Cash Flow Vs. Appreciation
Real estate investors often debate whether it’s best to go after cash flow or appreciation when looking for investment properties. There are benefits to each, but in our opinion, cash flow is the smart choice. Following are the considerations to keep in mind as you make your own decision about whether to pursue cash flow or appreciation. First though, let’s define what a cash flowing property is versus an appreciating property.
What’s a Cash Flowing Rental?
A cash flowing rental is one that cash flows positively. Cash flow can happen in both directions; positive and negative. For our discussion, cash flow means positive cash flow. That means that after all expenses have been paid, including the mortgage, insurance, property manager, etc., there’s still money left over going to the investor every month. Due to the economy, cash flowing rentals are usually found in areas like the midwest and the south.
What’s an Appreciating Property?
Appreciating properties, for the purpose of our discussion, are those that are found in the most desirable areas of the country; typically in or near big cities like Los Angeles, Boston, Chicago, Miami, etc. These properties are so expensive to purchase that they won’t cash flow, but some investors like to buy and hold them because they may appreciate in value over time.
What to Keep in Mind About Cash Flowing Rentals Versus Appreciating Properties
Here are some of the major differences that you should keep in mind about cash flowing rentals versus appreciating properties:
Appreciation is Speculative
If you’re the type of investor who doesn’t mind speculating about what’s going to happen in the future, you might not mind the appreciation investment model. Appreciation is very speculative because it’s completely dependent on value increases over time. It’s very much like playing the stock market in that respect. You buy a stock today and hope that by the time you’re ready to retire it’s worth a lot more. Fingers crossed it all works out. Of course, that game didn’t work out so well during the Great Recession of 2008 when millions of investors lost their shirts while stocks plummeted home values took a nosedive. Home prices go up and down over time. If you wait long enough, a property in an appreciating market will raise in value. But will it be high when you want to sell? And how much will it increase in value? No one can say for certain.
Cash Flow is Definitive
On the other hand, cash flowing property is definitive and real. You can count it and you can count on it. You know exactly what you’re getting in cash flow each and every month. The property may or may not appreciate in value this year or the next, but you know for sure that as long as you have a tenant, you’ll have a certain amount of money coming in. If you’re an investor who likes a sure thing, a cash flowing rental property is about as close as you’ll come to that.
Appreciation is Paper Wealth
Don’t you love those stories where someone bought a house for some ridiculously low price 25 years ago and now it’s worth ten times that amount? That adds up to an increased net worth for that investor—on paper. Because unless that property is cash flowing, there’s no way to get all the money out without selling the asset. Appreciation is paper wealth. It looks great on a balance sheet, but not so impressive on a bank statement. You have a property that’s costing you money. There’s the mortgage, the upkeep and all the other costs associated with a rental property, but you have very little or nothing coming in on the other side of the ledger. Appreciation doesn’t give you income.
Cash Flow is Financial Freedom Wealth
Cash flow rental property gives you passive income. Passive income is what gives you financial freedom. Freedom from having to work overtime to pay the bills; maybe even freedom from having to work at all. Eventually, with enough cash flowing rental properties in your portfolio, you could say goodbye to your boss for the last time. Properties without cash flow—that only appreciate in value—will never ever give you passive income that you can use to retire early. Owning a cash flowing rental property is like having access to a cash machine. And cash is king.
Appreciation Isn’t Reliable in Certain Economies
The economy is not stagnant. It goes from periods of excellence to periods of deep depression. In between it undulates up and down; you can’t depend on it to stay in one state for long. Which is fine, unless you’re depending on a rental property to appreciate consistently over time. Appreciating properties aren’t reliable in certain economies. When the economy is great and rents rise, you might lose tenants because they can get a bank mortgage and buy their own place for cheaper than they’re paying you in rent. When the economy contracts, your tenants might get laid off from their white collar jobs and have trouble paying your high rent.
Cash Flowing Properties Are Always Affordable
Looking at cash flowing rentals, you’ll see that they’re always affordable in any economy. When the economy is booming, your cash flowing rental will remain an attractive and affordable way for your tenants to live and save money. When the economy is failing, cash flowing properties will be even more attractive as people lose high paying jobs and have to work retail to get by. Your affordable rents can be paid with a job at a coffee shop and you’ll still be making positive cash flow each month. And if the home values are down for the moment, who cares? You’ve still got your passive income coming in, helping you continue on the road to financial freedom.
Finally, you can use the income from your cash flowing rental property to pay off your loan early. In 15 years’ time, you could easily pay off a $50,000 rental property that’s cash flowing just $300 a month. Then you can enjoy your equity and clear profit for the rest of your life. And what about an appreciating property? If you bought a $300,000 in a fantastic location that’s not cash flowing, you’re almost certainly still going to be paying on that mortgage 30 years from now.
You’ll hear investors arguing on both sides of this debate. In the end, you have to decide yourself how you want to invest; and more importantly, whereyou want to invest. MartelTurnkey has turnkey rental investment opportunities in five cash flowing markets across the U.S. We also have other investment opportunities you may be interested in. Contact us to discuss your options.