Appreciation and Cash Flow

[Quentin Mitchell]

Is Appreciation riskier than cash flow?

Now we both know that when comes to real estate there are no guarantee's and things vary based on market and individual goals. Also, the risk is different depending on the level of experience, market, and area of expertise which is all things equaled is a riskier move for an investor.

I think appreciation is riskier only because a downturn in a market could be out of your control even if you buy right and rehab right, most of the time you need appreciation to get your numbers and if your value goes down in the middle or right before a project ends then you're screwed whereas cash flow is based on rent and value doesn't matter for that.

[Llewelyn A.]

@Quentin Mitchell

Quentin,

I'm a Brooklyn, NYC Investor that has been buying holding properties here for over 2 Decades.

You may be looking at Appreciation as the "Gravy" or "Icing" on the cake..... BUT.... let's take another point of view.

Suppose you live in a highly appreciating neighborhood in ... welll... CHICAGO... where you are from.

Let's say you thought Appreciation was only the Gravy and that you will only qualify a property based on Cash Flow and NOT future appreciation.

Imagine this was 10 years ago.

You would be at the point where almost ALL of my friends and family in NYC are at this very moment.... completely priced out of ANY real estate in Brooklyn (and in your case decent neighborhoods in Chicago).

In reality there are 4 different ways to Analyze Real Estate:
1) Cash Flow
2) Mortgage Balance Reduction (think about a 30 year mortgage disappearing at the end of the 30 years)
3) Tax Savings and
4) Appreciation

If you Master analyzing Real Estate for all of these components and treat them not as GRAVY but as actual components, then you would begin to build and expertise on how to do Analysis on NOT JUST CASH FLOW.

You will develop your expertise on calculating Appreciation as well.

If you ZERO out 4) Appreciation, BTW, you still have the other 3 components.

If you ZERO out 4) Apprecation AND 1) CASH FLOW you still have 2) Mortgage Balance Reduction and 3) Tax Savings.

Let's say you ZERO out 1) Cash Flow (because your Tenants will pay all of your expenses including your Mortgage payment but you get no cash flow), 3) tax Savings and 4) Apprecation.

That leaves you with only 2) Mortgage Balance Reduction.

Why did I isolate this? Because it can make you RICH.

Imagine you buy a property with a 30 year fixed rate, $1 Million Mortgage and all your tenants pay all the bills including the Mortgage but you get ZERO Cash Flow.

In 30 years, you have averaged $1 Million / 30 years = $33,333 PER YEAR.

Imagine you did this scenario to 10 properties. You are now making $333,333 PER YEAR in the Mortgage Balance Reduction which you can realize by selling the properties.

In 3 years you are a Millionaire.

Did you take Cash Flow into Consideration? NO.. Apprecation? NO.... Tax Savings? NO

ONLY Mortgage Balance Reduction.

To me, the Cash Flow IS THE GRAVY.

The Others are actually where I make the money.

If my friends and family understood this, they would NOT have become Priced out of Brooklyn. I suspect it could be the same for people you know in Chicago as well.

Ironic, isn't it?