Choosing a Market to Invest in: Aim for Equity or Cashflow?

Question

Hi Everyone,

I'm about to graduate college and looking to jump-start my professional career with a well-placed real estate investment, most likely a house-hack. The idea is to live in an up-and-coming market for a few years while I work (energy engineering/flight instructor) and use my investment to supplement my entry-level income and accelerate my financial goals.

I've mainly been looking at the markets of Austin, Seattle, and Anchorage as they are all good professional fits for me, and I've compiled what seems to be the general consensus on bigger pockets below:

Seattle: Equity Play, Very Hard to Cashflow, Very Uncertain Appreciation

Austin: Equity/Appreciation Play, Hard to Cashflow, Some Appreciation likely but Huge Growth Unlikely

Anchorage: Equity/Cashflow Play, Regular Cashflow, Uncertain future with Slight Depreciation Possible

There are many who say that it is critical to gain equity in highly desirable areas early in your career, and that cashflow will always follow net worth.

Then there are those that say that Cashflow is all that matters, especially early in your career when your income may be <50k.

My question is, as a young person with relatively low income who is using real estate to establish financial security, would you consider markets with no cashflow just to establish equity, or would regular cashflow be the best way to multiply my real estate portfolio?

Best, Rob

Kevin Hoodwin · Answer

Just remember cash flow is more reliable than appreciation.  You can either hope for appreciation tomorrow or accept better cash flow today.  It's all about your risk tolerance at that point.

Edward Dawson · Answer

@Robert Swiss

I think all the markets you listed are not cash flow areas, only appreciation locations.  While they would be very good for appreciation, I think it would be difficult to obtain positive cash flow.  Not too mention it would take a ton of money to get into one rental property, and the local legislation & taxes are not at all favorable of landlords.  Just my opinion.  That is why I do not invest in those areas.  There are better markets that both cash flow & have strong appreciation!

Nathan H. · Answer

@Robert Swiss

I would focus on cash flow if you’re trying to consistently build a portfolio the traditional way. Of course the only constriction on real estate strategies is an investors creativity, but here’s my reasoning assuming that entry level pay for your job isn’t 100k+ and you’re doing this the traditional way.

If you’re not cash flowing a decent amount, you’ll be creating liabilities that could disqualify you with conventional lender.

As an example, Fannie and Freddie will typically count 75% of your rent income towards the offset of your PITI payment. If your PITI payment is more than 75% of your rent income, they will count the net amount against your DTI ratio. This could create a problem when trying to refinance or buy the next property.

Just something to keep in mind... Cash flow/income will allow you to leverage, leverage is how you build a portfolio.

Steve Morris · Answer

"would you consider markets with no cashflow just to establish equity, or would regular cashflow be the best way to multiply my real estate portfolio?"

Cash flow = You know today

Equity (reflected by appreciation) = You're hoping.

Higher cash flow means a property is likely worth more.  Faster growing cash flow means a property is likely to appreciate faster.

Allen S. · Answer

@Robert Swiss I would not consider Anchorage a “cash flow market” at all.  I assume you’re not already from here, and likely have not spent much time here, and so if you do move here, my recommendation is to rent for a year and thoroughly study the market and investment opportunities before you jump in to a house hack.  Don’t look at paying rent as “wasted money”... more appropriately you should look at it as buying patience and time for first hand education.

Working as a flight instructor or launching your aviation career can sometimes be a thin existence (unless you’re subsidizing that habit with your big oil job).  You’ll want to make sure that the investments you make add to your goals and don’t become a distraction or a financial speed brake.  This state is absolutely one of the greatest places for aviation on earth, and that’s exactly why I live here.  But just because the prices aren’t doubleplus insane like SFO or SEA doesn’t mean it qualifies as a “cashflow market”.  If you want cash flow then look to a market with good demographic trends (hint: ANC is losing population, the opposite trend that you seek).  Househacking can be done here, but make sure you have real information and numbers and not pie in the sky hopefulness.

Now, as a lifestyle choice with the best flying opportunities and an incredible place to live, ANC beats out those other two cities big time!

Ryan Bray · Answer

We invested in anchorage for a few reasons, none of which apply to your situation. I think Allen"s advice is spot on. It might make sense for you to buy a little duplex or something down the road but renting for a year is IMO great advice.

We cash flow on a 4 bed townhome in the umed area of anchorage and are looking to get another similar unit right now. The ROI for our situation roughly breaks down into thirds, 1/3 rental cash flow, 1/3 appreciation, 1/3 tax benefits of owning an investment property. We have pretty high income right now and are deeply vested in technology companies because both of us work for one. Financially, Anchorage RE investing is a hedge and a tax dodge for us.

I have family in Anchorage and love taking our kids into the outdoors and it doesnt get more outdoorsy than the Alaska wilderness. Hotels, rental cars, part of our flights are all tax write offs now. With 3 young kids, going anywhere is a big expense so this helps us afford visiting AK every couple of years.

Good luck!

Brian Ploszay · Answer

For your first investment, invest in your backyard, which I think is NY metro area.   There may be some good deals coming up there.  And I do believe NYC will rebound in time.  It is not a good entry level market though.  But either is Austin or Seattle.  If you move to Austin, great, invest there.

I think in the long run, I made more by appreciating properties.

Jordan Moorhead · Answer

@Robert Swiss I'd say huge growth in Austin is very likely! We're expected to double in population in the next 20 years and numerous companies are moving here, lots from NYC and San Fran.

Choosing a Market to Invest in: Aim for Equity or Cashflow?

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