Expecting Appreciation is a Game For Speculators, Not Long-Term Investors

by | BiggerPockets.com

On the surface that must seem a foolish idea. After all, though many call flippers ‘investors’ we realize that’s simply not the case. They’re the embodiment of speculation. They buy low with the plan to add value through the fix up process, then sell quickly and for a significant profit. At least that’s the intention, right? On the other hand, those who invest are lookin’ long term. In fact, they’re banking on the investment, in and of itself to give a return worthy of the time and capital invested into it. They expect reasonable and predictable cash flow. If they used leverage, they expect, over time to increase their net equity position through principal reduction via loan payments. Moreover, they expect solid retirement income from their long term investments.

Many argue that the potential for appreciation is appropriate when calculating long term yields on real estate. OK, I get that. My view is that the very existence of anyΒ expectation of appreciation begins to taint the concept of long term investment. Once it’s allowed to become an assumption in the spreadsheet, that investment capital has begun its journey into SpecLand. This is especially true if appreciation is at or near the top of the list of reasons why the yield is attractive. The years have taught me folks don’t like hearin’ that.

This leads me to an important question…

“What will your retirement look like if your investments don’t go up in value?”

But they will, cuz they always have, right’? isn’t an answer. It’s a hope at best. At worst, well, you can figure that one out.

Investors in my neck of the woods, San Diego, were spoiled since the mid 1970s. Double digit appreciation accompanied by equally insane rent increases, while vacancy factors were virtually nonexistent convinced most real estate investors they were brilliant. πŸ™‚ I include myself in that group. But since that region was growin’ in leaps ‘n bounds year after year, we all knew it would never end. Those who began in 1975 were buyin’ 2-4 unit properties for roughly $30-50,000. Β By 1981 those duplexes were worth, give or take six figures! Things flattened out during the early 80’s recession, but came roarin’ back in late ’85 with more double digit appreciation. ‘Course, by then we’d come to expect that as our due. During those two huge run ups the rents did the same thing. In those days San Diego County’s population was growing in the range of 50-80,000 annually, with no end in sight. No end in sight? Does that mean we have 20 million population here now? Um, that’s a negatory, Bertha. We’re at a comfortable 3 million, give or take few thousand. Real life happened.

But then we entered the new millennia, and the process began anew. By then you were considered a complete moron if your spreadsheets didn’t assume a ‘San Diego’ type increase in value for every year represented on your Excel sheet. Most folks ask me at this point, “But wasn’t all that appreciation a pretty cool thing?”Β Yes and no. If you benefitted from it, AND made all the appropriately well timed moves taking advantage of all that increased equity, you loved it.

Related: A Step-by-Step Guide to Start Investing in Real Estate Long Term

But there’s a catch. There’s always a catch, right?

See, the price based upon the ever increasing incomes of these units was also goin’ up. Specifically, here’s what I mean: A four-plex that sold for around seven times the annual gross scheduled rent in the 1970s, was selling for 8, 9, 10, then 15 times that GSI. Think that’s horrible do ya? It only got worse. When the latest bubble began growin’ in 2000 or so, it was noticeable that our third ride on the ‘Get Rich Train’ was leavin’ the station. All aboard!!Β 

Try $600,000 β€” at least.Β 

Not only that, but even with the rents significantly higher than they’d been just six years earlier, the 2006 value represented a gross rent multiplier of around 22! Ya can’t make up somethin’ that insanely stupid. Yet, way too many San Diego real estate investors merely assumed the new gravy train was no different than the two that had preceded it. Not hardly.

Related: Learning from Bubbles: A Look at Housing Bubbles Worldwide

Exit β€” Stage Left

Turn the clock back to late summer of 2002. This latest ‘rocket to the stars’ rise in values didn’t pass the smell test, but I couldn’t see the forrest through the trees when it came to the ‘why’ of it all. What a dunce I musta been.Β I called up the last mentor I had standing, and asked him for the answer. In return, he just cackled, tellin’ me I had a couple days to figure it out on my own, or he was gonna be sorely disappointed in all the years he spent with me. ‘What’s different this time around’? was the only bit of insight he gave me. I felt like the dullest tool in the shed about then.

Fortunately for me, Captain Obvious showed up with the answer. I don’t know what word expresses the concept of Duh! to the millionth power, but that’s the thought I had when the answer hit me. What college freshman majoring in finance didn’t already realize that it was the insane, fantasy loan underwriting that was fueling the cartoonish appreciation this time around? I felt so dumb I walked around the next few days in a funk made up mostly of self-pity. Am I really that blind? Wasn’t I smarter than that? Please, Lord, tell me I am. πŸ™‚

My mentor took me off the hook by generously placing the blame on the fact I’d been way to close to everything to see it clearly. Lookin’ back I can see he was dead on. Still not an excuse I’ve allowed for myself, as accurate as it was, at least in hindsight. Close or not, I was a very experienced pro who shoulda known better.

Appreciation is something we all enjoy when it deigns to bless our portfolio. However, cookin’ it into your spreadsheets for the expressed purpose of predicting overall yield is an invitation to major disappointment, and that’s being kind. For the next six months after being so humbled, I spent all my time preparing to leave my hometown market for good. I kept my intentions to myself, except for clients. Very few of ’em believed my reasons were credible, deciding to reap the rewards of another patented San Diego real estate boom. It was a boom alright, and those who remained when the bubble burst learned firsthand: they were at ground zero.

The lessons learned were many and priceless. But one lesson, at least to me, stuck out. Predicting future value increases is the answer to an old joke.

How does a real estate investor make a small fortune? They begin with a large fortune, then base investment decisions on a crystal ball’s assurance their properties will skyrocket in value.

For the record, that joke’s funny, ’til it’s not.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. I have to disagree on two points. First, flipping is not speculating. “Speculate”, per google, is defined as to “form a theory or conjecture about a subject without firm evidence”. I would argue that (good) flippers have evidence that the investment will pay off. I’m sure you could come up with a definition that includes flipping if you want to.

    Second, I don’t see a problem expecting (reasonable) appreciation. If you look at historical house prices, it always happens over a long enough time horizon. If you might be selling in a year or two, or ten, I wouldn’t rely on it.

    • Jeff Brown

      Hey Adrian β€” We’ll hafta disagree then. I much prefer both Warren Buffet’s and Benjamin Graham’s definition of speculation vs investor. I much prefer those two to Google, to say the least.

      As far as appreciation goes? Wonder what those who kept bakin’ in appreciation into their investments back in 2004-2006 think of it now? Or those who did it in 1979, or 1990, or . . .

      • Like I said, you can always make up a definition that will include it. I can make up a definition of speculation that includes all REI, but that doesn’t mean much.

        I think those who invested in 2005, expecting appreciation but insisting on cash flow (as anyone should at any time) are doing fine. As I said, you can’t count on appreciation in the short term.

        • Jeff Brown

          “Like I said, you can always make up a definition that will include it.”

          Again, I’ll stick with Buffett and Graham when it comes to those definitions.

          We we’re talkin’ about cash flow, Adrian. We were talkin’ about whether or not inputing future appreciation was wise. Whether or not an investor still has cash flow when relying on much of their return on future appreciation merely shows they’re fortunate.

        • jeffrey gordon on


          I think you meant “we we’re not talking about cash flow Adrian” vs “we we’re talking about cash flow Adrian” ???


      • I agree with Adrian. I don’t think flipping is speculation. In the article you say flippers hope to buy low and add value through repairs. They don’t just buy low, they buy below market value. It takes a serious deal to make money on a flip. I don’t make my money flipping by making repairs, I make money by getting a great deal, which is sometimes due to many repairs needed. Speculating I feel is hoping something changes in the market to increase value. That is not needed to flip, at least should not be.

        I agree about your appreciation point with rentals. I never figure appreciation, I think of it as a bonus. Appreciation has helped me make a lot of money the last few years.

        • “Speculating I feel is hoping something changes in the market to increase value. That is not needed to flip, at least should not be.”

          Mark, I think the reason flipping is speculating because while what you say is true, the opposite is what makes flipping so speculative. If anything changes for the worse during a flip, such as the ARV decreases, repairs run over initial estimates, or the market does a 180 altogether (think 2006), then even if you had a great deal, you’d be screwed. That’s where I think the risk comes in.

        • Replying to Sharon:
          You’re just pointing out that there’s risk in fipping – but why does this make it speculating? There is also risk in renting – what if the rental market takes a dive and you no longer cash flow, what if the renters trash the house, etc. So what’s the difference?

        • Honestly, Adrian, speculation = risk in my book. There are certain things one can do to mitigate risk with a rental, which Erion Shehaj so adeptly wrote about just recently:


          However, if a flipper has a hard money loan on a house and any of the conditions I mentioned occur, they will be hard pressed to make adjustments that won’t leave them financially impacted. I can’t imagine any professional flipper who would claim what they do isn’t somewhat speculative and/or risky in nature.

          I’m just curious if it’s really the word “speculative” you are having trouble with, or the fact that Jeff says flippers aren’t investors. To prove that point, just look at how the IRS taxes one or the other, and you’ll have your answer there.

        • Sharon,
          If risk = speculation, then every investment, including rentals, are speculation. I don’t think anyone would seriously argue that, besides which, you’re rendering the word speculation completely meaningless by saying that it literally means another word.

          I read Erion’s article when it came out, and re-read it just now. The takeaway is that the main risk in rentals is not being able to rent a property, but not being able to rent at the price you want. This has a direct comparison to flipping: you may not be able to sell at the price you want, but you will be able to sell for some price (except maybe in downtown Detroit – shout out to J. Dorkin).

          I’m sure that flippers would agree that what they do is “somewhat risky in nature” – I’m sure that landlords would also agree, and stock investors, etc. If they don’t, they don’t understand what they’re doing.

          Of course there are things you can do to mitigate risk in landlording. In fact, the recommendations in the article you linked can be directly applied to flipping.
          1. Make sure the numbers are correct – requires no explanation.
          2. Screen tenants properly – screen your properties properly also (inspections, etc to minimize risk of unexpected expenses).
          3. Buy good properties in good quality locations – also requires no explanation.

        • Adrian, I said speculation = risk, not vice versa. Big difference. I’ve never felt buy and hold investing for cash flow is risky. I buy in good areas that attract solid tenants, have reserves, and my rentals cash flow. Compared to flipping, where I think Jeffrey Gordon’s response to you enumerated all the ways you can get burned, TO ME seems very speculative and risky.

          Having said that, if you don’t feel the same way, no worries. That’s the beauty of BP – we can all have our own opinions and it doesn’t have to get confrontational. At the end of the day, I’m sure many people will read our conversation and come to their own conclusions and have their own takeaways. That’s a good thing!

          Cheers, Adrian!

    • jeffrey gordon on

      Adrian, flipping involves a lot of entry and exit costs that have to be prorated over any capital gain from purchasing/remodeling/disposing of the property–i.e. really high short term holding costs which diminish over longer holding periods incurred by investors vs flippers.

      So, as smart as every flipper is, in my years of experience there have been a lot of folks with lots of experience who did really well speculating in short term holds right up until the last one when everything blew up in their faces! It wasn’t that just lost out on the necessary pop to cover their entry/hold/exit costs, but that the property actually could not even be sold at literally any price let alone a break even price when the markets froze up.

      So yeah, I think a flipper is speculating that they are buying the property for at least 10-15% below cost so that they can sale it and recoup their investment. Adding money into improvements is a further crap shoot in that most remodeling investments typically don’t even increase the property value in an amount equal to their cost.

      My experience is you make your money when you buy and the key is not to lose that profit during your remodeling and marketing selling of the property.

      I find it a bit ironic to include a long term concept of real estate appreciation in the same conversation of a short term investment strategy like flipping?

      I agree with Jeff, once you start playing that game of forecasting rent/value appreciation along with expense increases it becomes difficult to know where to stop–one can pretty much get to any destination they favor by making fairly small adjustments in the value appreciation and/or the income/expense forecasts.

      Since we have the current sales price, the current rents and the current expenses and under Jeff’s model we also have a new well-located building in the country’s strongest economic markets that are showing excellent current rates of return on investment do we need to even go into the forecasting of future events?

      I can take one of Jeff’s duplexes in Texas and assume everything stays the same for the next 10-12 years and confidently match it up against almost any other alternative investment, not only that, but I would hazard to guess Jeff’s properties could go head to head with an investment supposedly favored in a 401k and still come out the winner!

      And yeah, I would expect to see 2-3% appreciation in residential real estate long term based on the last 50 years of my life, but truthfully “we ain’t in Kansas anymore Dorothy!”
      and only fools assume investments in the future have anything to do with prior track record!


  2. jeffrey gordon on

    Hey Jeff, thanks for the reminder that appreciation in real estate properties can be a fleeting experience, one to be savored when captured, but not a necessary ingredient to a successful real estate investing plan. Definitely to be thought of as icing on the cake when realized, but in my 35+ years around real estate most of the dramatic appreciation periods in real estate occurred around some really dramatic and often destructive events–i.e.no guarantee a real estate investor is going to be thankful for rapid appreciation in every situation!

    For me, your advice to invest in well located modern/new 1-4 unit properties in growing markets where both job growth and strong rental/purchase markets exist combined with the best investment financing, tax treatment, and a tenant management business that can result in sufficient net cash flow to pay off a building in 8-12 years is a no brainer when compared to playing with the Masters of the Universe in the stock/bond markets!

    Where else can you invest 5-25% down in year one and almost absolutely guarantee you will be free and clear 10 years later and yielding 50% of gross revenue net to the bottom line on a $275,000 (probably somewhere in a 5+% ROI rate) duplex?

    You can borrow money for up to 30 years fixed today for 5.5% and have a very small likelihood the property will not lose value by year 10.

    I have yet to see anyone propose a stock or bond investment with that kind of coupon that doesn’t have the potential to vaporize in the HFT mist.

    With those fundamentals, who needs appreciation, especially if it typically is surrounded with a bunch of accompanying drama which usually causes havoc to our personal and financial lives–give me 2-3% per year of value growth–i..e minimal inflation rate–and most of real estate investors would sing all the way to our bountiful retirement!



  3. Any appreciation is gravy. I have done flips, but mostly rentals. The rentals cash flow, big time.

    In the days before the big crash, like 2002 forward, ‘investors make money because the market was raising fast. Even investors that did things wrong, made money. They were lucky they made it out.

    If we have pricing deflation, which is very likely, you will see prices come down. Taxes going up, interest rates going up, PMU going up, salaries going down, will all lead to Deflation.

    It is very hard to get RE appreciation in a deflationary spiral.

  4. Hey Jeff, while I understand the concept of this article is specifically to NOT count on appreciation as an investor, I have to acknowledge that one of the first things i learned in REI was from Frank Gallinelli in his book about understanding cash flow. He mentions that the ways to make money in REI could be boiled down to 4 basics, one of which is appreciation. Obviously your both making two very different points about the topic, yet as a new investor i’m stuck trying to connect the dots. My question is this, assuming I do correct analysis and DO NOT include any factors involving appreciation, how do I decide which areas in my city are best primed for it?

    • Jeff Brown

      Great question, Mary. The answer in full would take an entire post. Boiled down, do the macro analysis of the region/state in which the proposed investment resides. Think in wider economic terms in this analysis, not just real estate. For example, are income taxes very high? How ’bout the government’s general attitude towards business? Are people and businesses coming into the the state or leaving it? Do the courts favor tenants over landlords, or do they judge based upon the contract and other evidence? In other words, you wanna know if investors/businesses/citizen producers are welcome, or merely plundered. The answers to those questions are why I left CA, but like places like TX and ID very much.

      When it comes to appreciation, I walk my talk and literally don’t include it in any analysis I might conduct. Now, all that said, my nearly 45 years of experience has allowed me to see all the ‘movies’ on the subject, all their sequels, and all the remakes. πŸ™‚ When I see a script I’ve seen many times before begin to roll out, I’m not too surprised at the ending. That’s why when I see states become popular with folks and businesses from other parts of the country, I become intensely interested. Businesses bring new jobs. People bring demand for housing and services. The rest takes care of itself. Appreciation at that point becomes almost predictable, but never reliably so, at least in my opinion and experience. THAT’s where the hubris of human nature takes over. We tend to think we know when in reality, it’s just not the case. So, I’ve learned to see various regions as fertile soil for POTENTIAL future appreciation, and that’s as far as I’m willing to take it.

  5. I agree that appreciation should not be relied on, but to say that any consideration of appreciation potential puts you into the realm of speculation is a stretch. By this logic, anyone that invests in a stock should only be looking at the dividend in order to be considered an investor. If you research an undervalued company and expect growth, which will translate into a higher stock price, you are now a speculator? I believe this would include Warren Buffett. I equate stock market speculation more closely with penny stocks and options (depending on how they are used).

    Also, to tie this article in with your last, which was heavy on the Location, Location, Location, mantra, I would say that those investors dedicated to the location principle are right in considering appreciation.

    • “By this logic, anyone that invests in a stock should only be looking at the dividend in order to be considered an investor. If you research an undervalued company and expect growth, which will translate into a higher stock price, you are now a speculator? I believe this would include Warren Buffett.”

      Steve: If you read Graham & Dodd, you will see your above statement is not far off … you invest only where there value (i.e. a company’s book value exceeds their price) and cash-flow. Of course, Wall Street is foremost a business in its own right these days, and these principles do not align with its present-day behaviours.

    • Steve,
      I was thinking the same … Buffett’s purchases and strategies certainly do take growth (appreciation) into account, albeit conservatively, and many of his purchases would not agree with Graham’s strict definition of speculation.

      But when reading Buffett’s reports every year, he still has a strong emphasis on owner’s earnings as the prime measurement tool of value. This would be the equivalent of Jeff saying use Net Operating Income and cash flow as main indicators to buy or not.

      This is an old video, but this was an interesting short interview with Buffett about buying houses and financing with 30-year mortgages. Similar to Jeff’s (and my) strategy.

      • Roy and Chad, I do agree with your comments. I have invested in the market and understand fundamentals… but I became disenchanted at the point that I realized (and perhaps always knew on some level), that the Gov’t controls the outcome of the game far more than an individual investor can. I saw the Buffett interview as well and obviously agree with him, since I doing exactly as he said!

  6. Appreciation is like Chinook in February … you smile and enjoy it when it comes, but you plan for -20 temperatures and 4′ of snow.

    When we model a property for acquisition, we usually use an appreciation factor of 0% … but not always, sometime we like to see if a property still warms our pockets when appreciation is -1 or -2%/annum.

    • jeffrey gordon on

      Hey Roy, right on! Jeff skipped the grey hair stage resulting from stress and went right to the bawld stage, arguing with him is a bit like arguing with mother nature–he has seen it all first hand, and is the first to admit he might have been a slow learner at times! I always quote him to my 31 yo son who has been knocking the ball out of the park investing in 1 and 2 unit property in DC–hard for someone of that age to truly understand that things go perfectly right up until they turn to crap!

      But then, if you dont get your hand caught in the drawer you usually don’t learn those fundamental lessons well–i..e invest in quality properties in the best locations, keep reserves, and make conservative assumptions and mostly be patient!


  7. Jeff Brown

    “Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook . . . There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose. . . everyone who buys a so-called “hot” common-stock issue, or makes a purchase in any way similar thereto, is either speculating or gambling. Speculation is always fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck, put aside a portion–the smaller the better–of your capital in a separate fund for this purpose. Never add more money to this account just because the market has gone up and profits are rolling in. (That’s the time to think of taking money out of your speculative funds.) Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.” Benjamin Graham

    This quote describes me as a young man. I truly didn’t realize there were times my ‘investments’ were, in reality, rank speculations. Sadly, this is why this generations old quote still hits the bullseye. Most don’t know when they’re speculating under the guise of investing.

      • Jeff Brown

        Here’s the most published quote of Graham on that subject, Adrian. As I said at the beginning of the comments, folks agree and disagree.

        β€œAn investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

        Understand, his book on investing is almost 600 pages long. But this quote stands alone. He makes it abundantly clear that ‘promises safety’ and ‘satisfactory return’ are purposefully left up to the individual investor. Tip: if you’re considering buying the book, and you’re over 40, I strongly recommend you get the downloaded version. The print in his book is almost unreadable without perfect eyesight. πŸ™‚

        • I think the key words there are “promises safety of principal and a satisfactory return.” Obviously, no investment “promises” anything. There are simply degrees of safety. I guess we just disagree about the likelihood that a flip will return principal and profit. I would venture a guess that there are a lot of flippers on the board who would agree that the likelihood is high.

        • Jeff Brown

          I’m with ya on the word ‘promises’, Adrian. But in context it’s clearly evident he doesn’t mean ‘guarantees’. As he does with much of his advice, he says ‘promises’ is up to the investor, i.e., my version of comfort zone.

          As far as flipping being an investment goes, I offer this observation from my own experience. For every successful flipper there are a whole bunch more who bit the dust. In fact, it’s also my experience that most flippers are not successful. Not true with long term investors. But again, that’s my experience/opinion, which when combined with $10 will get us both coffee and a cookie. πŸ™‚

  8. Great post and thread @Jeff Brown. Flipping is kind of a pejorative word, a less negative term is spec remodeling. Like a spec builder (short for speculative builder) who buys land and builds a house hoping to sell it for more than it cost, a spec remodeler buys an existing house and improves it hoping to sell it for more than it cost.

    Spec building or remodeling isn’t bad but it does entail more risk than an income investment because spec returns only happen when and if the property sells, and if it sells for the right price. Income investing begins with a property that is already throwing off cash (at least it should) and in the investor’s analysis will continue to do so.

    Starting with the bull market back in the 1980s Wall St. has done a masterful job of convincing people to give up investing for speculating because stocks always go up and those pesky dividends are just a headache. Besides ‘good’ companies don’t waste their time and money giving something back to their owners, that would cut into executive bonuses, er I mean would reduce their prospects for growth. This has been wonderful for Wall St. and the trading volume they depend on has risen stratospherically. They even have a shill TV network to rev up the action but where are the customer’s yachts?

    Speculating depends on things going right at some later and that’s never a given. Niels Bohr said it best when he quoted Markus Ronner: “Prediction is very difficult, especially about the future.”

    • Jeff Brown

      Hey Giovanni β€” For many ‘flipper’ has been assigned somewhat of a negative taint. I think flipping is wonderful for the experts who know which way is north on the flipping map. πŸ™‚ I’ve flipped many types of properties, though ironically never a house.

      I love to death your comparison of spec home building to flipping existing homes. If building a SPEC home is de facto speculation, what sorta mind boggling contortions of logic must one go through to say flipping is investing? πŸ™‚

      • Hey Jeff, good point that flipping can happen with all different types of property.

        When I owned a construction company we usually did a spec remodel a year for ourselves. Like you say it can be a good way to make short term money but I can’t imagine doing it without some kind of edge, like owning a construction company.

        Flipping is speculating and speculating is not investing but you won’t hear that from Jim Cramer or most ‘gurus’.

        • Jeff Brown

          Your point about having an edge in flipping is a superb insight, Giovani. In fact, I’d go as far to say the most prolific flippers have multiple ‘edges’.

  9. Gloria D. Wilson on

    Wow – this was so rich with information that I’m going to have to read it again. I’m just getting into the REI – looking to do owner occupied rental – triplex or quad – with a good cash flow, and am looking in several key, good neighborhoods – where I would want to live no matter what. Thanks for all this because it helps clarify so much for me. I am clear that, at least at this stage of the game, I am not a flipper. Cash flow is definitely my long and short term goal. Because I don’t understand all the nomenclature, please explain what EIUL means – and thank you for the Graham, Buffet and other quotes. I’ve a lot to learn – and don’t have the lengthy time frame of one just getting into the market at 30 – That said, thanks again.

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