Cash flow or appreciation, which should I pursue next?

Question

I invest with a buy and hold strategy in two very different markets, about 100 miles apart, and we're analyzing where to put our money next.

Our first SFR is in an inner suburb of KC, a fantastic location for young families or new graduates. The area has had great appreciation in recent years (our property has increased an estimated 20% in value since we purchased it at the end of 2011) and shows no signs of slowing down. Several new retail centers (IKEA, just down the road!) as well as proximity to downtown work and employment hubs in the outer 'burbs make the location an easy rental.

Cash flow on the property is around $250/month, with a rent multiplier of about .85 (using our purchase price from 2011). I think we can increase rent by at least $150/month at the end of the current lease, which would get us closer to a .95 multiplier.

Our second SFR and our duplex are in a small city/college town where property prices are much lower and rents are fairly high. The economy there is growing slightly, but pales in comparison to KC. The university in town has always been the stabilizing factor. Our SFR there is cash flowing about $200/month and has about a .85 multiplier (my sister is the tenant and we remodeled the kitchen with above market finishes, so we knew we were putting in more cash than necessary), but, in general, getting a 1-1.5 multiplier is really easy there.

Our duplex was a steal and we're getting 1.5 multiplier on it (one unit was rented below market by about $250 when we bought the place but we are honoring the lease for as long as they want to stay, they are great tenants) and the place is cash flowing upwards of $600/month.

Cash-on-cash is much better in the small town, as good SFRs cost about 1/3 (or less) than they would in KC and rent is closer to 1/2.

I'm curious to know what the BP community thinks here. Should we hang onto the property in KC to take advantage of the potential for appreciation and rent increases, or do we sell it and invest in more properties in the secondary market that have higher cash returns but very little appreciation? Thoughts on staying diversified in two markets if we know them both well? Would you add property in the growing economy (KC) market so as to not be overly invested in a smaller growth market (with the stability of a mid-level university in town)?

Interested in everyone's thoughts!

Jenni Purvis · Answer

@Jeff Rabinowitz

Thanks for the great questions! Our investing now is to build future wealth, all cash flow goes back into investing. It would be great to have the option to quit my job in 5 years if I wanted to, but it's not necessary. I like my job and not sure that full time investing would be the end-all for me, though I will certainly take any extra income I can figure out how to make. Ultimately, I would like to cash flow about $10k/month within 12-15 years, whether I do that the slow way (traditional financing, cash flow pays off mortgages early) or the fast way (owning riskier properties/creative financing that cash flows faster now). I'm not in any major hurry to get rich from my investments, but I do enjoy the Rubik's cube solver mentality of the real estate game :)

Jenni Purvis · Answer

@Cal C. , thanks for directing me to the SUNY thread, I enjoyed reading it. There are lots of choices in Emporia for run down places that produce good cash flow, but I assume they also come with some of the issues discussed on that thread.

@Anthony D. Blue Valley does probably have the best appreciation (Leawood, in particular), but the numbers make no sense to me for rental purposes. I probably have a little landlord crush on my Roeland Park house because I would've loved to live there when I was a new grad, it's a fantastic location. Not sure that it makes sense to hold on to it for appreciation alone, but it does seem to balance cash flow and appreciation a bit better than other Johnson County areas might.

Good point Eleena de L.

Cal C. · Answer

you have to love spell check when it turns lol into a Norse god

Jeff Rabinowitz · Answer

@Jenni , it doesn't seem to me that you absolutely need the cash flow. It is nice but the properties that cash flow best do not always leave you with the most money over all. There are ways to have your properties help you finance new acquisitions faster if you are able to forgo some of the current cash flow. Look for some of Jeff Brown's (the Bawld Guy) articles here on BP. He may open your eyes to slightly different ways of looking at your investments. Now, I have a core portfolio that cash flows nicely. I need it. I have never had a job I enjoyed enough to even think about staying for 5 years and I much prefer working for myself than others.

Cal C. · Answer

@Jenni Purvis Loki was debating Columbia Manhattan and Pittsburg wrong on all three counts! I forgot about emporia state

Eleena de Lisser · Answer

@Jenni Purvis If you can truly get cash flow plus appreciation, take that. But cash flow today should trump (anticipated but not guaranteed) appreciation in the future.

Jeff S. · Answer

@Jenni Purvis when you have appreciation you also have appreciation in rents, so in the long run you will be better off with the better property IMO. Having said that it is best to avoid alligators.

If you are looking for immediate income then the cash flow properties with a higher amount of work is probably the way to go.

Anthony Gayden · Answer

@Jenni Purvis Johnson County will continue to have the best appreciation in the metro area in my opinion. You said your single family rental was near the new IKEA in Merriam? The only issue I could see with that area is that the Shawnee Mission school district isn't performing as well as it did in the past. Don't get me wrong, they still have good schools, but I would bet that housing in the Blue Valley school district will have more appreciation.

In my opinion, if I was investing in the KC area, cash flow would be my goal. You are never going to get the kind of appreciation, even in nicer parts of Johnson County that you could get on the coasts.

Jeff Rabinowitz · Answer

@Jenni, before you try to analyze which is the better investment for you you must analyze your situation. Do you have enough income now? Would you like more? If you have a job do you like it and want to keep working or do you hate it and want to quit as soon as possible? Do you plan on keeping your funds invested for a decade?, two?, three? so that the future growth is more important than the current income? Are you comfortable projecting that far out? The more questions you can answer about your personal goals and needs the easier it will be to find the correct answer for you.

Cash flow or appreciation, which should I pursue next?

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