Cash on Cash returns or Long term appreciation?

Question

Hi

As I look to invest on real estate and try to decide on an area to invest, I am caught between two parameters : Cash on Cash ROI v/s long appreciation rate. Places that have a higher appreciation rate have a heavy property tax. The hefty property tax eats into your Monthly ROI as you shell out $300 - 500 per month on annual property taxes. The places with low appreciation rate has lesser property taxes and gives you a handsome Monthly ROI. I believe Real Estate investments are typically for long-term gains (unless you are flipping the houses). So what should be my main driving parameter to decide an area of investment : Immediate monthly cash on cash ROI or Appreciation rate? Can experts help me with their opinions?

Jay Hinrichs · Answer

what will be interesting in the MId west markets is to see if rental rates will finally start to follow values UP..  like what happened on the west coast last 10 years were rental rates darn near doubled..  I dont know if the mid west can do that IE take a 750 rent and expect it to be 1200 or more in 3 to 5 years.. thats where you will get a lot of appreciation is if that happens.. but as you said.. with out rental rates going up and prices continue to rise cap rates or returns go down on a cash flow basis.  what i really like about Indy though is the tax rates thats one thing that is important for long term.. Compared to other markets were tax's can really be an issue.. Texas for one and other parts of the mid west and rust belt.. were you can have a 70k house and tax's are 1500 to 2k a year.. I just bought a place in Vegas for a little less than 300k and tax's are 1450.00 a year.. so even though the 1% rule or 2% rule is a little skewed the low taxs  high fico and income level of the tenants here and no weather issues IE stucco house tile roof 10 years old. when you run all the numbers it seems to work OK..  Just sayin in conversation.

Bryan Lyde · Answer

@Babu Ramadoss I leverage my team mostly and local reia networks. I can recommend shecky who chimed in above with hrre, they run a tight turnkey ship with a good retail product in indy. REI nation is one of the bigger turnkey companies with mr. clothier. I can't speak for the profitability of their inventory but their product looks good.

Joseph Cacciapaglia · Answer

One thing that often gets glossed over in this discussion, is that properties in the "appreciation" areas will often start to cash flow well after just a few years. This is because they are usually in stronger rent growth areas as well. A lot of investors that are sitting with last year's purchase prices, but this years rents, are much happier in the appreciation areas than those that just bought based on the in place rent to price ratio. Of course, you can never be sure you are buying in an area that will appreciate, but you can also never be sure that your cash flowing property isn't in an area where rents will decline.

Jonathan Oh · Answer

@Babu Ramadoss

It depends on what you're looking to do. Are you trying to retire off income asap? Then focus on cash flow. Are you looking to build wealth? Then you want to focus on assets that will appreciate more. Hope this helps!

Mike Dymski · Answer

Demographics help gauge that potential (or lack of it).  Median household incomes need to rise to support the increased rent.

There are a lot of posts on BP about property class.  Or about the quality of certain sub markets.  You can go to https://www.incomebyzipcode.com/ and get a quick read on income levels for the target and adjacent zip codes.  Some areas require more analysis (street by street) but this is an objective start.  Our B class rentals in zip codes with a median household income of $38k don't look so B class any more.

Guifre Mora · Answer

Unless you pay cash, It needs to cash-flow. When you run the numbers it needs to pay for its self.

Blake Garcia · Answer

Id suggest the higher cashflow if youre looking to grow to more doors. Either way will work. 1 is buying higher quality doors vs pure door count. Either way its a landlords market for the foreseeable future. Just dont overpay!

Bryan Lyde · Answer

@Babu Ramadoss you're going to get the it depends answer. it depends on your short and long term goals. many will say chasing appreciation is gambling like the stock market. others say cash is king and never put your money where roi is not maximized.

personally, my goal is replacing w2 income in 7 years so cashflow is king for me. that also means I need to use less leverage with lower roi, or do more brrr which would like take longer based on what I buy.

your market will likely dictate one or other, and for the record I ignore appreciation in my underwriting as a buy and hold investor. the appreciation will never be realized until I refi out down the road.

Blake Garcia · Answer

Just bumping this week old post 😂

Still Cashflow

Anthony Vicino · Answer

"Cashflow makes you free. Appreciation makes you wealthy."

As others have already pointed out, the answer is "it depends". Primarily it depends on your long-term/short-term goals.

Here at BP you'll notice there's a lot of talk about cashflow, which I agree is absolutely important, but not always for the reasons people think.

There's a guy around these parts, (cannot think of his name for the life of me: LLewelyn, perhaps?) who I think does a great job breaking the difference down and often chimes in on subjects of this type. Any old-timers know who I'm talking about?

Cash on Cash returns or Long term appreciation?

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