Buy & Hold Rentals - Rent X vs Capital Appreciation
Rental Property Investor · Memphis, TN · Member since 2011 · 10 posts · 2 votes
I am relatively new to real estate investing. I just bought my first property. I have a back ground in banking so I've been involved in rentals/construction/development for a while, but this is the first time I've put my money in.
Since my purchase, I've been turned onto this site. I would say that I'm more risk adverse than most on here and cash flow is more important than ROI or any other factor so I bought my first house with cash.
I was able to purchase my first house and get it rehabbed for 2.8x gross rents. Now that it is cash flowing nicely, I'm considering adding another property to my portfolio using leverage.
I was very happy with the gross rent multiplier I was able to get my first house, however, I do not believe I will be able to get much capital appreciation from the property - I do not plan to sell and I think I will be able to get out for what I have in it, but I don't think I would be able to get much more than that.
Here's my question. For you buy and hold guys that have been doing this for a while: Which is more important to you? Gross Rent Multiplier of Purchase Price OR Potential Capital Gains?
Thanks in advance.
Hi Sammy,
Welcome to BP! You have found yourself the best RE networking website.
For me personally, Cash Flow is more important, any appreciation will just be bonus for me, but there are some very successful investors on this website who are doing great with Capital Gains strategy. Mitch is one that comes to my mind. Hopefully, he will be able to provide some insight.
But I think as long as you look for bargain deals, you should have some capital gains in the future, nowhere close to what investors like Mitch might have, but you should still have some. What's the time period you are thinking of for the capital gains? If it's 2-5 years, you probably won't see any, but if it's more than 5 years, then there's a good chance that you will see some appreciation.
Hi Sammy,
Welcome to BP! You have found yourself the best RE networking website.
For me personally, Cash Flow is more important, any appreciation will just be bonus for me, but there are some very successful investors on this website who are doing great with Capital Gains strategy. Mitch is one that comes to my mind. Hopefully, he will be able to provide some insight.
But I think as long as you look for bargain deals, you should have some capital gains in the future, nowhere close to what investors like Mitch might have, but you should still have some. What's the time period you are thinking of for the capital gains? If it's 2-5 years, you probably won't see any, but if it's more than 5 years, then there's a good chance that you will see some appreciation.
Thanks,
I really don't plan on selling so I would have a long term time frame. I've been focusing almost totally on cash flow, but I just wanted to make sure I wasn't making a big mistake or missing profit because I wasn't considering appreciation.
Of course, with my time frame, we're talking about something that no one could predict with much certainty.
Thanks for the honorable mention Max!
I invest in SoCal, so appreciation is the key to making big profits since chasing cash-flow is going to limit you to the nastiest areas and the poorest tenants. I like Riverside County because there's a little of both, some cash flow to help pay the bills and build a modest reserve for some big ticket items, while offering the potential for some nice gains in the long run since the values out there have been disproportionally beaten down. For example, the house we're signing docs for today was listed for 1/3 of its highest market value. I like that kind of upward potential. I also like San Diego and Orange County, but the opportunities are more scarce. Doesn't stop me from looking though! :-)
Personally, I've been waiting almost a decade for this market meltdown to happen. When I bought our primary residence back in 2002, the market was skyrocketing with homes selling the day they hit the MLS (just like ours). Fortunately, I bought during Stage 1 of the lift-off so I still have a bit of equity left. But from 2003-2007 I sat on the sidelines telling myself there is NO way I'm jumping into this piranha pool now. With 10% appreciation PER MONTH any investor looked like a genius. But the bubble burst taught many a very painful lesson, one that still stings many investors today.
But Max is correct you have to think LONNNNNNNG-term. At least 10 years IMHO. Investing for appreciation within a 5-10 year time frame is speculation and under 5 years is gambling since nobody can predict with certainty the ebbs and flows of the short-term market. In California, values have almost always followed a 7 year cycle, so 10 years is pretty safe. However, the last run up in values ran for about 10 years, so it may take a little longer to recover. And that's ok, I can wait. I've been holding onto my condo in San Diego for almost 2 decades now. Not only is the value twice what I paid. Not only is the principal balance half of what I started with. The rent has also doubled while maintenance has only increased a modest amount. Hence of power of buy & HOLD, for a long time. My tenants are buying a quarter-million dollar condo for me... and all I have to do is keep it in shape!
We don't spend our rental cash flow on ourselves, i.e., we don't live off the cash, we pretty much roll everything right back into our properties, especially making extra principal payments. Now some will say do that is simply nothing more than getting a return equal to your interest rate, but I don't care. I'm not going to live forever and my plan is to own the condo free and clear within 8 years and our other 2 rentals within 20. I want to turn 60 and have at least a handful of free and clear properties to fund our retirement.
I know most of us get caught up in the "today" activity of finding, evaluating, and analyzing deals, but take a moment and ask yourself, "Where do I want to be in 20, 30 or 40 years?". THEN WORK BACKWARDS! I don't want to be painting and rehabbing rentals when I'm 55. I don't want to be on the phone calling plumbers and contractors at 10 pm. I don't want to be chasing down tenants for their rent check. I want my business to be on auto-pilot while my team works for me. All I want to do at that point is read occasional reports mailed to my winter residence in Santa Barbara or Central California and make a few key strategic decisions from the wheelhouse of my 32 foot trawler in the San Juan Islands during the summer.
Remember, in the immortal words of Bart Simpson, "Work is for chumps!". Good luck to all out there in realizing your dreams.
Mitch,
Thanks so much for the summary. I think that you and I have similar philosophies. However, I am investing in Memphis, TN - a much more blighted area and, in my opinion at least, without the chance of appreciation that SoCal has. In absence of a chance at appreciation, I think I'm correct in looking for cash flow.
I was in banking in 2002-2007, and in 2002 - 2004 time frame, we knew there was no way the market was going hold. We kept wondering who were these people buying these huge houses. Now, I had no clue it was going to bring down the world financial markets as it did.
Currently, I'm reading The Big Short by Michael Lewis - it is a fascinating look at how the mortgage mess went down.
I say all that to say - I think you could be in line for some big time gains in depressed areas like Southern Cal because they are way over sold.
Thanks for the advice and good luck.
Agree with buy and hold and keep the cashflow. I like buying homes and duplexes below the $60k mark. Cashflow is better in this range.
I invest in SoCal, so appreciation is the key to making big profits since chasing cash-flow is going to limit you to the nastiest areas and the poorest tenants. I like Riverside County because there's a little of both, some cash flow to help pay the bills and build a modest reserve for some big ticket items, while offering the potential for some nice gains in the long run since the values out there have been disproportionally beaten down. For example, the house we're signing docs for today was listed for 1/3 of its highest market value. I like that kind of upward potential. I also like San Diego and Orange County, but the opportunities are more scarce. Doesn't stop me from looking though! :-)
Personally, I've been waiting almost a decade for this market meltdown to happen. When I bought our primary residence back in 2002, the market was skyrocketing with homes selling the day they hit the MLS (just like ours). Fortunately, I bought during Stage 1 of the lift-off so I still have a bit of equity left. But from 2003-2007 I sat on the sidelines telling myself there is NO way I'm jumping into this piranha pool now. With 10% appreciation PER MONTH any investor looked like a genius. But the bubble burst taught many a very painful lesson, one that still stings many investors today.
But Max is correct you have to think LONNNNNNNG-term. At least 10 years IMHO. Investing for appreciation within a 5-10 year time frame is speculation and under 5 years is gambling since nobody can predict with certainty the ebbs and flows of the short-term market. In California, values have almost always followed a 7 year cycle, so 10 years is pretty safe. However, the last run up in values ran for about 10 years, so it may take a little longer to recover. And that's ok, I can wait. I've been holding onto my condo in San Diego for almost 2 decades now. Not only is the value twice what I paid. Not only is the principal balance half of what I started with. The rent has also doubled while maintenance has only increased a modest amount. Hence of power of buy & HOLD, for a long time. My tenants are buying a quarter-million dollar condo for me... and all I have to do is keep it in shape!
We don't spend our rental cash flow on ourselves, i.e., we don't live off the cash, we pretty much roll everything right back into our properties, especially making extra principal payments. Now some will say do that is simply nothing more than getting a return equal to your interest rate, but I don't care. I'm not going to live forever and my plan is to own the condo free and clear within 8 years and our other 2 rentals within 20. I want to turn 60 and have at least a handful of free and clear properties to fund our retirement.
I know most of us get caught up in the "today" activity of finding, evaluating, and analyzing deals, but take a moment and ask yourself, "Where do I want to be in 20, 30 or 40 years?". THEN WORK BACKWARDS! I don't want to be painting and rehabbing rentals when I'm 55. I don't want to be on the phone calling plumbers and contractors at 10 pm. I don't want to be chasing down tenants for their rent check. I want my business to be on auto-pilot while my team works for me. All I want to do at that point is read occasional reports mailed to my winter residence in Santa Barbara or Central California and make a few key strategic decisions from the wheelhouse of my 32 foot trawler in the San Juan Islands during the summer.
Remember, in the immortal words of Bart Simpson, "Work is for chumps!". Good luck to all out there in realizing your dreams.
Mitch-
Excellent future plan you have spelled out here , I can relate as I see some similar goals for myself, and reading a sound plan like yours only motivates me more.
I am also am submitting offers in Riverside and have 2 going to the bank, short sales of course.
Like Mitch states out here, in So. Cal., you can get a little cash flow and potential for future appreciation, so you need to balance purchase price with rents very carefully.
The one deal I am looking at is cost of $160K, rent of $1450 a month, ($1495- also doable) 20% down-turn key-
excellent neighborhood (La Sierra) -so monthly PITI will be under $900- leaving $550 for reserves and cash flow.
I know everyone goes by the 50% rule and this does not meet that, but my actual experience with similar properties in the same area for over 12 years is that I average under $200 a month of other expenses per house over the 12 years. So PITI and $200 a month for reserves, leaves me $300-350 cash flow and a good appreciation upside in the far future. So I will only "make" 1% per month on my $35K down payment/closing: Investment costs. Looking at a 7 year hold and sell on this one.