Investing for Cash Flow vs. Appreciation — Which is Better?
Most people know that there are two core ways you can harvest a return on your investment when you buy real estate — cash flow or appreciation.
Ideally, an investment property will produce both, but nearly every investor comes to a crossroads where they have to pick which one is most important. Whether you prioritize cash flow or appreciation has a big impact on how you look at investment opportunities. Think of it as the “lens” through which you view the real estate market.
Is one strategy better than the other? There’s no real right answer. It really depends on the investor and their long-term goals. But let’s examine the question and see if we can declare a winner, even if it’s by a nose.
Cash flow in real estate usually means any surplus rent you can pocket after all expenses have been accounted for. Of course this means expenses like property taxes, insurance, and service contracts, but it also means the mortgage payment and contributions to a reserve fund for emergency repairs.
Deals that Tend to Emphasize Cash Flow
Properties in Slower Growth Markets. How fast a metropolitan is growing really matters. Faster growing economies tend to cause housing shortages which means higher real estate prices. In markets with more sustainable growth — like places in the middle of the country like Ohio or Missouri — real estate values just don’t swing wildly up and down.
“B” or “C” Neighborhoods. These are typically workforce housing neighborhoods. You can usually get them at a lower price compared to their rent potential — which means higher cash flow.
Property values less than $250,000. This is not a hard rule but, usually, properties at the lower price point have a higher chance of cash flowing. The reason why higher price properties usually don’t cash flow is that people who could afford these higher rents have more options and are able to buy a house instead of renting.
When is it a good idea to invest for cash flow?
Compared to appreciation, cash flow is more predictable. Yes, sudden vacancies and emergency expenses do happen, but after you settle into a rhythm with your tenant, it becomes easier to know how much cash you can count on each month.
Also, appreciation doesn’t manifest as cash until you harvest it in a sale or refinance. Before that happens, appreciation is entirely speculative. Cash flow, by contrast, manifests itself as cash every month— a big deal for people with their eyes on retirement or financial freedom.
Appreciation in real estate is when property increases in value over time. Over long periods of time, real estate tends to increase in value … but in the short term, especially in volatile markets, real estate can potentially lose value.
Deals that Tend to Emphasize Appreciation
Properties in Fast Growing Markets. Hot markets like California, New York, Texas, and Florida tend to feature big swings in property value. If you buy at the right time, you can profit big from a dizzying uptrend … but you can also lose big or have to weather a long doldrums if you pick the wrong time.
“A+” Class Neighborhoods. This is real estate talk for “nicer properties in nicer areas.” The purchase price is significantly higher so are the rents but the rents are not high enough for the property to cash flow. That said, because demand for the properties and the area is likely to remain high, they tend to appreciate more than outdated properties in bad areas.
“Value-Added” Strategies. A property that comes with a clear strategy to increase its value — say, a fixer-upper on the market for a song — can enjoy significant appreciation through a “value-add” strategy. Of course, this depends on the strategy succeeding without going vastly over-budget and eating into the appreciation profit.
When is it a good idea to invest for appreciation?
Investors who prioritize appreciation tend to have legacy or generational wealth in mind — building a large net worth to pass on to their successors.
So Should You Invest for Cash Flow or Appreciation?
Again, it’s great if you can have both … but if we have to declare a winner, we call it for cash flow.
Why? Two words — financial Freedom. For most people, financial freedom would have a much bigger impact on their life than some hypothetical windfall that may never manifest.
By financial freedom, we mean the ability to quit or retire from your job and focus on your passions, confident that a predictable stream of passive income will continue to fund your lifestyle.
People who are financially free have much more time, many more options — including the ability to occasionally speculate on appreciation, essentially having their cake and eating it too.
At MartelTurnkey, we look first and foremost at the cash flow potential of our turnkey rentals. When you buy from MartelTurnkey, you know you are buying a key piece in your personal financial freedom puzzle.
Contact us today for ready-made opportunities to “buy cash flow” … and even bank some appreciation along the way!