not $4500 btw.
I would not be able to find any deals like this in Kansas or Indi and I own there personally myself as well.
An investor can speculate as long as the cashflow is stable in my opinion.
So many pundits told investors to stay out of cyclical markets after 2008 and I ( and many others )listened to them and avoided California and coastal markets. Investors investors did well when they zigged when others zagged or basically when they ignored the pundits of avoiding.
@Dan K. I think it depends how much cash flow it produces compared to how much it appreciates. If I have an STR that nets me $40k yearly In cash flow which I have. That's essentially the same as me buying a house that appreciates $200k over a five year period. Which situation is better? Would I pay less tax on one of them vs the other or is one method better than the other? I'm not sure so is why I ask.
@Dan K. I think it depends how much cash flow it produces compared to how much it appreciates. If I have an STR that nets me $40k yearly In cash flow which I have. That's essentially the same as me buying a house that appreciates $200k over a five year period. Which situation is better? Would I pay less tax on one of them vs the other or is one method better than the other? I'm not sure so is why I ask.
@Matthew Stallings depends on your goals and when/how you access the $200k in equity. ie via sale, 1031, cash out refi, etc. Also, the return on your effort is not really comparable between an LTR and a STR. Takes a lot more engagement/work to manage STRs. How many bedrooms is your STR and what is the sleeping capacity? Curious.
@Brian Gerlach. Yes that’s a good point because STRs aren’t fully passive and yes it’s usually an hour or two of work each week. 7 bedrooms and sleeps 20. I guess in this case, $200k appreciation is better over 5 years but if you don’t 1031 when sell, owe a lot of tax money right?
@Matthew Stallings, In general you'll pay a lot less taxes on an appreciation vs cash flow play - Mainly because of cap gains rate vs ordinary income. But you have to wait to enjoy the money
I've never met a 1031 I didn't like :). But... if I had to pay tax then paying $65K and putting $135K into my pocket on that $200K of appreciation would be OK with me! And using your work load numbers that $135K (not counting cash flow) is my pay for around 500 hours of work over the 5 years. So $270 an hour. It aint as good as a plumber but beats delivering pizzas.
Of course I'd move out of CA first and to FL so I'd only pay $30K and get to pocket $170K (Oh wait that's what I did :)
Sometimes theres a time to just think of taxes as a cost of business - but not very often.
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?
Dan, I've been arguing that appreciation builds more wealth than cashflow since I ran the numbers and saw the math for myself. I'm so glad to see a post that confirms the math with longterm, first-person experience!
My only caveat when urging others to invest for appreciation is that an investor needs to have stable income outside of their RE investments to pursue this path. If an investor needs income today, it's difficult to sell them on the promise of future returns.
Beyond that, the arguments against investing for appreciation are silly.
For example: only cashflow-negative properties appreciate, especially in California. Simply not true. Even in CA, even in Los Angeles, even around me in the center of the city, cashflow-neutral (or even just slightly cashflow positive) deals exist!
Another argument: appreciation is speculative. Hogwash! There's risk in expecting appreciation, but there's also risk in expecting modest rental increases, expecting turnovers to be infrequent enough to actually profit, expecting your property not to be destroyed by tenants, expecting population gains in your market to continue, etc... Our task as investors is to mitigate risk. I mitigate the risk of not realizing appreciation by thoroughly analyzing the submarkets of LA County. I don't buy any old building and cross my fingers; I study demographic trends, development plans both private and public, retails openings, etc., to identify areas that are most likely to realize appreciation in the near term.
Another silly argument: appreciating markets are too expensive, especially in CA. I'll admit that highly sought-after properties are more expensive that less desired properties; that's basic cap rate stuff. Properties in CA trade at a lower cap rate because they're safer, more sought-after investments. I think this argument stems, though, from the sticker shock of a $2M fourplex, for example. You can buy 40 doors in Little Rock for $2M! But those Little Rock doors rent for $600/month and those LA doors rent for $6000/month. You're buying income, not doors. (I'm pulling these numbers out of my rear end, FYI. I know income streams are more expensive in LA, but like I said, that's cap rate stuff. Such is the case because investments here are safer and more desirable.)
Anyway, Dan, bravo for taking on the BP orthodoxy! I'm right there with you!
To me I think it depends on the investment strategy. If you are looking at holding on to an asset or assets for a long period of time, you may want to stick with appreciation because you are building wealth from equity buildup.
However if you want to live off of cash. Cash flow is king.
@Brian Gerlach Yea, they definitely can be a few times per year. I just want to buy a few more so I can quit my w-2 job and give me more freedom in my life.
@Dan K. I think it depends how much cash flow it produces compared to how much it appreciates. If I have an STR that nets me $40k yearly In cash flow which I have. That's essentially the same as me buying a house that appreciates $200k over a five year period. Which situation is better? Would I pay less tax on one of them vs the other or is one method better than the other? I'm not sure so is why I ask.
