Cash flow vs. Appreciation

[Kelly Elterman]

Starting out in the San Antonio market and having difficulty finding SFHs that cash flow well. Is this a function of the current market? Should I look elsewhere? Or are most investors still investing here despite poor cash flow because of the potential for significant appreciation in the coming years? Would love to hear how others are currently approaching this and nearby markets.

[James Hamling]

Ok, so a little correction here. 

We are talking an Investment Property, cash-flow IS appreciation. 

Ok, I will run down this rabbit hole for all those scratching the head. 

Investment Real Estate is a business, full-stop. If it were a sandwich shop, how do you place a value on it to sell/buy it? Is it the "value" of the cooler? Maybe what kind of chairs they have? NO, it's the REVENUES right? Show-Me-The-MONEY! We look at the gross revenues, all the operational expenses, and that "value" is based on what the net profit is, and what it takes to get that, right. 

Investment Real Estate is a BUSINESS. It's value is it's REVENUE, all the lovely expenses, and what the profit is, and what it takes to make that. 

AND similarly by all business's, a "value-add" is looking at that business and saying "Hey, look at that, if I just tweak a bit here, tinker a bit there, vhwallah, i can increase revenues 20% and MAKE MORE!". 

A standard rental properties value is on the profits it generates today, or tomorrows, all depending on what a person is looking for/at. 

All of that, rests on cash-flow. 

As cash-flow goes up, via rent increases, the "value" of the property goes up. Why? Because it's revenue generation has gone up, yes? making sense here? 

And similarly, if it's cap-x goes up, maintenance goes up, that DECREASES it's value. Why? Because it's more expense, more inputs to get that revenue generation. 

So, you DON'T get 1 without the other. They are tied at the hip. Rents stay flat, costs go up, the "value" goes down. Rents go up, expenses stay flat, value goes UP. 

This whole concept that the 2 are separate is only possible by using O.O. metrics for part of analysis and REI metrics for the other. Well, that's just ****** analysis input so of course only manure is going to come out the other end.

ALSO, it is called Real Estate INVESTING, it is NOT buying a paycheck. Basing the entire venture on just yr 1 numbers is NOT investing. I will happily, with a giant smile on my face, buy a property that has a minor negative cash-flow year 1, and jump for joy at the acquisition, if my prospectus is good. Where yr 2 is maybe net-0 and after tax benefits it's a nice profit. yr 3 now it's well into the green on cash-flow and so on where yr 5 people are calling it a cash-cow. 

INVESTING has a lot longer vision that month 1 year 1. 

I have a property we picked up just over 3 yrs ago now. The day we went under contract we projected a monthly net loss of $200 on cash-flow. Fortune shined on us at after closing, got a great tenant and that turned into a whopping whole $25 mnth net cash-flow. This was epic, you see $25 and ask how is that epic.  

Well, because we had a whole lot more vision than 1" in front of us. The market was a red-hot market, rapidly developing. by end of yr 1 we clocked over $40k in equitable gains from market appreciation, and the annual rent increase kicked in for yr2 and that monthly net on cash-flow jumped too a bit over $200. Yr 2 was even more favorable as we clocked another ~ $60k equitable gains and annual rent increase hit and it's a touch over $500mnth net cash-flow. 

And every year we enjoyed the depreciation write-offs that is in the tens of thousands $ in our pocket. 

So now, my biggest problem is going to be selling this thing in 2-3yrs. because it's going to be a cash-cow. What started many would have said it made no sense, and now all say "oh, I wish I could find those", lol, there all over the place, I have zero shortage of them, it just takes some wisdom, foresight and a touch of patience. 

Yeah, it doesn't work to this magnitude with any-ole property out there but this whole obsession with significant cash-flow day 1 is the problem, it does not work in this market cycle. This market cycle is about PATH OF PROGRESS. Yes, it requires patience to get a cash-cow, but guess how many you get sitting the sidelines, 0, ever. I am happy to wait a few years for a "meah" property to "bloom" into it's production. 

Every "Big Dog" on BP, has a constant story of a property they got "back when" that now is just amazing. The countless horde on BP hears of those properties and says how envious they are of that property. Yeah, well, it wasn't cash-flowing day 1 like it is year 11. If you want something that produces like that yr11 property, you gotta start with day 1. That's how it works, you don't get to skip a decade of appreciation.