Thanks @Nate R. for explaining.
As a primary buy&hold investor, with passive income as the goal, I come from a different perspective:
- The property appreciation is not something you can rely on, as nobody can predict the market fluctuations and time the market. Sure, you can look back and see how things went historically...but "past performance not a guarantee for future results". What if you plan to sell in 5 years from now and 5 years from now there is a recession or a major dip in RE prices? I don't think it is wise to base your buy&hold strategy on appreciation hopes, especially for houses with zero or negative cash flow. Appreciation is creme on top of the cake - it might be there, but it might not.
- Appreciation is a paper profit realized only when/if you sell. It's hope. If you plan on selling, you have to factor in the selling commisions (usually 6%), closing costs (probably 2%), depreciation recapture, taxes on the profit for a true return figure. I contend that if you are planning to hold for under 5 years, you are in fact a long term flipper, not a buy&hold investor.
- Leveraged appreciation (the way Nate considers it) is not just paper profit, is like virtual paper profit. A promise on a hope. It's not going to put any money in your pocket till you sell, and that only if you do it at the right time and in the right conditions. (And what happens if there is deflation? Unlikely, but still possible.)
- Then there is the inflation. To speak about appreciation, you need to speak about and understand inflation. I would say any investment needs to bring you more than the rate of inflation for a real gain. Heck, more than inflation and an additional 25%+ for taxes (e.g. if inflation is 2%, you need to make 2.5% return just to break even).
- And, again if you think long term and passive income, not just storage of wealth, if you can't redeploy that money into something better, how good is that appreciation? For example, let's say you buy a house that doubles in value in 10 years...but then all the similar houses in the area would also doubled in value. Can you sell the house and buy another similar one without adding more money? I doubt you can, not in the same area and condition.
How much of that appreciation is real, caused by area changes in economic conditions, or scarcity of land/space, etc. and how much is just a reflection of inflation (or quantitative easing, aka money printing)?
Read here for much better explanations that I can provide:
The-truth-about-the-real-estate-market
Inflation-adjusted-housing-prices/
US-home-prices
So, yes, you can recover your investment when selling, and hope the appreciation gave you back more than inflation and taxes, or at least kept you in place and preserved the true value.
You can probably count on the net cash flow. And you can count on the equity increase (due to principal paydown by tenants, and even that should take in consideration vacancy, otherwise you do double dipping). The rest is wishful thinking.
But then again, this is just my opinion and from my limited perspective. It could be flawed and subject to feedback and corrections, which I very much welcome.