Appreciation vs Cashflow?

Question

Just want to see everyone’s thought on investing for Cashflow vs Appreciation. I understand, that we should find a sweet spot between these two. But speaking from experiences, does Appreciation worth lost of Cashflow? That is the main question. This fuels the decision of choosing location. A good location could yield strong appreciation overtime that could be larger than the rental cashflow, for those seeking suburban duplex, multifam, etc.

Bill B. · Answer

If cashflow was the be all end all so many people say, they would all be invested solely in class d $50-$75k shoebox properties. They have the best cashflow. Or maybe mobile homes.

As of April Las Vegas properties are up 22% yoy. So if you played it safe and put 25% down, you made 88% on your downpayment. If you turned a previous primary in to a rental and only out 5% down you made 440%.

Last year, on a dozen vegas properties I brought in $200k in rent, profited $150k and cash-flowed $100k. And made about $600k in appreciation.

On my only out of state property a MN lakefront property (I plan to retire to someday.) I had $36k in rent, profited $20k, and had NEGATIVE $10k in cashflow. It appreciated about $100k last year.

Nobody expects cashflow from their IRA/401k, they are 100% appreciation plays. Yet nobody bad mouths that.

If you can afford to hold the properties through good times and bad (either solid w-2 income or reserves) most people don’t realize how useless $100-200/mo cashflow is. It’s one water heater, one fridge, 1/2 an ac unit.

If you don’t think he properties you’re buying will be worth more in 15 years when you pay them off then don’t buy them.

Andrew Postell · Answer

@Huy Le thanks for posting. There is no blanket answer here that applies to every single person.  For example, if you have tons of money and assets, then you have enough to keep more in a deal to produce more cash flow.  Alternatively, if you don't have a lot of money, then you might have to get all of your money out of a property so you can go do it again.  Getting all of your money out means that your loan balance would be higher...essentially reducing your cash flow.  So it will depend on your personal scenario a bit.

I'll provide an example of one of my own properties here just for example - it was a home I purchased in 2008 (during the housing crises).  It was a new construction home where the builder was selling them in 2007 for $175,000.  So now they were selling these houses for $131,000 in 2008.  I thought "I don't think the market will go down much further"....wrong!  The next year it was worth $125k, then $110k, then $90k....all the way down to $79,000.  Yikes!  Now, how much did I lose on this property?  Well, zero.  I still own this property today.  The point that I want to make is do not be afraid of mistakes - I guarantee you will make some.  Real estate can be forgiving.  Just make the best decision you can, plan on a long term view (5 years at a MINIMUM), and take your shot at a property.  Cash flow and appreciation are important but so is just getting started.  Hope all of that helps in some way.  Thanks!

Chris Martin · Answer

Again? Google appreciation vs. cash flow for about 22,900 results from BP forums, blogs, etc.

Tristan Toney · Answer

The textbook answer is to model deals based cash flows, and most institutional investors and analysts take that approach. The tradeoff is a function of risk tolerance, though, and the ultimate decisions should be made based on your particular business plan, the asset type, and the source of investment capital. Appreciation may seem like it only goes one way, but it's never a guarantee, especially given that Real Estate is intrinsically local and asset-type dependent. Rents, on the other hand, are considered to be a more reliable measure of value, especially by lenders. You could have astronomical appreciation but you don't benefit from it until sale or refi, and they couldn't care less because debt service is paid in dollars, not percents.  Also consider your time horizon. If you're financing the property with a ten year note amortized over 30 years, you could be forced to sell into a down market to cover your outstanding loan balance when the note comes due. If you're paying all cash and planning to deed the asset to your heirs then it's less of an issue.

Appreciation vs Cashflow?

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