The Great “DIVIDE” in Real Estate Investing

[Don Konipol]

No, the “great divide” isn’t between residential and commercial, nor between owner occupied and rental.  The 
great divide” is between purchasing real property for CASH FLOW, or purchasing real property for CAPITAL APPRECIATION.

IKnow, I know, the two are NOT mutually exclusive.  BUT, in my 45 years of real estate investing, brokering, syndicating, advising, I’ve come to the conclusion that investors go in PRIMARILY interested in one or the other. 

The “purest” example of cash flow investing is the investor who signs a 10 year lease as a “master tenant” on a commercial building and operates the building generating positive cash flow through releasing the space throughout the 10 years.  The purest example of a capital appreciation investor is the investor who buys a parcel of undeveloped land or a city lot with the idea of allowing development to “catch up” to his acquisition and then sell to the highest bidder.  Most real estate investment will have aspects of both cash flow or appreciation, but be over biased to one or the other. 

Here something else I’ve learned from experience. While many investors want to purchase properties that offer BOTH cash flow and appreciation potential, those properties are priced so as to provide a total return less than either  cash flow or appreciation types of properties.  So rather than look for 6 properties which each provide equal cash flow and appreciation, the investor can increase the total return of his portfolio by buying 3 properties with primarily cash flow attributes and three properties with primarily capital appreciation attributed.  

I do this with my own portfolio by placing half my capital in high yield mortgage notes, yielding me 12 -18% annual; and the other half in real property with often little current cash flow but large appreciation potential.  

If you have an interest on this topic, or think you can use or do use this concept in your investment portfolio, please let us know your thoughts and experiences.