More cash flow or more appreciation, which would you choose?

Question

Though the title doesn't allow enough space to fully type out a bit more detail, it's not quite as simple as picking cash flow over appreciation. Consider these two scenarios and their risks and issues.

Two scenarios in my hypothetical example:

Option 1:

You have 3 million to invest. You buy 38 properties (37.5 rounded up) paid in full at 80K a piece, each cash flowing 1K a month after all expenses including vacancy, capex, etc.

456K cash flow a year. Appreciating 300K a year. (3 million in RE at 10% a year). Since these are all paid in cash, there is little risk, and there are no hoops to jump through for portfolio loans.

This is literally a real life example of what was possible in Tacoma WA when I bought my first house paid in full at the near bottom of the market. This IS actually possible.

Option 2

Use the 3 million to put 125K down on 500K houses closer to Seattle at the bottom of the market. You end up with 24 units, cash flowing $500 a month each.

144K a year cash flow is what you end up with. Appreciation on the 12 million in real estate is 1.2 million a year at 10%. Risk is that it's all leveraged. You do have less properties to manage though than the above scenario but you also have to jump through a lot of hoops for portfolio loans.

This was literally a real life possibility at the bottom of the market in the greater Seattle area a few years ago.

Which would you choose and why?

Aaron K. · Answer

My preference would always be to buy something that is nice enough that you wouldn't mind living in it yourself.  This allows you to get some cash flow, but also have the opportunity for appreciation, I wouldn't calculate on appreciation, but it is nice to have.

Aaron K. · Answer

@Aaron Hunt I guess it's a good thing I have a lower standard for where I'm willing to live then :)

Aaron Hunt · Answer

Problem is I can only afford so many Class A rentals!

Aaron K. · Answer

@Tim Wilson yeah it isn't the absolute most efficient mathematically speaking to buy something you'd be willing to live in, but it does tend to attract better tenants and gives some exposure to appreciation upside, while not depending on it to make the property work.

Tim Wilson · Answer

Hello - To kick it off, if you could buy multiple 80k properties and gross 1k/month positive cash flow after expenses count me in! That sounds incredible. We are closing next week on a place in general Minneapolis area that will be around $300 positive/month and that sounded very good.

Personally after a couple purchases now, we prefer the monthly cash flow over appreciation. Appreciation is great and can be extremely beneficial in the long term through the ebbs and flows of market flux etc but it is the cash flow that will allow you to take addition risks in the short term. Without it at least for most people, coming up with that next down payment is extremely tough.

Aaron - we have used that rule ourselves, I've heard it isn't the wisest thing because you can tend to limit yourself of opportunities but after moving between a few states and a couple of home purchases when we buy rentals we like to have them as a "fall back" per say if we were to come back to the area and want to live in something while finding another house, we would need it to be functional and nice enough for ourselves in order to purchase.

Jack B. · Answer

It will be possible again albeit not as quite a low prices. My point was merely that this isn't a fantasy scenario. This could actually have been done. I didn't have that much capital back then. Now I'm rapidly approaching that and thinking of my options. After the next crash the prices will be higher than they were in the last crash but still, it shows what can be done with 3 mil in capital.

Also, you wouldn't necessarily go with the one that has the higher return. There is more risk associated with it, and more work since it requires leverage for 24 loans, tough to do without a portfolio lender with reasonable rates. Also tough to do when banks aren't lending much like during the last crash.

You could do a mix of both, buy a number of cash flowing properties paid in full in Tacoma (which is more like the mid-west) and buy a number of appreciation properties in Seattle with Leverage. I'll post some numbers on that later.

Aaron K. · Answer

The key phrase in this is "was possible"  hindsight is 20-20 so you would obviously pick the one with the higher total return, but in the situation it would depend on your financial situation and comfort level, you could have also purchased fewer Seattle properties for all cash or more cash flowing units with leverage, it wasn't an either or choice.

More cash flow or more appreciation, which would you choose?

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