Cash Flow vs. Appreciation???

Question

It seems that when listening to Bigger Pockets podcasts, I hear the same logic, both from the hosts and the guests (mostly), that as a midsize (5-20) multi unit investor, Cash flow plays a secondary role to appreciation. That appreciation upon exit is where the real money gets made, and that cash flow is simply a little gravy along along the way.

I'm calling BS. I do the exact opposite.

My strategy is to find optimal cash flow investments, and any appreciation at exit is the gravy. So far so good. I've got 32 Class B doors in Class C markets and and cash flow $6K/door/year.

When you stop worrying about appreciation, you'll wander into markets that you might have avoided. Even today, I'm finding properties in a Class C town, with 15%-17% CAP rates. In this particular market, the properties won't appreciate much over the next 5 years, maybe 10%-15%, but with that kind of cash flow, I'm good.

THOUGHTS?

Gino Barbaro · Answer

@Rich Davis

It's a function of the market cycle. In a buyer's cycle, there is more cash flow. As the cycle lengthens, the cash flow decreases.

Usually, the exit, whether it's a refi or sale, should produce more gain than the cash flow. We own 1,700 units, and have refinanced the majority of the portfolio.

You need to buy for cash flow. Cash flow gets you out of your job, equity keeps you out of your job.

!00% agree with chasing high caps and cash flow. Good luck collecting rents, keeping tenants, and trying to appreciate. I was part of that game years ago.

We focus on PPU, profit per unit.

Bobby Larsen · Answer

I agree with your approach. Cashflow provides more certain return AS WELL AS downside protection. Appreciation will happen over the medium to long term and will boost returns but cashflow is the lynchpin of a good investment.

Konstantin Ginzburg · Answer

@Rich DavisIt completely depends on the individuals goals and the market they want to invest in. Some markets are simply better suited for appreciation vs cash flow while other markets are the opposite. If someone wants to be within a specific market, the conditions within that market may wind up making that choice for them. I think the goals of the individuals is also crucial. If someone does not need the income coming in from rentals because they have other sources of income, they might be more able and willing to wait to get a larger return from appreciation. However, if someone is depending on that revenue to meet their regular bills, then they might benefit more from a cash flow property instead. Its hard to make broad appreciation vs cash flow assessments without looking at the individuals goals and situation.

Dimitrius Kiritsis · Answer

@Rich Davis Congrats on your success this far! I agree. The problem is people go for appreciation only with no cashflow and then have to wait to sell. Market conditions and timing is crucial to a successful exit.

Sarah Brown · Answer

I think it really comes down to your goals. I also look for cashflow. That being said, cash flow can come from value add opportunities. That being said, my goal is freedom and appreciation does come into the equation as well.

Robert Rixer · Answer

Yes because it's tough to make buildings cashflow right now, so all syndicators have to pitch is future appreciation. If this was 2017, the same people would be preaching that cashflow is king.

Bjorn Ahlblad · Answer

Cash flow hopefully covers expenses-many times does not even do that. Appreciation can make you rich. You will never get rich from CF. Know the numbers and always have enough money available to take you to the next step. If you are ever forced to sell you are very likely screwed. Always have a plan-or more than one. All the best!

Cash Flow vs. Appreciation???

Cash Flow vs. Appreciation???

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