Cash Flow vs Appreciation Value. Help!

[Daniel Kelly]

Hi all,

This is my first post on the BiggerPockets forum, woohoo! I have a quick question that I'd love opinions on. I am investing in a market in CT, I currently have one SFH, and looking to add my 2nd. The dilemma i'm having is I'm concerned i'm buying at the height of the market.

The house I would be purchasing has tenants signed through May 2022, at roughly a 9% cap and 19.7% ROI. From everything I've learned so far studying real estate, those numbers are good!

However: Ever since Covid-19, the prices on homes in this area have SKY ROCKETED. It's a sellers market, and in this instance I would be buying a house that was worth 25% less just a year ago. 

In conclusion: This property would have solid cash flow, but is it too risky to be buying a house at this much of a premium? My fear is 5 years down the line when I go to sell it, I will be taking a loss. Also this house appears to be in good condition, if that helps. 

Thank you Bigger Pockets community!! 

-Dan

[Jay Hinrichs]

Originally posted by @Bill B.:

Why would you bother buying if you’re planning on selling in 5 years? Do you think you’ll find a better performing investment in 5 years and be out of money to invest? You’re going to have 10% in costs to sell, so if it appreciates with inflation a couple percent per year you’ll only be even after 5 years. What if it drops 10%, then your plan is to lose 20% in 5 years? If it’s making money and you don’t sell it doesn’t matter what it’s worth. Just keep taking the money and use it to buy more.

I was going to make the same point Bill..  I would not be buying rentals if I plan to exit in 5 years or less with the exception of those who bought from 2009 to 2012  having a 5 year exit plan in those years was acceptable risk / plan.