Is seeking a "high appreciation" market a good strategy?

Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes

3y

High market appreciation should be the byproduct of a good investment, not the goal. Projecting future market appreciation is not a smart investment strategy. Sure, if you can find a good cash flowing investment in a market you think has upward potential go ahead and make the purchase.

2 Reply

Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

3y

I think it's risky, the markets that have appreciated the most will see the biggest downfall. Prices are just unreasonably high, you have you drop price by %20 in Austin to sell anything on market

0 Reply

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

3y

@Eliott Elias that's not what we're seeing with our listings. Prices are down from the spring/summer but they typically are with the seasonality of the real estate market. We're selling lots of listings at list price, just not above!

[email protected]512-888-9122

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Dan H.Pro Member

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

3y

First 5 years is a blip for a buy and hold investor. Second of course the higher priced markets have historically had the greater appreciation. That is exactly why they are the high priced market.

You could have done the same thing at many times including after the great recession and seen many zero appreciation markets (meaning appreciates worst than inflation) outperformed many historically high appreciation markets.

In addition one of the cities you noted has appreciation for this century significantly below the inflation rate.

Looking at 5 years can be mis-leading. This is especially true in times that are outliers. The last 5 years is an outlier because virtually every market appreciated more than inflation. This gave a look of high appreciation even though in some markets it was adjusting for years of a depreciating market (in inflation adjusted dollars). A property declines in value for 15 years in inflation adjusted dollars can have a high appreciation for 5 years and still not have even kept up with inflation (one city on your list did what I described).

Do the same thing looking at the last 22 years or the last 10 years. You will see different results (especially using this century - last 22 years).

2 Reply

Luka Milicevic

Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes

3y

My bigger question is how do you find what would be a high appreciation market

1 Reply

Nate Sanow

Investor & Agent · Tulsa, OK · Member since 2016 · 1k+ posts · 1k+ votes

3y

Good points and thanks for the good content. I guess I feel lucky I can have my cake, and eat it too.

1 Reply

Cole SchlackPro Member

Realtor · Hawaii, HI · Member since 2015 · 145 posts · 95 votes

3y

Appreciation is the bi-product and can be so random, I look for fair weather with limited development land.

San Diego and Hawaii are my Favorites

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

San Jose CA, imagine 20K in 2009 become 600K now.
You could use excel to calculate. It's on the bank already lol

0 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Cole Schlack:

Appreciation is the bi-product and can be so random, I look for fair weather with limited development land.

San Diego and Hawaii are my Favorites

Hawaii is the strongest appreciation market, especially Kauai county. It's the only county that almost does not experience price reduction.
I think CA is the second-best highest appreciation market in the last 10 years.

But in the last two three years, it seems Texas would be the new star for appreciation. Maybe even for next 10 years.

1 Reply

Aaron Gordy

Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes

3y

@Jordan Moorhead Agreed. We aren't seeing any drops. We are seeing longer hold times which reflects the market. The days on market has increased but overall its still defined as a sellers market. Sure, one can drop the price and sell it sooner but its not necessary. I think that folks still have the 50% YOY appreciation and 100 offers in their rear view mirror as a comparison and clearly, today's market is substantially different.

1 Reply

Jeff Roth

Real Estate Consultant · Ann Arbor, MI · Member since 2022 · 466 posts · 256 votes

3y

Great post Greg.

Love the detail and data.

Personally, someone said recently "you can't eat appreciation" and I liked that a lot.

I like strong cashflow. Strong cashflow makes up for a lot of mistakes and sins in other areas of the due diligence process. :)

Someone also said recently, they would rather have 3 paid off houses rather than 10 with similar cashflow. There is a lot of wisdom in this statement.

I tend to be the fisherman that catches enough fish for the day and has time to enjoy the day than the one buying boats and hiring other fishermen(women)(people) [you get the idea :)] and have to worry about keeping enough fish coming in to pay for the boats and the people.

Catch what you need. Eat what you catch. There is more than enough for everyone regardless of your preference of strong cashflow verses strong appreciation.

Sometimes you get both.

Happy to help!

1 Reply

Dan H.Pro Member

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

3y

>someone said recently "you can't eat appreciation" and I liked that a lot.

I have seen this before, but it is not correct as there are numerous ways to extract the appreciation. The extracted value can be used to purchase anything you desire including food. And when you extract the appreciation, it is tax deferred unlike cash flow that gets taxed annually.

I would rather make $100k in appreciation in a year than $100k cash flow due to the tax consequences. Note with current rules, I never expect to pay the taxes resulting from our RE appreciation and much of the appreciation will not be taxed by my heirs (anything less than $24m (married) is currently not taxed so heirs will only be taxed for value above $24m).

So not only can you purchase food with the appreciation, but you can purchase more food than you could from cash flow.

Good luck

2 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Dan H.:

>someone said recently "you can't eat appreciation" and I liked that a lot.

I have seen this before, but it is not correct as there are numerous ways to extract the appreciation. The extracted value can be used to purchase anything you desire including food. And when you extract the appreciation, it is tax deferred unlike cash flow that gets taxed annually.

Totally correct. I made the first more than half a million dollars from appreciation only by analyzing the price appreciation and interest rate policy from 2008 (and buy and leveraging correctly) . When we did the refi or sell on top of the market, the money is real. LOL

But yeah it's truly different when our projection and execution is just pretty much accurate. Even when we do BRRR, the appreciation is exactly like I estimated. And the dollar is real.

1 Reply

Greg ScottPro Member

OP

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

3y

Quote from @Dan H.:

the higher priced markets have historically had the greater appreciation. That is exactly why they are the high priced market.

Looking at 5 years can be mis-leading.

Exactly! This study shows that once again, past performance is no guarantee of future results.

And it is true that trees don't grow to the sky. Is a mature tree or a sapling more likely to show a high growth rate?

0 Reply

Dan H.Pro Member

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

3y

Quote from @Greg Scott:

Quote from @Dan H.:

the higher priced markets have historically had the greater appreciation. That is exactly why they are the high priced market.

Looking at 5 years can be mis-leading.

Exactly! This study shows that once again, past performance is no guarantee of future results.

And it is true that trees don't grow to the sky. Is a mature tree or a sapling more likely to show a high growth rate?

>And it is true that trees don't grow to the sky.

true for trees, but so far not true for RE.

>Is a mature tree or a sapling more likely to show a high growth rate?

historically, in RE it has been the mature tree over longer durations (high appreciating markets have tended to continue to be high appreciating when judging by 10 year spans). Core logic lists the same city as highest appreciating for 10 years, 20 years, 30 years. And I suspect if I looked, the trend would continue going back over 50 years. Comparing RE to trees can make an interesting analogy, but could be devoid of any reality.

>past performance is no guarantee of future results.

I agree with this statement so it is important to analyze the pertinent data to determine if what made the city’s appreciation so great still applies. Is the population still increasing? Are the jobs still high quality, income growing, and diversified? Is the supply/demand dictate higher demand than supply? For residential, are the vacancy rates low? Etc. Definitely do not use past performance by itself. Things change.

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Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

3y

Interesting times right now. It's tough for the part time investor to get cash flow (or a reasonable LTV) on leveraged deals with interest rates that are at or above cap rates.

2 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Mike Dymski:

Interesting times right now. It's tough for the part time investor to get cash flow on leveraged deals with interest rates that are at or above cap rates.

full-time investor too LOL.

I bet there's only 4-5 state that still makes sense for LTR cash-flow.
For STVR there're still many opportunities with a larger downpayment.

But gone is the day someone ask in BP "Hi I only have 10% down but I want 10% cap rate cash flow"

1 Reply

Account Closed

Investor · Los Angeles, CA · Member since 2015 · 36 posts · 63 votes

3y

I think Cleveland (where I'm from) and other tertiary markets surged these past few years because we're at the end of the cycle. The more prime markets, with strong population growth and job growth, had gotten priced up to the point where deals no longer penciled out. As a result, investors chased yield out of those markets and into more affordable secondary and tertiary markets. I've seen that pattern through three economic cycles dating back to the mid-90's. So, where you are in the economic cycle impacts what type of market is surging. But long-term return is ultimately driven by population growth, job growth, income growth, diversity of industry, constrained supply, and other factors (most related to "growth". I love Cleveland, but its sluggish population and job growth makes it cheap (which is enticing), but sluggish long-term. Does that make sense?

3 Reply

David Dachtera

Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes

3y

@Greg Scott,

Going after appreciation is not investing - it's speculating (gambling).

1 Reply

Bud Gaffney

Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes

3y

Ca$h Flow is most important. BUT higher appreciation is a plus. I'm also a buy/hold investor, so i'm a tad biased.

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Greg Scott:

I regularly hear people on BP discuss cashflow vs appreciation and which markets deliver on those. There have seen heated debates in this forum, particularly when the "must have cashflow" people are arguing with those willing to accept negative cashflow in expensive markets.

But how does one identify which markets are "high appreciation" markets?

In the last 5 years, which do you think had a higher percentage of appreciation?
- Cleveland Ohio or San Diego California?
- Portland Oregon or Memphis Tennessee
- Miami Florida or Indianapolis Indiana?
- Honolulu Hawaii or El Paso Texas?

Conventional wisdom is that the more expensive markets have higher appreciation opportunity. If this was your strategy, you were wrong. In the last 5 years Cleveland beat San Diego, Memphis beat Portland, Indy edged out Miami, and while neither Honolulu or El Paso did well, El Paso did better. You can see the data for yourself in this Bloomberg article https://www.bloomberg.com/grap...

Look at this graphic in particular.

Now, I'm sure some people will want to focus on the amount of dollar appreciation. If that is your focus, I must ask you. Are you better off having 73% appreciation on a $1M home in San Jose California, or 130% appreciation on 10 $100K homes in Dayton Ohio. The math has the answer.

Just my 2 cents

Also I just want to say that your question here is late 13 years. You should ask this 13 years ago lol. I've been investing for appreciation since 1997. But well yes the biggest appreciation started after that GFC 2009. After 2022, I would be more careful as real estate is quite pricy.

0 Reply

Jon Martin

Member since 2022 · 1k+ posts · 1k+ votes

3y

Quote from @Luka Milicevic:

My bigger question is how do you find what would be a high appreciation market

Look to where people are moving, whether those are retirees or high paid remote workers. Especially those cashing out of traditionally high appreciation markets (NYC, CA). Look for cities that could be the next Nashville or Austin where the median price is on the lower side. Those places have far more upside to grow in comparison to the already expensive markets that are already close to maxed out. That's what led me to Greenville SC.

Disclaimer: Amateur investor opinion here.

3 Reply

Conner Olsen

Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes

3y

Quote from @Greg Scott:

I regularly hear people on BP discuss cashflow vs appreciation and which markets deliver on those. There have seen heated debates in this forum, particularly when the "must have cashflow" people are arguing with those willing to accept negative cashflow in expensive markets.

But how does one identify which markets are "high appreciation" markets?

In the last 5 years, which do you think had a higher percentage of appreciation?
- Cleveland Ohio or San Diego California?
- Portland Oregon or Memphis Tennessee
- Miami Florida or Indianapolis Indiana?
- Honolulu Hawaii or El Paso Texas?

Conventional wisdom is that the more expensive markets have higher appreciation opportunity. If this was your strategy, you were wrong. In the last 5 years Cleveland beat San Diego, Memphis beat Portland, Indy edged out Miami, and while neither Honolulu or El Paso did well, El Paso did better. You can see the data for yourself in this Bloomberg article https://www.bloomberg.com/grap...

Look at this graphic in particular.

Now, I'm sure some people will want to focus on the amount of dollar appreciation. If that is your focus, I must ask you. Are you better off having 73% appreciation on a $1M home in San Jose California, or 130% appreciation on 10 $100K homes in Dayton Ohio. The math has the answer.

Just my 2 cents

Interesting point! I totally get your point about raw ROI numbers but there's also an emotional aspect to investing. Would you rather have one tenant or 10?

0 Reply

Royce Talbo

Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes

3y

why do cashflow people think that appreciation people only go for appreciation? buying in primary areas that appreciate well is like scaling down and buying a or b class neighborhoods. would you rather buy a couple b class properties that dont cashflow as well on paper or 10 f class properties that cashflow well on paper? yes you can get 10 houses that cashflow better but you also get 10 higher chances that a tenant will destroy your property costing you a year or more to repair. cap rate isnt really used in residential but cap rate is a measure of risk. if you apply cap rates to markets you will see primary markets that appreciate have lower caps meaning its less risky than cashflow markets. the probability that you will have more damage, evictions, vacancies etc. in cashflow markets are higher leading to lower overall returns.

its all a numbers game but you have to factor in all the variables. if you dont factor in risks and everything else on paper yes cashflow markets look better, but if you factor in everything over years then primary markets do better. the bottom line is, in the long run after you factor in everything, primary markets do better and are less headache.

1 Reply

Greg ScottPro Member

OP

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

3y

Quote from @Conner Olsen:

Interesting point! I totally get your point about raw ROI numbers but there's also an emotional aspect to investing. Would you rather have one tenant or 10?

I have many more than 10 tenants, so the operational requirements aren't a concern. One benefit of more tenants is if one property goes vacant, it is not nearly as big a financial hit as 100% revenue lost from one expensive property that will be much harder to rent out.

Similarly, a benefit of 10 cheaper properties vs one expensive property is the flexibility to sell off a portion of your portfolio instead of all or nothing.

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Is seeking a "high appreciation" market a good strategy?

Is seeking a "high appreciation" market a good strategy?

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