Am I breaking the rules?

[Mark Silberman]

I am new to this forum. I am looking to add more properties to my buy and hold real estate portfolio, but as I read what appears to be the conventional wisdom here, it seems I have broken all the rules others use to value deals. Yet I consider my real estate investments to be very successful.

I live in a very expensive suburban area outside NYC. And I buy properties that are in prime communities, top schools, great commute to high paying jobs, etc. I buy properties with 20% down that are mildly cash flow positive after paying all expenses including the mortgage. I typically rent to long term, highly compensated professionals who stay for several years. Although the cash flow is only mildly positive in the first couple of years, the property value appreciation is large and the positive cash flow gets better year after year as the rents steadily rise. And that positive cash flow comes to me mostly income tax free after taking paper depreciation deductions.  Demand for both rental and sales of quality properties in top school districts here is very high, and job growth is slow, steady and strong.

My thought is that annual appreciation of somewhere around 5% on the overall value of the property is leveraged times 5 by my 20% down payment. So 5% appreciation becomes 25% appreciation on the cash that I laid out as a down payment.

What am I missing when I read others opinions about needing to meet certain cap rates in year 1? As one example, a long term buy and hold property that I own was purchased 20 years ago with a small down payment is now worth 18 times my initial investment, with almost no mortgage left on it, and it is throwing off tons of positive cash flow every month.

I am interested in opinions on my approach, where I consider a small positive cash flow in year one as fine as I focus more on the long term rather than the immediate first year returns.