Sell to buy appreciation or to buy cash flow? what do you think?

[Sebastian Marroquin]

I'm curious to know what you think? 

We have a rental condo collecting very little cash flow ($200 per month). 

The reason why we kept it, was bc it used to be our primary home and we can sell it until the end of 2023 and NOT pay capital gains on the profit. 

We have about $200k sitting in it (equity). I have done the numbers back and forth and my debate is: 

1. Do I take the proceeds and go buy 5 rental properties at 20% down-  in lower priced markets where I would be cash flowing about $350 per property or about $1500 per month? 

or 

2. Buy here in CA where I can buy a home for $800k then improve the home and add an ADU with the same amount of money and end up with about $1k per month in cash flow (net after expenses) and increase the value of the home by around $200k (purchase for $800k put $200k in improvements: $1 million total and home's ARV would be $1.2)

Then refinance it and get back about $150k of my total investment and go do it again. 

I have done this already, so I know it works, but it does require a lot more time and effort. 

I do want to start building more 'Passive' income and start enjoying profits from it, but I know that buying in appreciation markets now can help dramatically in the future when I sell to buy in less expensive areas. 

What would you do? 

Thanks 

[Evan Polaski]

@Sebastian Marroquin, I would argue there really is very little cash flow in real estate.  No matter what everyone tells you, unless you can find an absolutely killer deal (which I would say is unlikely in this market), you are simply "buying" cash flow by deferring maintenance and capex.  You may be able to eek out more cash flow outside of the LA area, but you are likely also more likely to forego appreciation, and even my "high cash flow" purchases that I bought in Cincinnati in the financial crisis, I still have made a lot more in appreciation that I have in the last decade in rents.  

And even my high cash flow over the last 10 years, has already been entirely eaten up in a major renovation on one of my remaining two properties, and coming soon for the other rental (already replaced roof and gutters, next is $20k of concrete and retaining wall replacement).  The point being, over the long term, you will always be spending your cash flow on various items to keep the house together, so you might as well be maximizing your ability to create appreciation.