I'm hoping to get some perspective from people here on an experience I'm having in current markets. I would like to put some money into a property that can bring in some cash flow, or at least break even, and I want to do this in a market likely to have decent appreciation. The local markets that make sense for me are all coastal and have super high price-to-rent ratios so cash flow is very hard to achieve. I just never see any deals when I am sent properties. I've got a realtor that, however, is suggesting that I rely on cash flow going positive due to rent increases. This doesn't feel right to me. Rent feels sticky. Increasing it seems harder since it's a social decision that can affect tenants etc, and I've got an ethical system that will lead me to be reasonable about rent increases. So...my questions are: 1) Is there any legitimate reason that a realtor might be suggesting to me that I can rely on cash flow going positive due to an increase in rental income even in, say, a market like Seattle? When I use the rental property calculator on this site, I just don't see that happening with its default setting of 2% income growth; 2) What expectations can one set about income growth via rent increases in this environment. I've read a number of sources (including https://www.cbre.com/insights/...) that forecast rent increases in many types of markets (downtown areas, suburbs), but what might that translate into in terms of reasonable assumptions for % increase? The reason I'm asking these questions is that I'd much rather invest in a market that is in an area that I know and that I am likely to be. I can go the whole out-of-state route but it is, as many have acknowledged, just more uncomfortable. So if there is in fact some way to invest reasonably in a high octane market without being some super cash-flush investor, then that'd be great. I guess this comes down to: is there a way to balance the difficult cash flow situation in coastal markets against their attractive appreciation? Any help with these questions would be greatly appreciated!

I used to think cashflow was everything when I was buying turnkey rentals in 2013. Today I see cashflow as oxygen... it keeps you alive during tough times. But legacy wealth is not created by cashflow but forced appreciation.

@Ethan Miller cash flow is a good metric, but those who only know how to calculate CF are usually less sophisticated investors. The end goal is compounded annual returns (ie IRR), and that is a metric, though imperfect, that can compare different strategies. In high cost markets you will more often rely on rent growth to eventually cash flow if you are not doing value-add. Think about it this way, if expenses grow 3% while rent grows 3%, you will have increasing NOI over time since expenses are a fraction of gross rent (say 30-50%). Inflation is real, so you’ll need to account for it regardless what business you are in. Increasing rent is not a binary question of ethics.

@Ethan Miller My opinion is contrary to the general feeling on BP, but I think rent growth is under-appreciated in these forums while day 1 cash flow is over sold. The fact of the matter is that rent growth and appreciation are highly correlated, which makes sense from a supply and demand perspective. I looked at some data BP put out a while ago and actually having a high degree of day 1 cash flow was a predicator of low/negative total return for SFRs. Looking at BLS Rent growth for the past 20 years, shows that its averaged out to about 5% over the US. Now that's only so useful since RE is local, local, local and past performace isn't a guarantee of future results, but it is a starting point. At the end of the day it depends on what your goals and objectives are for RE investing, but long term wealth generation comes from appreciation and amortization. Given those facts you have to look carefully at the assumptions that underpin the rental growth assumptions.

@Ethan Miller Yeah, there seems to be this "big thing" about cash flow... You know the age-old adage is buy a property with financing and make sure the rent at least covers your expenses, right? You know about leverage, and how its good for real estate --- probably the only area where leverage/debt is good? There was a good thread on this on BP, but I can't find it right now. Let me put it to you this way. Lets say you have a $1mil property that zero cash flow (basically true example of some poster in the Bay area that BP kinda laughed off). Aside from capital replacements, after 30years you have a property free and clear, and you didn't pay for that equity. Your tenant(s) did!! i wonder how other investors you read here buying $100k properties are going to make. Do some math... their cash flow would have to be enormous even if that had ten properties of $100k. Also, in 30 yrs, their properties will still probably be worth $100k... Not to mention they'd ahve 10 kitchens, 10+ bathrooms, 10 hvac system, 10 roofs, etc. to address. I do agree that rent growth is also under appreciated. Just as real property appreciates, so does rent. Yes, recenlty its gone sky high. If you choose a good area, your expenses actually grow less than the rent. That's what happened to me. As for upping the rents on the tenants, that can be tough. Lets face it, no renter is really ready for periodic/constant rent increases. But then again, tenants don't always stay that long. That being said, don't forget the "age-old" adage I started with... With lots of younger investors starting out, they look around and ask what the "grey beards" are doing. These grey beards are very helpful and say they have rental properties with high cash flows... These young investors thank them and move one. In meetings (before covid) and a few on BP, I've continued to ask these grey beards: but what did you do when you started out? They, too, held properties for leverage and appreciation with little cash flow. The cash flow properties (actually usual rental apartments and not a bunch of single family homes) is necessary because they are retired now, and this is their pension plan. ahh!!! Like with any investment, the strategy has to meet your goals and needs. I'd be happy to chat if you'd like. I hope this helps. Good luck.

@Ethan M. I think appreciation is a LOT more important than the BP crowd from 2011 would have thought. I think a lot of the early cash flow is king stuff comes from seeing appreciation get wiped out by the crash. I think cash flow is pretty much always necessary unless you are very well capitalized, but appreciation is really what will help you build wealth. Cash flow is often sucked up in long term hold situations by major CapEx events. As a case in point, I have an incredibly stable four unit that cash flows well. The roof is coming due soon, and I will have to decide if I want to put 3 years of cash flow into the roof or if I want to sell it (yikes). These are the kind of difficult decisions that face true buy and hold investors. I personally am more of a buy and trade up investor as I think you want to add the value and then sell to get the gains locked in. Then you want to use the gains to buy a new, larger asset that will allow you to play that game again.

@Ethan Miller I have no evidence to support my opinion and don't really want to go down the rabbit hole of trying to find any, but here's how I've always seen it. All things being equal and assuming "good" properties that don't have gigantic underlying problems, have "normal" tenants, "normal" upkeep, weren't purchased as "home runs" that are almost impossible for you to duplicate again, etc. I see it as a simple risk vs. return tradeoff. Lower (or negative) cash flow probably means more leverage and/or a hotter market and most likely a higher final IRR. Higher cash flow probably means less leverage and/or a more stable market and most likely a lower final IRR. If you can survive the tough times with the low/negative cash flow properties, you'll probably make more in the end. The problem is that some expose themselves too much and can't hold on during the occasional downturn. I know my personal risk tolerance and financial limitations (high school teacher for most of my adult career), so I insist on enough cash flow to grease the wheels in case of tough times. However, I have definitely made a lot more money through appreciation and debt retirement than cash flow. The way I run my numbers is right for me, but different than my friend/mentor's. But the way he runs his numbers is right for him. IMO, you just kind of have to know what you can weather financially if times go bad, what your risk tolerance is, what your time is worth in terms of the time suck that is real estate investing vs. other investments, etc. Good luck and best wishes!

Some thoughts • Initial cash flow has poor correlation with actual long term cash flow and this is no a coincidence. The RE market is efficient. The properties with the highest initial cash flow are those with expected lower appreciation (property and rent) and/or higher risk. • in my primary markets rents have increased over 21% YOY (source ApartmentLists.com). This average rent increase changes the cash flow situation quickly. I would have zero issues purchasing a property that projected negative cash flow. Cash flow is just one source of RE profit and one of the least beneficial if it is not needed to pay the bills. Why is it one of the least beneficial? It is because cash flow is taxed. Other forms of RE return can be deferred and potentially avoided (readjusted at death). Cash flow also pales in return compared to high appreciation returns. In high cash flow markets, the appreciation exceeds the full rent. I have a property that appreciation has been $16k/month (rents are far less than $16k). I have another property that has appreciated over $7k/month over a long hold. The rents are now past $7k/month, but they have not averaged over $7k for the hold period (so appreciation since purchase is greater than rent collected since purchase). • the best returns are value adds. If I have $0 invested, my return is infinite. I only have one property that has any of our money invested in it. Good luck

1) I would not purchase a property that doesn't cash flow from day one unless it is a complete rehab and the current tenants are truly paying way under market. It is not an easy task to simply raise the rents with the current tenants and some realtors make it seem like an easy task. This also goes with making an appreciation bet, and only purchasing a property with the intention that your return on investment will come from appreciation. That should be part of the equation, but not the whole point. 2) A general rule is that rents take about 6-9 months to catch up to the current property values. In my market of Columbus, Ohio, the properties have appreciated so much and will continue to do so, so the rent rates will be running from behind for a while.

How to think about cash flow & appreciation

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

@Huong T Nguyen

Oh no no.. I was not trying to say you were trying to evade taxes or anything. Just trying to make sure you were being tax efficient.

1 Reply

John Clark

Member since 2018 · 1k+ posts · 1k+ votes

4y

"
I'm hoping to get some perspective from people here on an experience I'm having in current markets. I would like to put some money into a property that can bring in some cash flow, or at least break even, and I want to do this in a market likely to have decent appreciation. The local markets that make sense for me are all coastal and have super high price-to-rent ratios so cash flow is very hard to achieve. "
-------------------------------------------------
You are being utterly unrealistic, to the point of being a unicorn hunter.

Remember the old stock picker's choice: High growth, High safety, and High dividends -- Choose two. Same thing applies here. You want "decent" -- whatever that is -- appreciation, AND you want cash flow. Appreciation and cash flow are two aspects of the same coin. Your preferences determine which you want, but the market price determines what you get. People willing to settle for appreciation will escalate prices, cratering cash flow.

Now let me tell you why you are a unicorn hunter: You want coastal appreciation -- New York City, California -- and cash flow on top of that -- those are the deals that "make sense" to you, that's your standard. Inland (Chicago, other midwest areas) appreciation isn't going to be good enough for you. So you want creme de la creme appreciation and you want cash flow on top of that?

No. Come back when you get realistic.

1 Reply

Andrew S.

Member since 2019 · 13 posts · 6 votes

4y

The importance of the minimal / zero / temporarily negative cashflow also depends on your monthly P/L & balance sheet.
Does it matter if you (not your rental business) have to pay for new appliances, roof, furnace, month of no rental income during vacancy?

Can you easily pay that with your 9-5 job excess income?

Do you have a rental emergency fund of ~$25k or whatever you think is reasonable?

Are you interested and confident in having those abilities for the long term? Are you willing and able to hold that during a market down turn? Security of other assets/ income during a bear market?

Are you buying this rental to quit your job or to grow wealth in many years?

1 Reply

Huong T NguyenPro Member

Member since 2019 · 93 posts · 35 votes

4y

Quote from @Huong T Nguyen:

Quote from @David M.:

@Huong T Nguyen

I think commercial properties are different than residential properties. Maybe its because I haven't done a larger commercial property. Isn't the value of the commercial property, especially in your case, driven by cap rates and basically how much rent you can pull in? Its an entirely different valuation method than a single family residential. And even in my market, the multi's feel like they are driven by the rental income for a similar reason.

How does using a 15yr amortization instead of 20yr decrease your income tax? I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

I would just be mindful about generating expenses just to pay less tax. For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s). But, you still have $0.75 in your pocket. Its a big difference. Paying taxes is good; it means you are making money. You just want to be paying taxes efficiently...

You are correct, David. I was wrong. We get taxed on the portion of mortgage payment that goes towards the principal. And no, I do not mean to evade taxes, but I was thinking if I could retain more profits, I could accumulate capital faster, to continue investing in RE.

Yes, in commercial RE, I believe property value is determined by how much income it brings, relative to comparable properties in each area.

I am still a brand-new investor. I got cold feet and I backed out on a couple deals before. I also missed out on a bunch of opportunities. I have to feel confident enough in the decision I have made in order to go forward. Still a lot to learn, and BP is a great educational forum. Thank you, David and everyone else for sharing your knowledge and experience with me and helping me learn by pointing out where I am wrong!

2 Reply

Andrew Jennings Freerks

Developer · NY · Member since 2021 · 131 posts · 106 votes

4y

@John Clark I was a former Bronx City Planner, transformed to a local realtor and investor in the South Bronx, where we are experiencing 8-10% appreciation year on year, even through the pandemic. Most locations are 20-30 minutes to Midtown, so the demand will always remain high. The South Bronx is pretty much the last bastion of cheap available land within 30 minutes of Midtown Manhattan. The net rental easily covers your monthly expenses. If you are interested, I create a quarterly market report for the South Bronx that I can share with you, so you can see how the market is priced and which way it is changing. I'd be happy to be your point person here.

1 Reply

Huong T NguyenPro Member

Member since 2019 · 93 posts · 35 votes

4y

Quote from @Andrew Jennings Freerks:

@John Clark I was a former Bronx City Planner, transformed to a local realtor and investor in the South Bronx, where we are experiencing 8-10% appreciation year on year, even through the pandemic. Most locations are 20-30 minutes to Midtown, so the demand will always remain high. The South Bronx is pretty much the last bastion of cheap available land within 30 minutes of Midtown Manhattan. The net rental easily covers your monthly expenses. If you are interested, I create a quarterly market report for the South Bronx that I can share with you, so you can see how the market is priced and which way it is changing. I'd be happy to be your point person here.

Hi Andrew, could you please also share the report with me? Currently I am looking to purchase another property and have lately been thinking about going to Florida (Tampa or Daytona Beach or any up-and-coming areas) to check out some condos, but Bronx is closer to me than Florida.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @David M.:

@Huong T Nguyen

I think commercial properties are different than residential properties. Maybe its because I haven't done a larger commercial property. Isn't the value of the commercial property, especially in your case, driven by cap rates and basically how much rent you can pull in? Its an entirely different valuation method than a single family residential. And even in my market, the multi's feel like they are driven by the rental income for a similar reason.

How does using a 15yr amortization instead of 20yr decrease your income tax? I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

I would just be mindful about generating expenses just to pay less tax. For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s). But, you still have $0.75 in your pocket. Its a big difference. Paying taxes is good; it means you are making money. You just want to be paying taxes efficiently...

>I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

First statement is correct. Second statement is not. There is difference between interest rate and interest paid. The shorter duration loan results in a high payment that typically (virtually always) includes more to principle and more to interest.

>For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s).

In this case you are going to incur the interest expense regardless so the analogy it not correct. However, I agree to maximize return you stay with the 30 year fixed loan and this is because it better leverages the investment money. If I tie up more money in a property, that is money that is not being optimized to produce highest return. If you take out another loan to access the equity, the question is why not just use the 30 year loan? Leverage is an incredible way to generate wealth, 30 year fixed loans at high LTV is possibly the best way to use leverage.

leverage, compounding, and value adds can generate great wealth.

1 Reply

Huong T NguyenPro Member

Member since 2019 · 93 posts · 35 votes

4y

Quote from @Dan H.:

Quote from @David M.:

@Huong T Nguyen

I think commercial properties are different than residential properties. Maybe its because I haven't done a larger commercial property. Isn't the value of the commercial property, especially in your case, driven by cap rates and basically how much rent you can pull in? Its an entirely different valuation method than a single family residential. And even in my market, the multi's feel like they are driven by the rental income for a similar reason.

How does using a 15yr amortization instead of 20yr decrease your income tax? I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

I would just be mindful about generating expenses just to pay less tax. For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s). But, you still have $0.75 in your pocket. Its a big difference. Paying taxes is good; it means you are making money. You just want to be paying taxes efficiently...

>I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

First statement is correct. Second statement is not. There is difference between interest rate and interest paid. The shorter duration loan results in a high payment that typically (virtually always) includes more to principle and more to interest.

>For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s).

In this case you are going to incur the interest expense regardless so the analogy it not correct. However, I agree to maximize return you stay with the 30 year fixed loan and this is because it better leverages the investment money. If I tie up more money in a property, that is money that is not being optimized to produce highest return. If you take out another loan to access the equity, the question is why not just use the 30 year loan? Leverage is an incredible way to generate wealth, 30 year fixed loans at high LTV is possibly the best way to use leverage.

leverage, compounding, and value adds can generate great wealth.

I agree with you about 30-year fixed loans at high LTV as the best way to use leverage.

Now, for the same loan amount, monthly payment for a 15-year fixed rate (at a lower rate) is always higher than a 30-year fixed rate (at a higher rate), because you pay twice as fast towards the principal. However, the interest portion of your monthly payment should be lower for 15 years loan than for the 30-year loan. So, all in all, you end up paying more income tax if you do a 15-year fixed rate. Am I right?

1 Reply

David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

4y

@Huong T Nguyen

Yes, you are correct that the interest portion of the monthly payment is less on a 15yr than a 30yr. One can check it themselves with an amoritization table. Because the principal drops faster, there is less interest which follows since the loan is being paid off so quickly. I am not sure what the other poster is comgin from.

So, you might be "paying more income tax," but you actually will have more money in your pocket at the end of the day, is my original point.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @Huong T Nguyen:

Quote from @Dan H.:

Quote from @David M.:

@Huong T Nguyen

I think commercial properties are different than residential properties. Maybe its because I haven't done a larger commercial property. Isn't the value of the commercial property, especially in your case, driven by cap rates and basically how much rent you can pull in? Its an entirely different valuation method than a single family residential. And even in my market, the multi's feel like they are driven by the rental income for a similar reason.

How does using a 15yr amortization instead of 20yr decrease your income tax? I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

I would just be mindful about generating expenses just to pay less tax. For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s). But, you still have $0.75 in your pocket. Its a big difference. Paying taxes is good; it means you are making money. You just want to be paying taxes efficiently...

>I thought only interest, and not principal, was allowed to be deducted? The shorter amortization will only decrease your interest payments.

First statement is correct. Second statement is not. There is difference between interest rate and interest paid. The shorter duration loan results in a high payment that typically (virtually always) includes more to principle and more to interest.

>For example, by spending $1 you now no longer have that dollar, even though the deductions makes the financing cost cheaper, i.e. less costly but its still a cost. If you kept that dollar, you pay say $0.25 (for the sake of example) to the Government(s).

In this case you are going to incur the interest expense regardless so the analogy it not correct. However, I agree to maximize return you stay with the 30 year fixed loan and this is because it better leverages the investment money. If I tie up more money in a property, that is money that is not being optimized to produce highest return. If you take out another loan to access the equity, the question is why not just use the 30 year loan? Leverage is an incredible way to generate wealth, 30 year fixed loans at high LTV is possibly the best way to use leverage.

leverage, compounding, and value adds can generate great wealth.

I agree with you about 30-year fixed loans at high LTV as the best way to use leverage.

Now, for the same loan amount, monthly payment for a 15-year fixed rate (at a lower rate) is always higher than a 30-year fixed rate (at a higher rate), because you pay twice as fast towards the principal. However, the interest portion of your monthly payment should be lower for 15 years loan than for the 30-year loan. So, all in all, you end up paying more income tax if you do a 15-year fixed rate. Am I right?

>So, all in all, you end up paying more income tax if you do a 15-year fixed rate. Am I right?

You are correct. I initially thought the 15 year paid more interest early in the loan and less in the later part of the loan. However, looking at the payment table if only the term is changed, the 15 year loan had less interest starting at the 2nd payment. In reality 15 year loans are at lower rates, so every payment will have less interest than the 30 year loan.

1 Reply

Ethan M.

OP

Member since 2022 · 16 posts · 17 votes

4y

Quote from @John Clark:

"
I'm hoping to get some perspective from people here on an experience I'm having in current markets. I would like to put some money into a property that can bring in some cash flow, or at least break even, and I want to do this in a market likely to have decent appreciation. The local markets that make sense for me are all coastal and have super high price-to-rent ratios so cash flow is very hard to achieve. "
-------------------------------------------------
You are being utterly unrealistic, to the point of being a unicorn hunter.

Remember the old stock picker's choice: High growth, High safety, and High dividends -- Choose two. Same thing applies here. You want "decent" -- whatever that is -- appreciation, AND you want cash flow. Appreciation and cash flow are two aspects of the same coin. Your preferences determine which you want, but the market price determines what you get. People willing to settle for appreciation will escalate prices, cratering cash flow.

Now let me tell you why you are a unicorn hunter: You want coastal appreciation -- New York City, California -- and cash flow on top of that -- those are the deals that "make sense" to you, that's your standard. Inland (Chicago, other midwest areas) appreciation isn't going to be good enough for you. So you want creme de la creme appreciation and you want cash flow on top of that?

No. Come back when you get realistic.

@John Clark your language seems unnecessary shrill. I think you misunderstood my meaning, which may be understandable given what I wrote. Really, instead of "local markets that make sense for me are all coastal" I should have written: "the markets that are local to me are all coastal." I've got nothing against locations in the midwest, except that my ability to understand those markets is limited by lack of personal exposure and contacts (though I have lived in the midwest). With respect to wanting "creme de la creme appreciation", I don't think I have a high standard there. What's been immensely valuable about the comments of so many on this thread has been the detailed discussion of the various ways of understanding the relationship and relative importance of cash flow and appreciation. That's what I've been learning from on this thread, and I feel quite thankful for all the careful observations people have made so far.

4 Reply

John Clark

Member since 2018 · 1k+ posts · 1k+ votes

4y

Quote from @Andrew Jennings Freerks:

@John Clark I was a former Bronx City Planner, transformed to a local realtor and investor in the South Bronx, where we are experiencing 8-10% appreciation year on year, even through the pandemic. Most locations are 20-30 minutes to Midtown, so the demand will always remain high. The South Bronx is pretty much the last bastion of cheap available land within 30 minutes of Midtown Manhattan. The net rental easily covers your monthly expenses. If you are interested, I create a quarterly market report for the South Bronx that I can share with you, so you can see how the market is priced and which way it is changing. I'd be happy to be your point person here.

--------------------------------------------------------------

Thank you for the offer, Mr. Freerks, but there's no need. my point to the original poster was that he wanted coastal appreciation (and 8-10 percent annual appreciation qualifies) and cash flow on top of that. The OP has since clarified what he meant to a degree.

And your post actually buttresses my observation that he's a unicorn hunter. If one is describing an area as "the last bastion" -- that gets into unicorn territory. Is it possible to find such deals? Sure, but I wouldn't make unicorn hunting a strategy. You can find 8 - 10 percent annual appreciation in the midwest, too, but those areas rarely have meaningful margins of cash flow, and finding that level of annual appreciation in fly-over land is unicorn territory in and of itself, even without cash flow.

1 Reply

Scott JohnsonBusiness Member

Specialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes

4y

Hey, @Ethan M.!

Make sure you ask your Realtor one critical question that rarely gets asked... "How many rental properties do you own?" Those who have experience in the rental market are the ones I would listen to. There are a lot of fake teachers out there who dish out garbage information that loses people money, so make sure you know where they're coming from, experience-wise.

Going to Rentometer.com will get you a few free rental reports. Put in the city you're looking to invest in and sign up for the trial for the free Pro reports. This will give you a general idea of rents in that area. Then, put in the address of a specific property you're considering and run a report with that.

Regarding appreciation, I like to focus on things I can control. Cash Flow, Depreciation, and Loan Paydown are things that I have some control over. Appreciation is based on what other people in the market are buying/selling properties for. This I have zero control over. Make sure your returns from Cash Flow, Depreciation, and Loan Paydown are solid, and don't worry too much about how much the market values your property. As long as you're making money, who the hell cares what they think anyway?

Buying a break-even property in hopes that rents or the price will go up is a buy, hold, & pray strategy, which I stay completely away from. Trust your numbers and make sure the property makes you money. Ask your broker to send you an RPR Report (Realtor Property Resource) that shows the market activity in the neighborhood, city, or zip code you're looking in. This helps as well. They can also send you demographics.

[email protected]

3 Reply

Joseph P FinkelsteinPro Member

Long Beach, CA · Member since 2020 · 71 posts · 46 votes

4y

Regarding your first question, whenever we work with clients in our market (So Cal) we always compare the current rents to market rents using rentometer, so its not uncommon for us to try and get a building into contract for a client that is breakeven, or even negatively cash flowing. If there is a lot of meat on the bone, and we know the client can recapture the upside with a couple rental increases (generally ours are at minimum 5% given the way laws are written) we know the property is a good fit.

Also, regarding investing in coastal markets, you might want to look at the submarkets in your area. For instance, you might be able to take your dollars further in a C/C+ neighborhood that isn't as pretty, but still has strong, consistent appreciation as a result of being tied to an economic hub.

2 Reply

How to think about cash flow & appreciation

How to think about cash flow & appreciation

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