Owning for cash flow, or easy resale value?

Question

So I've been wrestling with this topic in my head for a while and have decided to put the question to you guys.

Would you rather own a property that provides cash flow?  Or would you rather see something with less cash flow, but easy to liquidate?

The reason that I am torn is because in Milwaukee, there are deals that can be found that provide desirable cash flow, but the location is not very desirable (i.e. I am assuming that they are difficult to sell).  While property in very desirable locations seem to barely pay for themselves (why would I buy if there's no cash flow???)

I like the idea of buying and holding property to provide cash flow.  Provided a property can be rented with minimal vacancy, I'm not opposed to owning in a less desirable location... is this reasonable?  Should I forget about the old adage of location, location, location?

Somebody, please set me straight...

Wade Sikkink · Answer

@Eric Black  excellent advice...

Eric Black · Answer

@Evan Stich and @Wade Sikkink, like you we are planning on holding our properties for quite a long time. However, things don't always go as planned. You should have a backup exit strategy for what you will do with the property if your plans change and you need to sell the property for one reason or another in 3, 5 or 10 years. And in that exit strategy, assume there will be no appreciation just to be safe. Then, sit back and hope you never need to use that backup exit strategy.

Evan Stich · Answer

@Wade Sikkink In an ideal situation, I would like to hold my properties for at least 20 years.  I could only hope that after 20 years, the value will go up no matter what type of area the property is in.  I can only hope that I will not hit any serious road blocks that would force me to sell.  Thanks for the input, everyone!

Wade Sikkink · Answer

@Evan Stich I would say it depends on your planned holding period.  The properties I'm buying now I plan on holding for 20 years, so I'm not overly concerned with resale.  In 20 years I'd like to hand the business over to one of my children and have them buy me out over the next 20 years or so.

If you have a short horizon, then I'd probably focus on re-sale.

Scott McClelland · Answer

I always lean towards cashflow.  My goal is to find properties that have strong cashflow and that I can purchase for 20% below market value.  This allows you to have some built in equity/appreciation.  This also makes the property attractive to other investors if you wish to sell in the future and are not 100% confident in someone purchasing a primary residence in the area.

Aaron Montague · Answer

I would classify myself as a buy and hold investor.  I wouldn't pass up the opportunity to make money on a flip however.  Any cash I make from the flip is that much more I can spend on my next buy and hold.

Evan Stich · Answer

@Eric Black great point about exit strategies!  I suppose that if I plan on buying and holding a property, thoughts about an exit usually mean when I'm in retirement.  I will definitely keep this in mind when analyzing each property.  Thanks again, hopefully I can get more input :)

Dawn Anastasi · Answer

I prefer to invest in properties that provide cash flow, and that I can exit in a few ways:

a) Sell of portfolio to investor

b) Sell of individual units to investor or owner-occupants

Eric Black · Answer

Hi Evan,

It depends on your risk tolerance. You should buy for cash flow but you have to have multiple exit strategies. You may buy a property that cash flows great but is in an area that doesn't sell quickly. If something changes and you have to sell much sooner than you planned you can be in trouble. This doesn't mean you have to buy only in the areas that sell very quickly. My recommendation is to do some research on different areas and find the "average days on market" for recent sold properties. Determine your definition of "sell quickly" and then find properties that cash flow and are in those areas that sell within your criteria.

I don't think you can go entirely one way or the other, it's a balance that you're comfortable with. Plus there's a difference between a "less desirable" location and a bad location.

Good luck.