Need Advice: Investing for Equity - not cash flow

[Jenna Harris]

Hello BP world! 

I am a new investor - I own my personal residence in San Diego, and have a duplex in Indianapolis (currently undergoing renovation). My strategy - and ALL the research I have done - is to look mainly at cash flow when assessing deals, and I firmly believe this is a sound strategy. However, it is likely that within a year or so, my husband may have an phenomenal career opportunity in Nashville and it would be a huge quality of life improvement for my family. The issue is that the cost of good housing in Nashville (neighborhoods where we would want to live) is rapidly increasing - some neighborhoods we like have increased more than $100k since April of last year when we visited! 

That being said, we are thinking it may make sense to purchase our soon-to-be-primary-residence NOW, and rent it out until we move there. We would have to sink ALL our cash, probably sell the Indianapolis property (which we were considering doing even before this opportunity), and would earn barely above a break even point on the rent. In short, we would have no capital left, and no cash flow, but could potentially save a very large amount on the purchase of the Nashville house a year from now. 

Question #1 is: What is everyone's thoughts about this in general? Has anyone done this before? What risks/rewards/challenges/etc do you see here?

Second issue is: After speaking to our San Diego lender, it looks like we would be able to keep our current San Diego home as a rental when we move. Again, this is another property that has massive equity potential but very little, if any cash flow. We could rent it out for enough to cover our costs, and we are earning about $50k per year in equity that we could borrow from to purchase other properties down the road. Nashville house will also have a huge potential for equity both as a rental and as our primary residence.

Question #2 is: In general, has anyone had success with investing for equity rather than cash flow? How does this work? (There is very little research on this as a strategy). At some point we would want to leverage some equity on these properties to restart our cash flow strategy - do you see this as a set back? Does it make sense to have two properties that gain equity but no cash flow then leverage the equity in a year or so to invest for cash flow? 

I'd love to hear anyone's experience in this arena. The original plan was to invest for cash flow, and save all the profits to re-invest and buy more, so we do not NEED the cash flow at this point (and we won't need it in Nashville either). I sincerely appreciate any personal stories - good and bad - about investing in higher class properties that gain equity.

Thanks so much!

- Jenna

[Dan H.]

I think there is a lot of sources that speak to the appreciation markets versus cash flow markets. Hint: historically it is not even close for long-term buy n hold. The high appreciation markets historically have produce a far better ROI than low appreciating cash flow markets over the long-term.

However, those are long term numbers.  Appreciation markets do not appreciate 100% of the time in the short term.  They even depreciate in the short-term.  I would be leery of relying on a short-term appreciation of a market as large as Nashville.  If you knew something unique about a specific area such as putting in a new stadium, university, etc. that is different.  My point is forecast the RE market in the short-term is difficult; I do not view it as easier than trying to time the stock market.

You have experience managing an OOS RE already.  They can have some challenges.

A lot can change in a year to your plans.  Even if you end up moving to Nashville in a year, do you know where you will be working, what schools you desire for any kids, etc.

I would wait to purchase in Nashville.  A lot can happen to your plans but, in addition, investing in a cash neutral property for an expectation of near term appreciation has a lot of variables/risk.  Maybe the Nashville market stagnates or depreciates.  Maybe something changes and you do not move to Nashville.  Maybe you do end up moving to Nashville but you priorities change as regard to location in Nashville.

Good luck