Landlording for Cashflow or Appreciation? (in expensive markets)
Investor · Everywhere, USA · Member since 2016 · 69 posts · 19 votes
Landlording for Cashflow or Appreciation? (in expensive markets)
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesDepending on future events to fix a problem isn't investing...it's speculating. REI isn't about buying properties, it's about moving money through a property, in the front and out the back, and when it comes out the back it comes out with "friends". If you are unsure of how many (if any) new friends your money is going to make, but you are sure you are going to lose friends in the process, and the goal is to make as many "friends" as you can, why would you...
How the meeting room where you are supposed to make these new friends looks isn't important. What matters is how many friends you can make. If you can meet at a less expensive meeting room, with the same amount of money to spend on meetings, and make more friends through volume, why would you...
33 Replies
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Depending on future events to fix a problem isn't investing...it's speculating. REI isn't about buying properties, it's about moving money through a property, in the front and out the back, and when it comes out the back it comes out with "friends". If you are unsure of how many (if any) new friends your money is going to make, but you are sure you are going to lose friends in the process, and the goal is to make as many "friends" as you can, why would you...
How the meeting room where you are supposed to make these new friends looks isn't important. What matters is how many friends you can make. If you can meet at a less expensive meeting room, with the same amount of money to spend on meetings, and make more friends through volume, why would you...
- Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes5y
@Joe Villeneuve
Excellent analogy
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
I agree with Joe. The appreciation game is better suited for experienced investors that can absorb the losses while waiting for the appreciation, similar to flipping. If you're looking to build real wealth, you need buy-and-hold properties that cash flow. I would consider reading Long Distance Real Estate Investing by David Greene and then finding a market better suited for long-term investments.
The DIY Landlord Book4.7248 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
One caveat: if you can buy these properties and quickly flip them, I wouldn't pass up on that opportunity. That's easy cash that can then be invested in a buy-and-hold property. I just wouldn't hold them long-term thinking they may appreciate even more because there's a good chance the market will swing and you'll lose that equity.
The DIY Landlord Book4.7248 Reviews - Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
It sounds like your goal is buy and holds for cash flow, and this property would move you in the exact opposite direction. Any time I've gone outside my criteria to explore a property, I lost money. I would advice to just completely focus on one thing - your thing - and don't deviate.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes5y
For me it comes down to all dynamics involving the deal. It just depends on the scenario. For instance, if I were to acquire a 4 unit in certain parts of SE DC it's considered heavily sought after property. If I cold get it for 50k to 100k below market even with the $300 loss, I know in the very near future I could mitigate a lot, and either break even or slightly cash flow. Say I get the property for 400k and have the principle paid down significantly in 5 to 10 years. I will be getting some cash flow with other people creating my equity. I will get the tax benefit and in that area it's very possible I could sell the same building for at least 800k (or more). In addition, by that time the cash flow would be significant. Because I have a healthy mix in my portfolio and I sincerely want a property in this area, in the long run that can be a massive powerhouse winner. If it were in Hagerstown, Bowie or Baltimore the answer would be hell no but as stated it comes down to the deal and all dynamics involved.
- Member since 2019 · 7k+ posts · 4k+ votes5y
For Northern California or wherever expensive, the focus by default shall be Appreciation.
- 5yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
I lived in Silicon Valley(south of San Francisco) for over 30 years. We had a windfall profit there with our investment and personal property which was pretty substantial-1985-2017. It was 'fortuitous dumb luck'. Would I buy there today, for buy and hold property that is not cash flowing? Absolutely not.
- Member since 2019 · 7k+ posts · 4k+ votes5y
You can still cash-flowing in Bay Area/Norcal market, especially outside big cities. There're still opportunity of 7-8% cap rate Multi Family. But for SFR it's none as cap rate is almost reaching 1%. For SFR the best strategy would be airbnb and/or rent per room basis.
- Investor · Morrison, CO · Member since 2015 · 221 posts · 177 votes5y
I'll put my two cents in on this one and I'll agree with many of the mentioned comments already, that RE isn't about speculation. Perhaps people have forgotten what happen to many investors in Phoenix and Las Vegas in 2008/2009. The floor drops out and you're left holding the bag. I will say I can be overly cautious and man I wish I would have bought up every house and building on the market in 2012 in Denver. But I have one true rule in RE and I've followed that - don't ever speculate. With that being said, a good research and implementation model to increase value after fix, rent increase, etc. can really put you in the forced appreciation column versus the market appreciation, so don't get those two confused.
- Member since 2019 · 7k+ posts · 4k+ votes5y
Las Vegas is an entirely different market than San Francisco/Seattle/Norcal market. These two city economy are driven by Tech sectors and the stock market while Vegas depends on hospitality/hotel sectors. Tech-driven economy seems still lasting until at least 2030 or another decade.
The one that drove the economy, even inside the bay area, is the wage growth of tech-based engineers.City within bay area that has less engineer is lagging the market. - 5yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 684 votes
If you're really confident that the equity is there buy them and then resell them. Don't tell the owner what you're going to do, it isn't their business. If you need to tell them you're renting them, do it. Then change your mind after you close. This is business, and if you can make a quick 100k, do it. Then do it over and over again. If you want more passive income, find another market. Rochester NY is excellent for buy and hold. Happy to give you some real life examples of what we do in Rochester. We can't get 100k equity spreads like you can in CA. If I could, I certainly WOULD! Feel free to DM me anytime.
Cheers,
Mark
Updegraff Group Realty4.745 Reviews - Member since 2019 · 7k+ posts · 4k+ votes5y
true, few times I see house that's sold for $450k in March only reappear in June for $550k without any changes except previous buyer is buying with hard cash.
- Real Estate Agent · San Francisco · Member since 2018 · 42 posts · 13 votes5y
@Justin Koopmans Hey Justin. Which cities are you looking in? May be able to provide some advice/expectations.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes5y
@Justin Koopmans To help clarify on a point that seems to be moving in a misunderstood direction, speculation IS a major segment of Real Estate Investing, AND some speculative investing can be structured for low risk exposure (ie wholesaling) and other forms are extensive risk exposure (ie long term holding for speculative market value increase's) and should be left to just those of appropriate mastery level and with ability to absorb losses if when losses occur.
Speculative investing is maybe the most misunderstood and misquoted of all facets of REI, no surprise as a volume of expressed ideas are by novice persons lacking full comprehension themselves. Not a knock, just an honest statement of facts. House flipping is speculative investing; your outlaying capital today, to create a finished product over time, to than sell at a future date based off a projection of what the future value will be, with potential of substantial capital loss, that is definitively speculation because the future value is not a known fact, it is a projection, estimate, analysis, your speculating at what that future value (ARV) will be. Now most often it is a rather short time window, speculating out 3-6 months, which helps to keep variables low. That said, I have a friend who bought a duplex closing 1 week before the 08/09 collapse. Thats an extreme example but a good example of the fact that projecting future value, even with best analysis at hand, is never a certainty, it is a speculation.
So understand, risk exposure does not go up in a straight line over time, it compounds as time is added, going up much like a mortgage payment goes down, arcing into exponential risk exposure as time increases. So purchasing a long term buy-n-hold with speculative investing as the strategy, makes for monumental risk exposure.
And for those who say "but mortgage is getting paid down" as an argument that risk goes down over time, I understand where one would think that decreases risk but in the analysis and entire picture it is like a drip into a swimming pool. Picture buying a property for $1m, at top of market in late 2007, and your renting it out for a monthly net loss of $250, because in late 2007 everything is blue skys and certainty the market value will be going up minimum $40 that year and $50k the next and so on, soon to be a cash-cow of a deal, and than, it's not. So we know it was on average 7 years or so to get back to net 0. Yes, you had mortgage pay-down but, you also had 7 years of expenses. There was vacancy in that 7 years, maintenance items, things broke, 1 tenant had to be evicted, it was not 7 years of monthly rents and just $250 out of pocket. As i said, as time goes risk exposure grows, more things to go wrong, more potential for loss, vs a flip that has all of 6 months hold time.
I agree with @Nathan Gesner that as a general rule only veteran investors should ever touch into speculative investing, much like options trading there are many making regular fortunes at it and yes it can be an excellent investing strategy BUT, but but but, it is such for the qualified and knowledgeable as for every 1 making a fortune there are at least 10, 20, 100 loosing everything.
I currently invest & advise on a market of speculative investing and it's been fantastic, and will continue in such. To achieve this, I have been market involved for 25+ years, 10+ years specific to this speculative potential, knowledge and insight from inside professionals, governmental agencies, a laundry list of data and knowledge and involved entities all making known facts of actions and items that create the market value appreciation. This is why the speculative investing is worth doing, why the risk exposure is investable. In no way shape or form is it simply saying "well, values and rents go up with time, so this should go up with time, ok, lets loose money now because, well it should turn other way, someday, maybe, possibly, probably, maybe".
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes5y
Originally posted by @Mark Updegraff:
If you're really confident that the equity is there buy them and then resell them. Don't tell the owner what you're going to do, it isn't their business. If you need to tell them you're renting them, do it. Then change your mind after you close. This is business, and if you can make a quick 100k, do it. Then do it over and over again. If you want more passive income, find another market. Rochester NY is excellent for buy and hold. Happy to give you some real life examples of what we do in Rochester. We can't get 100k equity spreads like you can in CA. If I could, I certainly WOULD! Feel free to DM me anytime.
Cheers,
Mark
Yeah, that's horrific advice, and as an agent you should know a felony level crime. Lying to a seller to induce them to sell at significant market value discounts, such as $100k, with intent to specifically do something else and only said such to get the profit spread, is equity stripping and theft by swindle, illegal in all 50 states.
Your advice is literally the exact opposite of what anyone should ever do.
- Investor · Everywhere, USA · Member since 2016 · 69 posts · 19 votes5y
Thank you everyone! Wow, lots of responses! I really appreciate that. @Michael C Williams The two properties in question are in rural outskirts of Sacramento.
- Member since 2020 · 19 posts · 17 votes5y
@Bjorn Ahlblad
I am also in Silicon Valley, but my timing is not as fortuitous as yours, having just moved here for work! I read that you would not purchase a buy and hold investment here that is not cash flowing, but I was curious to get your opinion on house hacking here? I plan on living here for the next 5-10 years. I am currently spending 36k/year on rent. So far, on the properties I’ve analyzed house hacking may lower my monthly housing costs by ~200-400$/month (although I do realize this could quickly be negated by maintenance costs and unforeseen repairs); my train of thought is that I would still be contributing that 36k towards an asset that is building equity (while someone else also helps me achieve that), instead of paying it in rent with no return. Interested to hear your thoughts on this!
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes5y
Originally posted by @James Hamling:
@Justin Koopmans To help clarify on a point that seems to be moving in a misunderstood direction, speculation IS a major segment of Real Estate Investing, AND some speculative investing can be structured for low risk exposure (ie wholesaling) and other forms are extensive risk exposure (ie long term holding for speculative market value increase's) and should be left to just those of appropriate mastery level and with ability to absorb losses if when losses occur.
Speculative investing is maybe the most misunderstood and misquoted of all facets of REI, no surprise as a volume of expressed ideas are by novice persons lacking full comprehension themselves. Not a knock, just an honest statement of facts. House flipping is speculative investing; your outlaying capital today, to create a finished product over time, to than sell at a future date based off a projection of what the future value will be, with potential of substantial capital loss, that is definitively speculation because the future value is not a known fact, it is a projection, estimate, analysis, your speculating at what that future value (ARV) will be. Now most often it is a rather short time window, speculating out 3-6 months, which helps to keep variables low. That said, I have a friend who bought a duplex closing 1 week before the 08/09 collapse. Thats an extreme example but a good example of the fact that projecting future value, even with best analysis at hand, is never a certainty, it is a speculation.
So understand, risk exposure does not go up in a straight line over time, it compounds as time is added, going up much like a mortgage payment goes down, arcing into exponential risk exposure as time increases. So purchasing a long term buy-n-hold with speculative investing as the strategy, makes for monumental risk exposure.
And for those who say "but mortgage is getting paid down" as an argument that risk goes down over time, I understand where one would think that decreases risk but in the analysis and entire picture it is like a drip into a swimming pool. Picture buying a property for $1m, at top of market in late 2007, and your renting it out for a monthly net loss of $250, because in late 2007 everything is blue skys and certainty the market value will be going up minimum $40 that year and $50k the next and so on, soon to be a cash-cow of a deal, and than, it's not. So we know it was on average 7 years or so to get back to net 0. Yes, you had mortgage pay-down but, you also had 7 years of expenses. There was vacancy in that 7 years, maintenance items, things broke, 1 tenant had to be evicted, it was not 7 years of monthly rents and just $250 out of pocket. As i said, as time goes risk exposure grows, more things to go wrong, more potential for loss, vs a flip that has all of 6 months hold time.
I agree with @Nathan Gesner that as a general rule only veteran investors should ever touch into speculative investing, much like options trading there are many making regular fortunes at it and yes it can be an excellent investing strategy BUT, but but but, it is such for the qualified and knowledgeable as for every 1 making a fortune there are at least 10, 20, 100 loosing everything.
I currently invest & advise on a market of speculative investing and it's been fantastic, and will continue in such. To achieve this, I have been market involved for 25+ years, 10+ years specific to this speculative potential, knowledge and insight from inside professionals, governmental agencies, a laundry list of data and knowledge and involved entities all making known facts of actions and items that create the market value appreciation. This is why the speculative investing is worth doing, why the risk exposure is investable. In no way shape or form is it simply saying "well, values and rents go up with time, so this should go up with time, ok, lets loose money now because, well it should turn other way, someday, maybe, possibly, probably, maybe".
Excellent post James! It looks at a lot of the factors that go into creating wealth in a wholistic way, not in their discrete parts. And it mentions the R word too (and I don't mean return!) Risk gets far to little attention here, and almost never in the context of a continuum based on time. Great stuff!
The only thing you missed was rent growth. Appreciation and rent growth usually go hand in hand since both have their roots in a supply/demand imbalance. When demand outstrips supply that drives up prices for RE, but also the rent that those assets can command. Not saying that solves all problems, but if you apply that idea to your example the total return looks a bit different since by year three or four the asset will have a positive cash flow.
The real concern with appreciation that everyone dances around but never says, is changes to the underlying supply and demand characteristics of an area. NYC RE fits this bill perfectly. Everything was great until COVID changed the way the users of NYC RE operated. Extreme example I know, but it drives home the point about understanding your customer base well enough to know if they could up and leave any time or do they have some more structural ties to your assets/ can someone else infill the property.
At the end of the day all risk comes from not knowing what you are doing, as a really smart guy once said. So I generally agree with your assessment about experienced investors. However, investing also comes down to answering the two questions, Is it a good asset and is it cheap? But the good asset depends on what goals you have. For some that may be replacing a W2 income, for others it is early retirement, for other still it is putting excess money to work. All of those beget different strategies and what works for one won't work for the other.
- Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes5y
@James Hamling Can you cite a statute that limits what a buyer may tell the seller of property about the purpose for which the seller intends to use the property outside the foreclosure process?
- 5yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
Originally posted by @Krystin Aversa:
@Bjorn Ahlblad
I am also in Silicon Valley, but my timing is not as fortuitous as yours, having just moved here for work! I read that you would not purchase a buy and hold investment here that is not cash flowing, but I was curious to get your opinion on house hacking here? I plan on living here for the next 5-10 years. I am currently spending 36k/year on rent. So far, on the properties I’ve analyzed house hacking may lower my monthly housing costs by ~200-400$/month (although I do realize this could quickly be negated by maintenance costs and unforeseen repairs); my train of thought is that I would still be contributing that 36k towards an asset that is building equity (while someone else also helps me achieve that), instead of paying it in rent with no return. Interested to hear your thoughts on this!
House hacking is definitely a good idea to reduce the cost of that mortgage etc. Think big and get enough rent so you can absorb vacancy, mtnce, taxes, water and all the other associated expenses you will encounter with ownership. Think about your renter pool and where will they want to live, and can you stand living with them. Work on your screening process; it will be twice as important when you have people living in your house!
Housing prices have always been high in Silicon Valley, when I moved there in the mid eighties people thought they were way too high. Little did we know back then that 500k was actually a bargain! Just because it has been roaring up for the last however many years does not mean it can't slow down or even stop, or worse. There have been slumps along the way too; some of my co-workers bought badly and were later forced to sell due to changes in employment or stock options. At one point I almost fell victim during the dot com bust! Trick is to buy big but always have enough cash to weather a storm that will come along sooner or later. Join a local LL association, hang out here, make sure you know your numbers; all the best!
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes5y
Originally posted by @Darius Ogloza:
@James Hamling Can you cite a statute that limits what a buyer may tell the seller of property about the purpose for which the seller intends to use the property outside the foreclosure process?
Sure; the criminal crimes statutes on Theft By Swindle, there ya go. Or would you like every criminal offense sited, and instructions on how to check a law library? Maybe the definition of Fraud, equity stripping.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes5y
Originally posted by @Bill F.:
Originally posted by @James Hamling:
@Justin Koopmans To help clarify on a point that seems to be moving in a misunderstood direction, speculation IS a major segment of Real Estate Investing, AND some speculative investing can be structured for low risk exposure (ie wholesaling) and other forms are extensive risk exposure (ie long term holding for speculative market value increase's) and should be left to just those of appropriate mastery level and with ability to absorb losses if when losses occur.
Speculative investing is maybe the most misunderstood and misquoted of all facets of REI, no surprise as a volume of expressed ideas are by novice persons lacking full comprehension themselves. Not a knock, just an honest statement of facts. House flipping is speculative investing; your outlaying capital today, to create a finished product over time, to than sell at a future date based off a projection of what the future value will be, with potential of substantial capital loss, that is definitively speculation because the future value is not a known fact, it is a projection, estimate, analysis, your speculating at what that future value (ARV) will be. Now most often it is a rather short time window, speculating out 3-6 months, which helps to keep variables low. That said, I have a friend who bought a duplex closing 1 week before the 08/09 collapse. Thats an extreme example but a good example of the fact that projecting future value, even with best analysis at hand, is never a certainty, it is a speculation.
So understand, risk exposure does not go up in a straight line over time, it compounds as time is added, going up much like a mortgage payment goes down, arcing into exponential risk exposure as time increases. So purchasing a long term buy-n-hold with speculative investing as the strategy, makes for monumental risk exposure.
And for those who say "but mortgage is getting paid down" as an argument that risk goes down over time, I understand where one would think that decreases risk but in the analysis and entire picture it is like a drip into a swimming pool. Picture buying a property for $1m, at top of market in late 2007, and your renting it out for a monthly net loss of $250, because in late 2007 everything is blue skys and certainty the market value will be going up minimum $40 that year and $50k the next and so on, soon to be a cash-cow of a deal, and than, it's not. So we know it was on average 7 years or so to get back to net 0. Yes, you had mortgage pay-down but, you also had 7 years of expenses. There was vacancy in that 7 years, maintenance items, things broke, 1 tenant had to be evicted, it was not 7 years of monthly rents and just $250 out of pocket. As i said, as time goes risk exposure grows, more things to go wrong, more potential for loss, vs a flip that has all of 6 months hold time.
I agree with @Nathan Gesner that as a general rule only veteran investors should ever touch into speculative investing, much like options trading there are many making regular fortunes at it and yes it can be an excellent investing strategy BUT, but but but, it is such for the qualified and knowledgeable as for every 1 making a fortune there are at least 10, 20, 100 loosing everything.
I currently invest & advise on a market of speculative investing and it's been fantastic, and will continue in such. To achieve this, I have been market involved for 25+ years, 10+ years specific to this speculative potential, knowledge and insight from inside professionals, governmental agencies, a laundry list of data and knowledge and involved entities all making known facts of actions and items that create the market value appreciation. This is why the speculative investing is worth doing, why the risk exposure is investable. In no way shape or form is it simply saying "well, values and rents go up with time, so this should go up with time, ok, lets loose money now because, well it should turn other way, someday, maybe, possibly, probably, maybe".
Excellent post James! It looks at a lot of the factors that go into creating wealth in a wholistic way, not in their discrete parts. And it mentions the R word too (and I don't mean return!) Risk gets far to little attention here, and almost never in the context of a continuum based on time. Great stuff!
The only thing you missed was rent growth. Appreciation and rent growth usually go hand in hand since both have their roots in a supply/demand imbalance. When demand outstrips supply that drives up prices for RE, but also the rent that those assets can command. Not saying that solves all problems, but if you apply that idea to your example the total return looks a bit different since by year three or four the asset will have a positive cash flow.
The real concern with appreciation that everyone dances around but never says, is changes to the underlying supply and demand characteristics of an area. NYC RE fits this bill perfectly. Everything was great until COVID changed the way the users of NYC RE operated. Extreme example I know, but it drives home the point about understanding your customer base well enough to know if they could up and leave any time or do they have some more structural ties to your assets/ can someone else infill the property.
At the end of the day all risk comes from not knowing what you are doing, as a really smart guy once said. So I generally agree with your assessment about experienced investors. However, investing also comes down to answering the two questions, Is it a good asset and is it cheap? But the good asset depends on what goals you have. For some that may be replacing a W2 income, for others it is early retirement, for other still it is putting excess money to work. All of those beget different strategies and what works for one won't work for the other.
I have been exercising control to purposefully not mention Rent Appreciation in open 2 general public posts to help deflate the ignorance out there by novices who hear such and just assume rental appreciations are universal, misallocate, than get into a reverse situation. There are some areas where rents are well into bubble territory when considering as % of tenant demographic gross income; 50%+ is dangerous territory, 55%+ is clearly not sustainable, 60%+ is building for a bubble and 65% is surprise it has not yet popped.
As we are in such a weird spot at this time that supply/demand cycles is facilitating dangerous upward rent appreciation deviations in some markets, and others have ample room to grow, and with so many unknowing of how to identify the difference in markets or even asset class's within a market and where they stand in rent sustainability.
When any rents go down you know, person will declare the sky is falling for all rents, everywhere, every market, every asset class. Well, I have come to accept the same is often true in reverse for euphoria, so I just strive to not feed into that at all but yes you are correct, my "farm" market is pacing about 5-7% rent appreciation although I am slowing that on leases to 3.5-4% for sustainability sake.
- Real Estate Agent · San Francisco · Member since 2018 · 42 posts · 13 votes5y
@Justin Koopmans Thanks. I'll lay out some simple math here. The average SFR property in Sacramento is around 400k. Not sure where exactly you are buying or the price point but if you are actually getting these properties at $50k-$100k below market value, that's pretty incredible. So incredible I would seriously question why the seller is willing to take that loss rather than list it on the MLS. Triple check the numbers with multiple realtors to make sure you are accessing the value correct. With that type of "discount", the $300 net negative cash flow is negligible. Sacramento has appreciated 12% YoY and while this is not sustainable, it won't all the sudden flip to negative the next year, or year after that. Biggest factor right now, interest rates, which will be at record lows through 2023 as per Fed minutes.
As a Bay Area investor, my guiding principal is that you make money on the purchase. Meaning if you buy the right house at the right price, it's very hard to lose money.
If those property figures are even remotely accurate and you pass these up, please DM me because I will buy them lol.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.