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

Real Estate Agent · Miramar Beach, FL · Member since 2016 · 285 posts · 245 votes

3y

@Greg Scott Doesn't always have to be solely a cash flow vs appreciation decision. It's probably actually most prudent for a portfolio to have both cash-flowing assets in lower growth markets AND some assets in higher appreciating markets. This diversifies off some of the risk to the overall portfolio. Maybe 3 cash flowing properties to every 1 appreciation property? But it really depends on everyone's personal situation. If someone is making $300K in their W2, I probably wouldn't tell them to buy in a market where they could cash flow $250/month on a SFH. Conversely, if someone is making $50K in their W2, buying a much more affordable property in a cash-flowing market may be what is best for their goals and financial situation at that time.

The bottom-line is that we'll never know which markets will continue to grow steadily and which won't. People have been slamming SoCal for decades saying that everyone is leaving and that prices simply can't continue to rise but they have and they've far exceeded pretty much every other market in the US. A lot of people who call out SoCal have never lived here or even traveled here. Do I think that will continue? No clue. Just as much as I don't know whether Cleveland/Detroit will return to their early 1900s glory. So maybe best to snag a few properties in different markets with different strategies and hold for the long-term.

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John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

3y

You don't have to settle for one or the other, get both. I can certainly get both in my market of Greenville SC.

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Allan C.

Rental Property Investor · Member since 2018 · 826 posts · 810 votes

3y

@Greg Scott these opinion-related debates are quite stale and circular. I’d actually be more interested in empirical data that categorizes people by net worth growth.

BP should run a poll that shows user demographics who made $<1 M, $5 M, $10M+ from cash flow vs appreciation and let the data guide folks. Would be good to also separate out passive (LTR) from active (STR, flip, syndication) to delineate strategies.

People also need to recognize that yield naturally declines as equity increases. New investors are more motivated to chase yields on $100k properties, whereas established investors may not want properties <$1M.

Yield is a function of risk, effort and barriers to entry. Period.

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Greg ScottPro Member

OP

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

3y

Quote from @Allan C.:

Yield is a function of risk, effort and barriers to entry. Period.

Wall Street would have you believe that yield is a function of risk. The CAPM provides the famous framework for that.

Glad you added the comment on "effort' because I've regularly seen where a little bit of effort can yield outsized returns, well beyond what CAPM would indicate.

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Dan H.Pro Member

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

3y

Quote from @David Dachtera:

@Greg Scott,

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

I challenge you to find a legit definition in any dictionary where going after RE appreciation is not investing. Your definition does not match the definition from dictionaries. Certain investors apply their own definition of the word, but that is analogous of me calling the sun the moon. Just because I have my own use, it does not change the definition.

From Oxford languages and the first definition that came up in the search from my browser:

expend money with the expectation of achieving a profit or material result by putting it into financial plans, shares, or property, or by using it to develop a commercial venture:

Note the definition is based on expectation of profit and does not care about the source of that profit (appreciation, cash flow, etc).

being an investor and a smart investor are not the same. A smart investor uses data to determine if an investment is “good”. “Good” investment factors in both expected risk and return.

historically the high appreciation markets have produced better return for long term holds (source case Shiller ranking of top RE return cities this century). You could also use neighborhooodscout and a little calculation to realize cash flow cannot compare with the appreciation in cities that are 10 out of 10 for appreciation for this century and the return they have produced from appreciation alone. Ironically these high appreciating cities purchased in 2000 also, in general, have rent to purchase ratios in a different league than the cities that initially had better cash flow.

based on historical performance, investing in the appreciation markets have been the better performing investment, over initially better cash flow markets, for long term hold durations.

the trend of appreciating markets out performing cash flow markets goes back decades, but it does not imply this trend will continue going forward.

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David Dachtera

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

3y

@Dan H.,

You seem to have contradicted yourself.

"the trend of appreciating markets out performing cash flow markets goes back decades, but it does not imply this trend will continue going forward"

Does that contradict or match the definition of "speculation"?

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Dan H.Pro Member

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

3y

Quote from @David Dachtera:

@Dan H.,

You seem to have contradicted yourself.

"the trend of appreciating markets out performing cash flow markets goes back decades, but it does not imply this trend will continue going forward"

Does that contradict or match the definition of "speculation"?

Not a contradiction because the definition of investing is on the expectation of a profit. The expectation of profit does not have to match the reality for it to be investing.

it also goes back to smart investor versus not smart investor. The smart investor looks at data, analyzes the risk, analyzes different returns based on various conditions and determine if the investment is worth pursuing.

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Conner Olsen

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

3y

Quote from @Greg Scott:

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.

Great points Greg, hadn't thought of that!

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Paul MoorePro Member

Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes

3y

Hi @Greg Scott! I really love your original point. Thank you for raising this issue. My two cents...

I've been following Warren Buffet and trying to apply his stock principles to real estate. If he were a real estate investor I believe he would go for cash flowing assets all day long. But he would start with assets where he finds hidden intrinsic value. Assets where great operators can force appreciation and get cash flow rather than assets where investors count on the market to raise their value. Counting on the market is a fools errand. When it helps you that is great. But smart investors find value, look for cashflow and hold for long periods to give the flexibility of the market to help them even further. Good luck and happy investing!

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John WilliamsBusiness Member

Property Manager · Clarksville, TN · Member since 2018 · 443 posts · 210 votes

3y

Clarksville, TN is another one of those cities with an abundant room for growth! Our city is where cash flow meets appreciation!

[email protected]931-272-3065

Rent My Home - Property Management4.8209 Reviews

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Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes

3y

Great post!

[email protected]248-209-6824

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ 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

Mad dope data in this post yo.

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Ricardo Hidalgo

Real Estate Agent · Member since 2019 · 569 posts · 257 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

I think it really depends on the net worth of the individual and income in the way he chooses his assets. I prefer high appreciation based markets because long term thats where you make the majority of your money (on the exit). I think cash flow is great and I would never buy something that is going negative. But I would rather choose a market that offers over 10% appreciation on a larger asset with 5% COC than vice versa.

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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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