Cashflow markets vs. Appreciation markets - Fact, Fiction, Danger

[Greg Scott]

About 10 years ago BP started categorizing markets as cashflow markets and appreciation markets.  

Criticism of cashflow markets -  I remember a podcast with David Green where he was critical of Midwest markets that had cashflow.  He went into details about how other BP members had focused in areas with high cashflow and they had extremely poor returns.  I certainly can understand how he got that perspective.  I live and invest in the Midwest and know these markets well.  If you are an out-of-state investor and myopically looking for the highest cashflow, where does the data take you?  On paper, the highest cashflow properties are in the terrible, awful, bring-a-gun-with-you submarkets.  While some people make money in those areas, that is a very challenging business model. 

Why appreciation markets? - The concepts BP was discussing at the time was more appreciation-focused.  David said (and I believe he is correct in these statements) that the people that became wealthy in real estate got there primarily from appreciation.  David Greene started shifting his focus to higher-priced cities, with the idea that appreciation would drive the profits.  

Is that true? - Meanwhile, I was investing in Midwest markets in solid middle class neighborhoods.  My cashflow was not amazing, but it was acceptable.  Because I was investing in solid cities and submarkets, I also got appreciation.  A few years back I did an analysis using Zillow data and found that over the past 10 years, Indianapolis had a greater appreciation than San Diego.  Why did nobody know this?  I suppose when a $100,000 house becomes a $200,000 house, it isn't as eye-catching as when you $1,000,000 house becomes a $1,500,000 house.  As a side benefit, I enjoyed more favorable tenant / landlord laws.

The DANGER of appreciation markets - Austin, Texas was once labeled an appreciation market.  Current oversupply has driven down rents.  Imaging making an investment where you were counting on appreciation for your returns, and instead your property LOST value!  This week the US Census announced that immigration policy has caused dramatic population reductions in several other "appreciation markets".  Miami, which was one, has already been seeing dramatic reductions in property values.  How do appreciation markets perform when there is no appreciation and it may be a decade before prices recover?

Both is better - I must say I am much more comfortable with Dave Meyer and Henry Washington's approach.  Cashflow may not make you rich, but it gives you holding power. Appreciation is great, but you can't always count on it. If you can hold a property long enough in the right cities and submarkets, then you usually also get appreciation.  

Go get both!

[Arn Cenedella]

@Greg Scott

The “debate” is nicely laid out in your post. 

Like most things in life, the correct answer is generally BOTH AND and Not EITHER OR. 

I strongly agree with your point about most wealth is created through appreciation. That’s why I invest in RE. 

Many investors who make “cash flow” the be all end all miss the true way wealth is created. It takes a heck of a lot of equity to generate $150K to $250K annual income. I have also found once one reaches a certain net worth, cash flow takes care of itself. An investor can generate as much as little as they want with their allocation of capital decisions. 

A property must cash flow for sure. I describe this as being “self-supporting”. The cash flow is NOT money I need to support my lifestyle or pay my bills, it is a protective buffer for when problems arise - rents drop, unexpected repairs etc. 

in order to invest heavily in real estate one MUST have the capital to do so. 

How does one generate this capital?

There is really only one truly successful manner to do so - spend less than you earn. That’s it. 

If one spends less then they earn, they don’t need cash flow now to support their lifestyle. They are investing for future benefit - equity growth. 

It’s both and. 

But if I was a young person entering peak earning years, I’d invest with the finish line being 10 to 15 years out. The finish line isn’t how much I put in my pocket year one.