Appreciation: the often-overlooked element in Real Estate Investing

When evaluating any multifamily real estate investment, it is best to determine your objectives up front. Are you a buy and hold investor looking to build net worth or more of a cash flow investor looking for consistent double-digit returns (12% plus)?

Many investors lean heavily towards the school of thought that “Cash Flow is King” and its easy to see why. Who does not love a double digit return on their money? Don’t get me wrong, cash flow is an important element to any REI decision, however it should not come at the expense of the power of appreciation. Many in the cash flow camp view appreciation as merely speculation and this is somewhat true in many areas of the US. However, I offer a different perspective on the importance of leveraged appreciation in supercharging your portfolio through the lens of investing in Southern California.

Historical data reveals that the long-term compounded appreciation rates in the South Bay area of Los Angeles are 6.5% dating back to 1965. Our region is somewhat unique as there is no more available land in which to build on, surrounded by mountains and oceans with one of the strongest & largest economies in world. These factors are what is driving the market data and you can be reasonably assured that this will continue.

When combined with the appropriate use of leverage in areas with consistent appreciation, investors can easily achieve returns greater than 20%-25% over the long term where cash flow is a modest 3%-5%. This is achieved by combining the four elements of return:

1-Cash Flow 3%-5%

2-Appreciation 5%

3-Equity Build Up Through Amortization 5%

4-Tax Benefits 3%

Now apply the appropriate use of leverage over the long-term to acquire additional inventory and your 5% appreciation can grow as high as 20%.  This number will dilute over time as equity builds signalling that it is time to re-invest. This is where you can build a staggering amount of net worth. Once your investment/acquisition goals have been achieved, its time to sit back and enjoy the cash flow that comes along with it, only now you are worth millions of dollars as well. Imagine the financial freedom that comes along with putting the power of leveraged appreciation to work for you today.