Minimal/no cashflow, but good potential for appreciation

Apex, NC · Member since 2015 · 46 posts · 14 votes

Hello BP community. I'm considering buying a property to hold and rent out, and would like some more input on whether it's a good buy.

The property is in the Raleigh, NC market, specifically in the downtown Cary area (probably a C market right now). It's a 3 bedroom, 2 bathroom, 1050 SF SFR built in 1988. Structurally the house seems to be in fairly good shape, roof is new, HVAC has been maintained, hot water heater is recent. Needs paint and carpet and a little TLC in the kitchens/bathrooms, but overall it seems like a good little house.

The property is currently rented month to month to a tenant who has been there for about 7 years. Rent is currently $785/month. Market rent is more like $1,100/month. The seller is another investor who has since moved out of the area. They want to walk away from the sale with $125,000. Market value for the house is probably about $128,000 - $130,000. This is an off market deal, and properties on the MLS in this area tend to go very quickly with multiple offers. At market rent, this is just under the 1% rule, (my ideal target for my market). At the current rent, though, I'd obviously be way under what I'd need to cover expenses.

If I left it at that, I'd say this deal is mediocre at best. What makes things interesting, however, is that the house is in a market that I think has a strong chance for serious appreciation. The house is 2 blocks from the historic downtown section of one of the most desirable towns in North Carolina, and the town is putting a lot of resources into revitalizing this area. My thought is that I could acquire the property, get the rent up over the next couple of years where I'd cover my expenses but not really cashflow for a while. At this point, if the house never appreciates I'd be fine but if it does I'd get a nice bonus.

What do you guys think? Worth buying?

And another thing that might be relevant -- this would be my first property and I'm wondering if it's worth buying an ok deal to get my foot in the door.

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David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.

1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.

2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.

Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.

I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)

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David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Alex Corvin,
Buying for appreciation is not investing, it's speculation (read: gambling).
Even at $1,100/month, 1% would only be $110,000 purchase price.
The better question would be will it cash flow? If no or poorly, you may want to reconsider, especially as it's your first.
2 Reply
Alex Corvin
OP
Apex, NC · Member since 2015 · 46 posts · 14 votes
10y
Thanks @David Dachtera! I definitely agree that I don't want to buy for appreciation, I think that's why I'm very hesitant to pull the trigger on this one. I want to make sure it makes sense even if the property never appreciates. I'm not super concerned about a loss in value because I intend to hold for the long term and the rental income should be able to keep it afloat if there's a downturn.
As far as cash flow, in my market with the 1% rule my analysis says I can generally expect to make about $100/month, which I'd be happy with. For a purchase price of $125,000 on this house and $1,100/month I'd break even month to month.
I think I can accept this because in the long run I get equity due to loan paydown, and any appreciation is icing on the cake.
2 Reply
Account Closed
Greensboro, NC · Member since 2016 · 45 posts · 20 votes
10y
Alex Corvin My 2 cents ... Assumptions: - Buy at $125k with 25% down at < 4% interest rate, - Since current tenant is on a month to month lease, inform tenant rent will go up to market in 3 months or so. This will likely cause them to move out, but with the strong market you should be able to replace with a market rate tenant around $1,100/mo. - Minimal turn expenses (paint, carpet, other light cosmetics) do not exceed $3k. - Manage the property yourself. - Initial reserves for CapEx and repair items of $10k. With those assumptions, you should be cash flow positive. As stated before, any bets on appreciation are speculation. I would encourage you to develop a set of guidelines, or metrics, by which you analyze deals. If a deal does not meet your guidelines then you absolutely must pass and move on to sourcing and analyzing the next deal. Furthermore, you can make an offer on a deal that will force the metrics into your established guidelines. It is essentially free to make an offer and the worst a seller can say is no. You will at least have the peace of mind that you tried, it did not meet your guidelines, and you will be free to focus on finding deals that work for you. Best of luck to you and let the group here know how it turns out for you. -Tyler
3 Reply
John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
Pass. You make money when you buy. Buy something 20-25% under market. Then let the cash flow and free equity work for you.
5 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.
1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.
2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.
Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.
I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)
6 Reply
David Dachtera
Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
10y
@Alex Corvin,
I'll have to agree with John Thedford. If you're not making money on the buy, you risk not getting paid down the line.
"Fall in love with a deal" at your own peril.
2 Reply
Jason V.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y
@David Faulkner - Fantastic, In-Depth look at how to analyze a deal.
The one thing I'll point out is that the people on BP who have a problem with buying for appreciation is that they only have a problem buying for just appreciation. What you do (as I see it) is what everyone should do: buy for both cashflow and appreciation.
Also, I'd be curious to what your 'stress testing' looks like. Mine usually stipulates that I'm still profitable at X% Vacancy or Y% Rent Drops with all my expenses on the high end.
In the end, what I want is to have a property always be putting cash in my pocket. Whether it goes up or down in value (and obviously I always want it to go up) it means I can keep building my portfolio/wealth. If I can cash out of a property and put even more cash in my pocket, awesome.
2 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Jason V.:

@David Faulkner - Fantastic, In-Depth look at how to analyze a deal. le"
The one thing I'll point out is that the people on BP who have a problem with buying for appreciation is that they only have a problem buying for just appreciation. What you do (as I see it) is what everyone should do: buy for both cashflow and appreciation.
Also, I'd be curious to what your 'stress testing' looks like. Mine usually stipulates that I'm still profitable at X% Vacancy or Y% Rent Drops with all my expenses on the high end.
In the end, what I want is to have a property always be putting cash in my pocket. Whether it goes up or down in value (and obviously I always want it to go up) it means I can keep building my portfolio/wealth. If I can cash out of a property and put even more cash in my pocket, awesome.
Thanks! I'm super conservative and so some may argue (rightfully so) that I get carried away with stress testing. I run through a scenario like "if the market totally tanks starting the day I close escrow like it did in 2008, would I get myself into dire financial trouble with this investment?" I lived through 2008 as an investor, so I know what it looked like and what happened, so I basically assume those same conditions and if that gets me into financial trouble I either try to restructure the deal to fix that or pass. Another mental exercise I go through is to play the "and" game ... "what and how many things would have to go wrong before I'd get into financial trouble with this investment?" ... I count the "and's" in that answer ... the more and's the better and the more options I have. For example: "I'd have to have a renter not paying AND I'd have to lose my job so I couldn't carry the mortgage out of pocket AND I'd have to burn through my 6 months reserves without being able to evict or get another paying tenant AND I'd have to further not pay my mortgage for 2 years AND the market would have to drop by more than 30% in that period and eat up all my equity so I couldn't sell ... then I'd be in trouble". That's lots of and's ... how l likely is that to happen? Of course, there will always be a scenario that I could construct that would end in my financial ruin, but how likely would that scenario be? Also, the more and's you insist on having, the harder it will be for you to find deals that meet your conservative criteria (but the safer those fewer deals will be) ... at some point you won't buy anything, so there is a balance that needs to happen there which is fine so long as it is a conscious act of compromises. It is the compromises that you overlook and are not aware of making that tend to bite you.
You are correct in that I look at both cash flow AND appreciation over the LONG TERM ... to me, it is just as risky (maybe even more risky) investing in a property with positive cash flow but negative (inflation adjusted) appreciation as it is investing in a property with positive appreciation but negative (day 1) cash flow. So, I would NOT assume that your wealth is growing just because your cash flow is positive ... it could be just your initial investment getting trickled back to you a couple hundred bucks a month at a time on a property that is going down in value and you are losing purchasing power. If you get it, appreciation creates both equity and cash flow ... price appreciation and rent growth go hand in hand. It's a long weekend coming, so I'm not trying to start a holy war with these statements, just some food for thought.
1 Reply
Alex Corvin
OP
Apex, NC · Member since 2015 · 46 posts · 14 votes
10y
I really appreciate all of the great feedback I'm getting from everyone here. It sounds like the consensus is that I should hold out for a better deal for now, or try to find a way to structure this deal to make it cashflow better now.
0 Reply
Gabe C.
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
10y
I would definitely do the latter before you do the former. If the seller is willing to take less rent, he's likely willing to take less profit. Maybe you can negotiate him down a little. I don't think the 1% rule is very easy to pull off in Raleigh/Cary. It's more like the .85% rule there, so if market rent gets you there, it sounds promising.
Other things to consider. Does it have significant lawn or trees close to the roof? Landscaping can get expensive in summer months... Assuming no HOA? Even if you want to manage it yourself, I'd figure in property management. You may change your mind in the future and dont want to paint that out of the picture. I assume you've figured insurance costs and taxes... Without all of that it's hard to say whether it flows or not.
I can't remember what year exactly they stopped using polybutylene pipes in the 80s, but double check that it doesn't have them. They are all starting to burst now. I had a place built in 1986 that burst. Had to replace floors and clean out sewage dumped into my crawlspace as well as replacing entire plumbing system.
Happy to help analyze further if you can fill in some of the above numbers. As well as loan terms you expect. APR/term/%down... this place is my exact criteria and I analyze 3-5 or so like this a day.
I live in SF and only see Raleigh/Cary a few times a year. I know that downtown area is glossier every time I see it. Seems like a good place to invest. I went to grade school in Cary, and downtown was almost a ghost town back then. Good to see it making a comeback!
1 Reply
Johnny Kang
Investor · New York, NY · Member since 2014 · 279 posts · 224 votes
10y
@David Faulkner
Few questions:
1) Since you've preferred to invest in an appreciating market versus investing in an area that might cashflow well but not appreciate, what balance of cashflow & appreciation did you strive to achieve when you first started out? Was it to buy the C-class property in an A class neighborhood, fix it up for high rent, good tenant base? or was it B class property in a B/B+ class neighborhood and try to work your way up to A class neighborhood, etc.?
2) Many seasoned investors eventually decide to go into multi, so why SFRs?
0 Reply
John Thedford
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
10y
@David Faulkner
Thanks for the post. Always great to see different points of view.
0 Reply
Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
10y
I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @Jack B.:

I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.
Mark at investfourmore knows his market. It is not as much as investing for appreciation as much as what the location historically offers. Obviously investing in run of the mill sfrs that have no history of appreciation makes little sense to expect appreciation or factor for it. OTH markets like SOCAL David works this appreciation history is very different. So different analysis is required. It is not normal to blanket one style invest if the historical climate varies so much from location to location. That does not mean ignoring the cash flow or appreciation fundamentals. OC David invest with many exit options that mitigate risk. This philisophy can work in most locations regardless.
3 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Originally posted by @Johnny Kang:

@David Faulkner
Few questions:
1) Since you've preferred to invest in an appreciating market versus investing in an area that might cashflow well but not appreciate, what balance of cashflow & appreciation did you strive to achieve when you first started out? Was it to buy the C-class property in an A class neighborhood, fix it up for high rent, good tenant base? or was it B class property in a B/B+ class neighborhood and try to work your way up to A class neighborhood, etc.?
2) Many seasoned investors eventually decide to go into multi, so why SFRs?
Good questions
1)When I first started out I did not know I was supposed to be striving for cash flow, I was a dumb retail buyer purchasing my primary residence. It would've been cash flow negative at the time, which means that most on BP would've advised passing, and then rents and prices proceeded to double. Looking back, what I did right was bought the smallest, ugliest house on a nice class A block, put some work into it, and bought something I could afford (remember: I held it through the downturn). Today I analyze both the cash flow AND the appreciation over the LONG TERM with the IRR calculation as described. I will go wherever I can get the best risk adjusted IRR, and I find for me personally in my market that tends to be nicer neighborhoods with higher rates of price appreciation and rent growth. I do also own what I consider some cash flow plays inland where the appreciation is lower, so I'm not against it and have a balanced portfolio, but those were bought in the downturn for 20% of their peak price when class A stuff was going for 80% of peak so the numbers worked out differently then.
2)I may eventually go to multis, but I do love SFRs. 3/2 SFR is the most in demand rental property in my market and most others. They attract stable, working class families that tend to move in, pay their rent on time, and stay for a long time ... those are the kind of tenants that will pay your mortgage for you and make you rich. They tend to appreciate at a higher rate than multis. I have lots more options with SFRs ... additions, rezoning, reconfiguring, etc. When it comes time to sell, I can sell to a retail buyer and not an investor ... all they care about is that they love the property, and if they do they will pay up without any consideration of cash flow, appreciation, or even comps in many cases. These are some of the reasons why I love them.
3 Reply
Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
10y
Originally posted by @David Faulkner:

Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.
1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.
2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.
Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.
I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)
Yes, assuming you buy on the right side of the curve (not right now in Raleigh) and you plan to hold long term. Appreciation generally makes up 75% of my returns, but I still do well without it (10-15% COC).
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @Matt R.:

Originally posted by @Jack B.:
I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.
Mark at investfourmore knows his market. It is not as much as investing for appreciation as much as what the location historically offers. Obviously investing in run of the mill sfrs that have no history of appreciation makes little sense to expect appreciation or factor for it. OTH markets like SOCAL David works this appreciation history is very different. So different analysis is required. It is not normal to blanket one style invest if the historical climate varies so much from location to location. That does not mean ignoring the cash flow or appreciation fundamentals. OC David invest with many exit options that mitigate risk. This philisophy can work in most locations regardless.
I should add Mark is a total pro, who knows how to identify forced appreciation opportunities and does it as a regular practice. He still works the appreciation angle and guess what? Has made more in appreciation than cash flow from what I can tell...he just hates to admit it:)
0 Reply
Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
10y
Originally posted by @Matt R.:
Originally posted by @Jack B.:

I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.
Mark at investfourmore knows his market. It is not as much as investing for appreciation as much as what the location historically offers. Obviously investing in run of the mill sfrs that have no history of appreciation makes little sense to expect appreciation or factor for it. OTH markets like SOCAL David works this appreciation history is very different. So different analysis is required. It is not normal to blanket one style invest if the historical climate varies so much from location to location. That does not mean ignoring the cash flow or appreciation fundamentals. OC David invest with many exit options that mitigate risk. This philisophy can work in most locations regardless.
He would have done just fine with appreciation if he bought pre 2013.
I wish I would have invested then too, but I was focused on Charlotte where prices were still at cash flow levels. Raleigh appreciated more quickly and prices were already too high to cash flow at that time. Lots of drivers in this market, including a very large tech sector.
Appreciation in this market has been significant. But now he's on the wrong side of the curve...
For risk management purposes, I do not and would not invest solely for appreciation. That said, it does generally make up 75% of my returns...25% being cash flow.
0 Reply
Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
10y
Originally posted by @David Dachtera:

@Alex Corvin,
I'll have to agree with John Thedford. If you're not making money on the buy, you risk not getting paid down the line.
"Fall in love with a deal" at your own peril.
Agreed. Don't fall in love with property. Fall in love with a low risk stream of cash flow with strong appreciation potential!
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @Jon Q.:

Originally posted by @David Faulkner:
Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.
1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.
2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.
Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.
I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)
Yes, assuming you buy on the right side of the curve (not right now in Raleigh) and you plan to hold long term. Appreciation generally makes up 75% of my returns, but I still do well without it (10-15% COC).
Agreed. This seems to get buried on BP. I have seen large hedge fund REI analysis. I have yet to see one where cash flow out produced appreciation. They both are critical still.
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @David Faulkner:

Originally posted by @Johnny Kang:
@David Faulkner
Few questions:
1) Since you've preferred to invest in an appreciating market versus investing in an area that might cashflow well but not appreciate, what balance of cashflow & appreciation did you strive to achieve when you first started out? Was it to buy the C-class property in an A class neighborhood, fix it up for high rent, good tenant base? or was it B class property in a B/B+ class neighborhood and try to work your way up to A class neighborhood, etc.?
2) Many seasoned investors eventually decide to go into multi, so why SFRs?
Good questions
1)When I first started out I did not know I was supposed to be striving for cash flow, I was a dumb retail buyer purchasing my primary residence. It would've been cash flow negative at the time, which means that most on BP would've advised passing, and then rents and prices proceeded to double. Looking back, what I did right was bought the smallest, ugliest house on a nice class A block, put some work into it, and bought something I could afford (remember: I held it through the downturn). Today I analyze both the cash flow AND the appreciation over the LONG TERM with the IRR calculation as described. I will go wherever I can get the best risk adjusted IRR, and I find for me personally in my market that tends to be nicer neighborhoods with higher rates of price appreciation and rent growth. I do also own what I consider some cash flow plays inland where the appreciation is lower, so I'm not against it and have a balanced portfolio, but those were bought in the downturn for 20% of their peak price when class A stuff was going for 80% of peak so the numbers worked out differently then.
2)I may eventually go to multis, but I do love SFRs. 3/2 SFR is the most in demand rental property in my market and most others. They attract stable, working class families that tend to move in, pay their rent on time, and stay for a long time ... those are the kind of tenants that will pay your mortgage for you and make you rich. They tend to appreciate at a higher rate than multis. I have lots more options with SFRs ... additions, rezoning, reconfiguring, etc. When it comes time to sell, I can sell to a retail buyer and not an investor ... all they care about is that they love the property, and if they do they will pay up without any consideration of cash flow, appreciation, or even comps in many cases. These are some of the reasons why I love them.
I would suggest the reason why you love socal sfrs so much is LA area has produced the largest cash flow and equity returns nationally for sfrs since 2000. If you invested any where else besides LA, SF, SJ or SD those results would be significanly less profitable. Location ultimately seems to always come back to haunt or reward many buy and holders longer term.
1 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Alex Corvin:

I really appreciate all of the great feedback I'm getting from everyone here. It sounds like the consensus is that I should hold out for a better deal for now, or try to find a way to structure this deal to make it cashflow better now.
Do not make investing choices by consensus. YOU should decide what makes sense for you, your situation AND your market. I read somewhere that almost half of all investors are in the bottom 50% of investors as far as profitability.
1 Reply
Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
10y
Originally posted by @Matt R.:

Originally posted by @Jon Q.:
Originally posted by @David Faulkner:

Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.
1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.
2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.
Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.
I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)
Yes, assuming you buy on the right side of the curve (not right now in Raleigh) and you plan to hold long term. Appreciation generally makes up 75% of my returns, but I still do well without it (10-15% COC).
Agreed. This seems to get buried on BP. I have seen large hedge fund REI analysis. I have yet to see one where cash flow out produced appreciation. They both are critical still.
Yes, this is true with most MF deals also. Most, generally 75% of returns come from appreciation/capital gains.
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
Originally posted by @Account Closed:

Originally posted by @Alex Corvin:
I really appreciate all of the great feedback I'm getting from everyone here. It sounds like the consensus is that I should hold out for a better deal for now, or try to find a way to structure this deal to make it cashflow better now.
Do not make investing choices by consensus. YOU should decide what makes sense for you, your situation AND your market. I read somewhere that almost half of all investors are in the bottom 50% of investors as far as profitability.
Alex, I can't say what to do and mostly because IDK your market. But I will say your thinking ahead and considering local path of progress is spot on for most professional investors.
0 Reply
Tate Brown
Investor · San Francisco, CA · Member since 2016 · 6 posts · 1 vote
10y
Originally posted by @Jack B.:

I learned early on from reading blogs such as investfourmore.com that gambling on appreciation is just that, gambling. Appreciation is a bonus, but cash flow is king. It is what keeps you afloat. I could lose my high paying job and still live the same lifestyle while my houses appreciate - because of cash flow. Cash flow = less risk of losing the houses due to non payment. Not only do I get to keep my houses if I was not working, I get to live off the income. The appreciation is a bonus. When you deviate from this fact, you are taking on risky business, no different than stock picking and hoping it goes up in value.
I love this analysis. I think as long as you invest in properties that produce Cash flow, peaks and valleys in a RE market are irrelevant. It is currently what I am using in my analysis and look forward to reading more at investfourmore.com.
Best,
Tate
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