Appreciation or Cash Flow?

[Adam Wells]

Let me know if this topic may be better off in another forum. Hi all. I have a 3 family in Boston and am looking to purchase another 3 or 4 family. I know Boston will appreciate over time. I am a buy and hold investor. I started to look at New Bedford, MA because I realized that the amount of money I need to put down in Boston, would allow me to purchase 3 multi families in NB. Basically I'm thinking that I could buy 3 multi's, and three times the cash flow, in NB for the same price as 1 in Boston. I feel like the biggest down fall is over time Boston is going to appreciate SO much more than NB. I'm typically much more interested in cash flow as my goal is to have $20k/m in passive income. Any investors out there who have done both? Thoughts? Any feedback from anyone is much appreciated.

[JD Martin]

Cash flow is king. Appreciation eventually takes care of itself, or not. A house that cash flows at $500/month could theoretically depreciate to $0 and still be a gold mine. A house that breaks even or has negative cash flow could theoretically double or triple in value and still have you losing money over that time period. 

Think of this way: cash flow is your theoretical future appreciation now, in hard dollars.

Which is better in 10 years:

1. Buy a $50k house, all cash, flows $5k/yr, worth $50k in 10 years;

2. Buy a $50k house, all cash, no cash flow, worth $100k in 10 years.

Tax  considerations aside, you have the same amount of money, right? $50k in each scenario. Except time and inflation have eroded the $50k value of scenario 2, and you have (hopefully!) leveraged your cash flow from years 1-10 on scenario #1 into interest and/or other investments. 

These are simpleton examples, that leave a lot of nuances out, only meant for illustration purposes. You can play with the numbers and find places where Scenario #2 will win out in the long run, but a lot of that is out of your control. Unless your market suddenly becomes devoid of renters, you have a lot of control over Scenario #1. 

PS: You do not "know" that Boston will appreciate over time. You expect that it will, and you are probably right, but you cannot know that for certain. There are thousands of homeowners in metro areas everywhere that knew their property would appreciate over time that are underwater on their homes.