Balancing Cash Flow and Appreciation

[Jamie Nacht]

What's preferred: (1) High cash flow, but low chance of appreciation, OR (2) modest cash flow, but high chance of appreciation? 

I had a discussion last week with a fellow investor, and we were debating the merits of either of these situations (assuming it is an either, or situation). I'd like to throw it out to the BP community to hear your thoughts. To put a little more color to it, let's assume the following:

Situation 1: Invest in a market where it's likely to get cash on cash returns of 12%, but the market the property is located in hasn't appreciated at all over the last 5 years

-VS-

Situation 2: Invest in a market where it's likely to get a cash on cash return of 3%, but the market the property is located in has appreciated at least 6% per year, during each of the last 5 years. 

Which one do you like more? Why?