Age old question: Cashflow vs Appreciation

[Phillip Dakhnovets]

Hello my friends,

I recently came across a BiggerPockets podcast about Cashflow vs. Appreciation, and this quote by David Greene really stood out:

"Everyone I have ever talked to has always said: Location, Location, Location... buy in the right area, with the right schools... the appreciation you get will trump any bit of cashflow that you thought was important, and you won't have the headaches."

I have experience with both and can definitely say that cashflow is nice in the beginning because it gives you freedom, but appreciation is what makes you wealthy. Appreciation is a bit riskier since it depends on factors we can't always control, such as school levies passing, business success, crime reduction, etc.

In my opinion, it’s hard as a newbie to jump into appreciation properties, as they require a lot more initial capital to acquire. Plus, it’s easier to learn and perfect your processes on cashflow properties because they provide an income cushion for any mistakes you might make.

Looking at the Greater Toledo market, there are obvious cashflow areas, but what about the appreciation spots? If you were to invest $100K+ of your own money into one property, where would you go?

Thank you for all the great replies,

Phillip Dakhnovets
Guardian Property Management & Maintenance

[Greg Scott]

I've heard a number of BP podcasts where they talk about an "appreciation market" or a "cashflow market".  Based on your post, it seems you may be focused on expensive "appreciation" submarkets vs inexpensive "cashflow" submarkets.  I find this discourse about cashflow OR appreciation an incredibly narrow way to look at the market. I 100% disagree with the premise than an investor has to choose one or the other.

As an investor, why are we not looking for cashflow AND appreciation?  This should be particularly true if we are willing to invest outside of our local area.

Supply vs demand imbalances deliver price appreciation.  Very expensive markets have the problem that when they get too expensive, they price people out of the market so they move.  This is a natural pressure release valve for high rent and prices.  It is part of the reason people are leaving California.  On the other hand, if you find a supply vs demand imbalance in a cheaper market, prices and rents can rise unhindered.  (DFW this past decade is a good example.)  These markets will rise until either a bunch of new supply starts coming on the market or there is a shift in population trends.

Focusing just on cashflow often attracts people to areas where there are other problems. (e.g. Flint, Michigan)  That could include crime, job losses, etc. Focusing just on appreciation causes people to take on negative cashflow situations, gambling that the market will eventually save them before they run out of cash. (e.g. San Francisco)

I look for markets that cashflow AND ones that have a supply/demand imbalance. Cashflow is easily calculated on a spreadsheet. Population
growth is an easy measure of demand increasing. Checking the supply of new construction in a given area can help you gauge if supply is outstripping demand. (Austin is getting hurt now with new supply.)

Investors should be looking for both cashflow and appreciation.