Next Property - Appreciation ($650K) or Cash Flow ($170K)?

[Einar Mykletun]

Hello fellow BP members!

I wanted to ask for your advice regarding a decision I’m putting in front of myself: I’m trying to decide if my next investment property should be a play for appreciation or cash flow

I’ll try to give enough numbers and information to hopefully provide you with the ability to help provide your guidance.

My Current Portfolio

- 7 “cheaper” cash flowing properties (values ranging between $140-$210K) in Las Vegas, NV
- 2 “expensive” appreciation properties (values ranging between $650K-$820K) in Orange County, CA
- Monthly cash flow (for all 9 properties): $2,600

Other Relevant Information
- I’m currently working full time
- I have enough savings to last me more than 2 years (without a salary)

The Investments I’m Considering

Option 1
- SFH in Orange County, CA, for $650K with negative monthly cash flow of $300
- 30 year loan with 25% down payment of $187,500

Option 2
- SFH in Orlando, FL, for $170K with positive monthly cash flow of $270
- 30 year loan with 25% down payment of $42,500

Pros and Cons

Option 1

CONS:
(a) Negative monthly cash flow
(b) Large down payment
(c) Even larger exposure to market in Orange County, CA (would be 3 properties)
(d) I would likely have to sell one of my existing Las Vegas homes to come up with down payment (otherwise I’ll have too many mortgages to qualify for a new one)

PROS:

(a) Potential for larger appreciation (10% potential appreciation in 5 years of $650K vs. 10% appreciation of $170K), so I feel it is a better long term play
(b) I’m not sure if you guys typically give this much weight, but when I include the larger principle payment that would be made every month (e.g. around $800), it changes the monthly cash flow equation if one chooses to consider it, making it more attractive (long term)

Option 2

CONS:
(a) I feel it’s a weaker long term play (less appreciation potential)

PROS:
(a) Positive monthly cash flow out of the gates

General Notes
- I feel I can sustain the monthly cash flow in both cases
- I am only considering taking on the larger property (Option 1) because my other cash flowing properties provide me some buffer.
- However, I’m wary of pushing the limits too far and exposing myself to too much risk (debatable what is “too much”)

Conclusion
I'm looking for your advice/guidance about my above decision. I realize I can look at other opportunities than then two I have listed, but I feel I'll still come back to the debate about whether I want to go for a more expensive property with negative/less cash flow but better future appreciation possibilities, vs. a cheaper property with positive cash flow but less appreciation potential.

Thanks in advance and I'll try to fill in any missing info based on your feedback and questions.

Einar

[Thomas S.]

Based on the fact that your existing 9 properties are valued at $3.7M and your positive cash flow is only $2600 I am guessing that you are primarily a speculator as opposed to a income investor. For that reason alone, since you provide no specifics on individual properties, I would say by all means continue to speculate on appreciation. But beware the time may be approaching soon to liquidate as they are most likely not self supporting investments regardless of your present perceived "positive cash flow".

You will get two answers to your question, those that rely on cash flow will advise buy the cash flow property, those that speculate will advise buy the speculative property. In other words no answer you get will be of much value.