Why I hate appreciation

Question

I knew that title was going to grab your attention :) Before you go typing to disprove me just hear me out here as a thought experiment.

Let me preface this conversation by saying I believe a dollar today is worth a whole lot more than a dollar tomorow. Not only the time value of money as inflation makes dollars less valuable but also what I would like to call the "time value of life".

I am 26 years old and at no other time in my life will I have the ability to enjoy myself more than right now. I have full mobility of my body and health, I dont have many responsibilities like kids, wife, employees etc. I am able to do things without the impacts of societal demands to conform. That being said I can enjoy a dollar a lot more now than I can in the future. This fact makes investing for cashflow today a lot more enticing than investing for appreciation in the future.

So if this is my goal why would I hate appreciation you might ask? I try to invest in B/C properties but I invest in a fast growing area so a rising tide raises all ships. Despite my attempts my properties still rise in value over inflation. This rise in value causes appraisal districts to get all excited increase my taxes. Even though my rents are going up as well, my taxes are going up even faster resulting in a lower cashflow.

This is my argument for hating appreciation. I am forced to have a diminished cashflow now when my time value of life is higher in exchange for apprciation in the future when my time value of life is lower.

Any merit to my arguement? Or am I just a dummy from the YOLO generation that doesnt undestand life? Or are there so many false assumptions in my logic that my argument is a pile of dookie? Or should I think twice before I post things online after waking up at 4 AM with a strange thought?

Discussion commence...

CK Hwang · Answer

"I am forced to have a diminished cashflow now when my time value of life is higher in exchange for apprciation in the future when my time value of life is lower."

Find this argument a little strange. Really from an investment point of view as much as a personal point of view. I'm in my late 30s and I'm enjoying life more than ever.I'm fitter and healthier than i was in my 20s, have a better perspective about what to stress about and what I don't. I love my little family and am happy to spend as much time with them as I can. I don't see why your time value would be lower as you age, i would imagine it would be more better as you fill your life with more people and things you love. Oh and the best part is that my current lifestyle is paid for by a nice cash out on an investment i made in my 20s, and it was all thanks to......capital appreciation

John Thedford · Answer

@Joseph Weisenbloomdon't want to take me up on my offer??:)

Look at the bright side. When your lease expires, you can raise the rent to compensate. When you sell..in particular if you 1031 you can defer 100% of the gain. In that case, every dollar of appreciation is free money! I love appreciation but hate the higher taxes..as does every investor. What is your other alternative? A falling market...and then EVERYONE would be posting about that. I will take the free gains and keep smiling:)

Joseph Weisenbloom · Answer

@John Thedford@Radhika M.@Kyle J.

I appreciate the feedback guys. Sometimes I just like to play devils advocate on a situation just to have fun. Sometimes I don't necessarily believe something but think its interesting to ponder. If anything I would say my "time value of life" theory is flawed. I think I was just considering the perspective through someone that is older and doesn't have the mobility and health. I understand that peoples values over time change of what they want so that shouldn't be an issue until I'm really old.

I have recently had a large increase in taxes which was partly my fault because I wasn't able to protest it. My tax bill went up 17% which really cut down my cashflow this year which I wasn't happy about. The validity I can see in a downside to higher appreciation is a larger portion of my gain is Illiquid. I am still getting a gain but I won't be able to access it until selling/refi occurs. As opposed to a rent check which I can get right now.

So I guess that sums up my argument is I want the money now I'm impatient haha.

Kyle J. · Answer

Interesting discussion @Joseph Weisenbloom.  I especially like your second post about re-reading it when you're fully awake.  Too funny.

A couple things to consider.  Although cash flow is nice because you can spend it, appreciation can be good too.  A few of my rental houses increased in value so much over just the last few years that I was able to take out six-figure HELOCs on them which I can now use to buy more cash flowing properties.

Also, don't be so sure that now (at 26 years old) is the prime of your life.  Although it's fun to be young and single and not have to answer to anyone (like the wife or kids in your example).  It actually can also be fun to have someone to answer to (like a wife and/or kids) and someone who you can share your adventures with.

Like most people I suppose, I had a lot of fun in my 20's.  I'm much older now and have a wife and kids, and I can tell you that I'm having a LOT more fun - albeit a different kind.  Just this year alone, the wife and I went on vacations to Avila Beach, Bodega Bay, Monterey, Lake Tahoe, Santa Cruz, San Francisco, and Scottsdale.  We also spent some time in Italy not too long ago, and we just booked another vacation to Costa Rica.  I would never have done those things if I wasn't married because it just wouldn't have been fun to do them alone.

My point is, don't hate appreciation.  Let it work in your favor.  Also, don't think of now as the prime of your life.  In fact, hope that it isn't.  Because if it is, what do you have to look forward to?

Just some things to think about.

Jeff B. · Answer

HUMBUG.  The rising taxes is a sign of a good property.  B units should demand FMR and if you're not keeping up, then the c/c does decline - - simple solution - - raise rents.

Don't assume that taxes are the root cause of the c/c issue - - scrutinize the expense and see what's driving down the NOI.  In Quickbooks, you can compare the PnL to last years and spot the changes quickly.

The C units need even more direct management.  I started with a class C property but it had cash flow.  Over time, upgrades, increasing rents and better curb appeal has migrated the property into a nice class B and the economic value of the mfu 5+ has APPRECIATE the value to 2x my purchase price.

Radhika M. · Answer

@Joseph Weisenbloom Catchy title indeed :)

I have to agree with others posters above appreciation is why I personally invest in real estate :) and it is your friend in the long run.  If your taxes are increasing and rents are not keeping up then it is a problem indeed and you may need a new stratergy.

I am in California and for the negatives here in regards to cost of entry and pro tenant laws I still like investing here long term because of appreciation and Prop 13 where your property taxes can not be increased like you are seeing.

John Thedford · Answer

Sell it to me for a deeply discounted cash price and I will relieve you of your frustration!

JD Martin · Answer

If your taxes are climbing as a dollar amount (not percentage) faster than your rent you are doing something wrong. If your property value is rising so fast that tax increases are more than negligible, you should be collecting appropriate rent for that neighborhood. If this is impossible, you are probably invested in the wrong neighborhood.

Joseph Weisenbloom · Answer

@CK HwangYea are probably right. After reading this in a fully awake state of mind this doesn't make as much sense as I thought it did. You ever wake up in the middle of the night and have one of those weird revelations? Next time lesson learned don't get on biggerpockets and type up nonsensical questions while you are half asleep!

Figured I would throw it out there.

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