For long-term investing, is cashflow or appreciation better?

[Tyler D.]

I'm not sure of what my opinion is on this, and would like to see what others think on the matter.

Here on BP, the mass majority of advice and articles are focused on cashflow. I see the obvious benefits of cashflow, which are the following:

• 1) Safer in the case of a downturn. Even if property values tank, people still need a place to rent and rents may even go up.
• 2) You can easily access the returns from cashflow, and potentially live off of cashflow passively.
• 3) Since cashflow returns are immediate, you can reinvest those returns quickly as opposed to value locked away in equity.
• 4) Cashflow properties are often cheaper, meaning a lower barrier for entry.
• 5) You don't have to worry about buying at the wrong time, as you are profiting immediately.
• 6) Predictable. You don't know for sure whether a market will appreciate or not, but you can see pretty clearly what will cashflow.

On the flipside, the benefits for appreciation:

• 1) Higher property values, meaning you can invest more $ with less properties acquired, less time spent buying/managing/maintaining.
• 2) Maintenance costs, and sometimes taxes, are proportionally lower in a more expensive house. 10 new roofs on a $40k house will cost a lot more than 1 roof on a $400k house.
• 3) Loans are easier to get and better interest rate. Most banks won't even consider a $40k property, and the few that will charge higher rates or huge origination fees. You can invest more $ into real estate before hitting your 10 conventional loan limit.
• 4) Tend to be in more desirable areas, meaning lower chances for bad tenants. Also higher chances for rent/ property value growth in the future. Most appreciation markets tend to be in areas with positive growth, whereas many cashflow markets are depressed and losing population and jobs.
• 5) Though you may not cash flow immediately, after held for long enough it likely will, and will possibly even surpass an equal value of cashflow from cashflow properties.

I think that both make sense for different reasons, with cashflow markets being better for those who are just getting started, and those who want to aggressively scale up using the cashflow from previous properties to buy new ones. Appreciation markets seem like they would favor a more passive investor who can afford to buy and sit back for a decade or two, using the investment as a supplement to their primary income. 

I currently own property in a cashflow market, and am looking at picking up some properties in a mixed market before potentially moving into appreciation. I'd love to hear your thoughts on this complex topic.

[Joseph Cacciapaglia]

The real key to this analysis is your #5 under the appreciation benefits. I think the biggest benefit in most "appreciation" markets is that they tend to also have strong rent growth. I've looked at several "cash flow" versus "appreciation" scenarios over long periods of time, and in many cases the appreciation markets create more cash flow during holding periods longer than 5 years. I believe that anyone that plans to hold properties for the long term would be better off focusing on rent growth and appreciation than they would on year 1 or in-place cash flow.

I also think your discussion on being able to scale up with cash flow faster than appreciation is off base. A lot more of my investor clients scale up through cash-out refinances or 1031's than through cash flow. Let's say you're getting a 12% cash on cash return annually in your cash flow market. If you save every penny of that, it will take you 8+ years to save the same down payment that you made into that particular investment. However, with only a 3% appreciation rate, you'll have enough to put down on a second property with your accumulated equity in 4-5 years.

In reality though, most investors that scale rapidly do so by creating value, using outside income, or using other peoples' money. Neither cash flow nor appreciation on it's own will allow you to snowball your investments very rapidly.