Quick question about cash flow and appreciation.

[Chang Maeng]

Hello guys.

This site has been very helpful for me and encouraged me to start as an investor.

Again, thank you for responses and I am looking forward to get some again.

Typically, the more urbanized cities have lesser cap rate, and people are purchasing properties based on appreciation. For example, 1 room condo at the heart of boston costs around 400k and is being rented $2000 per month. If you consider all the fees (including mortgage payment), it will produce negative cash flow. However, property prices are going up for some reason.

I am really confused why this is happening. We know this type of properties already produce negative cash flow, and it seems like the rent is not going to increase tremendously. But, people are purchasing based on appreciation even though those buildings produce negative cash flow. How these types of buildings can be turned into producing positive cash flow in the future when numbers are really hopeless? Why people (including investors) are purchasing those buildings for what reason?

Any inputs will be appreciated. This can help me decide which field I should be concentrating more.

Thank you.

[Account Closed]

Originally posted by @Ali Boone:

@Account Closed

@Account Closed

"with the now positive cash flow." That means it wasn't cash-flowing initially, so the 'now' positive cash flow is because of appreciation in the sense that the rent amounts got higher over time, in addition to the equity build. That is still an appreciation game. Whether you are banking on equity build or rent increases, you are playing the appreciation game in the sense that your success is dependent on that growth.

I didn't knock it, I just called it what it is.

@Chang Maeng

There are a lot of markets that fit that bill. That's basically what I look for in properties too. It may not be everybody's cup of tea, but I like it.

@Account Closed

No, you're still confusing two different concepts, 1. rent growth and 2. appreciation. There is generally a relationship between the two but they will have completely different rates and cycles. You seem to advocate buying based on cash flow at ONE point in time. You are counting on no rent decreases, value decreases or vacancy increases or increasing operating expenses . What are you basing that optimistic prediction on if you are unaware of historic rent growth or appreciation rate, one days picture of a "cash flow"? I guess I'm just saying the snapshot game does not predict the profitability over your holding time very well. Buying a "higher crap rate" or instant cash flow does not mean you are buying wise. Nothing wrong with trying to get immediate cash flow but you are a fool if you don't have a good idea which way it is going.

[Chang Maeng]

I do also think she is not considering "variables" with current cash flow that property has. Bob I understand what you are trying to say. Either appreciation and cashflow has its variables and as soon as one neglects the fact, its a gamble. I almost neglected the fact that just because it has a positive cashflow doesn't mean it will continue forever.

@ali boone

I do think what Bob Bowling is saying is true. Both 1)appreciation 2)cashflow have its variables and you cannot neglect either one. But I think usually these traits have positive relationship that people do not really aware that while (1) can go up, (2) can go down. This will be transparent when people see the reality and trying to sell their properties. This will happen at the end of real estate peak I guess. If Bob didn't told that, I would probably neglected that factor also.

[Ali Boone]

@Account Closed

I never said I buy based on a snapshot in time (if I'm saying that right). I am fully aware of long-term rent growth and appreciation rates in the areas I buy in and advocate (hence why I don't advocate Detroit). I am huge on sticking with markets with strong historic data that support growth in both of those areas. Not all markets grow, both in rents and appreciation, as fast as CA but that doesn't mean they don't grow at all. There is no 100% certainty in any market that will prevent any value from dropping, but there are certainly things to look at to help mitigate it.

And sorry, I messed up in my last response... I shouldn't have used the word 'appreciation' in the context I did. I used it to describe both rent growth and price increases when I should have only used it for the price increases. I completely understand they will be on different rates and cycles, but my point was that the success you are referring to is dependent on the growth of both of those (which is why I used the one word to cover both of them, and I shouldn't have so it would have been more clear). Which again is fine, but it is a particular method of investing and not everyone wants to do that method. It works great for you and that is super cool. I give you props for your success!

[Ali Boone]

Chang, sorry not sure what gave you that impression. If you look at my blog articles here on BP, you'll know that I'm the biggest advocate ever of not just going off the written numbers on a property. I'm huge on the factors that contribute to a property outside of the numbers- market factors, property factors, you name it.

Sorry, I must have said something in my previous response that caused you guys to think I only care about numbers and nothing else. I definitely didn't mean to insinuate that because I'm the farthest from that.

[Chang Maeng]

Mistake.

[Chang Maeng]

Originally posted by @Ali Boone:

Chang, sorry not sure what gave you that impression. If you look at my blog articles here on BP, you'll know that I'm the biggest advocate ever of not just going off the written numbers on a property. I'm huge on the factors that contribute to a property outside of the numbers- market factors, property factors, you name it.
Sorry, I must have said something in my previous response that caused you guys to think I only care about numbers and nothing else. I definitely didn't mean to insinuate that because I'm the farthest from that.

I am just trying to say that its ALWAYS better to consider both variables.

I see you are a huge advocate of cashflow. Nothing is wrong. However, it doesn't cost any if you do also consider appreciation value. I think Bob was trying to tell you that fact. He was trying to say you should also consider people who just want to buy properties for residential use or other investors who purchase based on appreciation.

For example, if there is a condo that has -1% negative cash flow but 10% appreciation value, its better than having a condo that has 1% cash flow but 5% appreciation value.

I probably know what you are trying to say, and you do care about numbers. Its really hard to explain in English since its not my first spoken language, but I believe you undestand what I am trying to say.

[Ali Boone]

Again Chang, sorry you got the impression that is what I meant. If you saw all the stuff I write in the blogs and in other forums, you would know that I am the biggest advocate of a growing market and that's all I'll buy in for myself. What I didn't specify is where I draw that line. The line for me personally is that a property has to have positive cash flow and be in a growing market. Not everyone needs or requires that positive cash flow in a property, as with your example of taking a -1% cash flow in exchange for a high appreciation. But if you do take the negative cash flow and plan only for that appreciation (and/or rent growth), you are in fact playing the appreciation game. That is a different strategy than investing for cash flow because your results are based on something different than if you were to invest for the cash flow.

I totally understand everything that is being said. I just don't personally go for appreciation-only properties but I'm in total support of whoever wants to.

I definitely think I'm not writing my responses quite right based on how you guys are interpreting my requirements/understanding/preferences/etc. I apologize for that. I probably shouldn't try to have a smart conversation when my brain is fried because I'm not able to get my thoughts out clearly. So I'm going to bug out of this thread and leave it for new folks to jump in and discuss, but feel free to PM me anytime if you (or Bob) want to talk offline.

[Engelo Rumora]

This thread sure is heating up lol

Loving the passion.

I believe that investing should be based on the numbers in the deal and not predictions of capital growth. Hoping a property will go up in value is not a strategy. If the numbers in the deal make sense today and suit your end goal the investment might be worth pursuing further. Too many investors get caught up on predictions that one particular area will see more appreciation than the other. Cashflow is king and if there is any growth in the future this is just a bonus.

Thanks for reading

[Account Closed]

Originally posted by @Engelo Rumora:

This thread sure is heating up lol

Loving the passion.

I believe that investing should be based on the numbers in the deal and not predictions of capital growth. Hoping a property will go up in value is not a strategy. If the numbers in the deal make sense today and suit your end goal the investment might be worth pursuing further. Too many investors get caught up on predictions that one particular area will see more appreciation than the other. Cashflow is king and if there is any growth in the future this is just a bonus.

Thanks for reading

I could have sold you a Blockbuster franchise 5 years ago based on the numbers. Where would you be today? Successful investors don't make wild predictions. If I have a stable 40 year+ appreciation rate of 10% how am I not doing the CURRENT numbers in my decision when you are only looking at TODAYS numbers and "predicting" they will stay about the same and yet you are the one that is ignoring historic NUMBERS such as rent growth and appreciation?

AND again it is the cash flow over the holding period. Seems the cash flow now demanders keep ignoring the TOTAL cash flow.

[Engelo Rumora]

Originally posted by @Account Closed:

Originally posted by @Engelo Rumora:

This thread sure is heating up lol
Loving the passion.

I believe that investing should be based on the numbers in the deal and not predictions of capital growth. Hoping a property will go up in value is not a strategy. If the numbers in the deal make sense today and suit your end goal the investment might be worth pursuing further. Too many investors get caught up on predictions that one particular area will see more appreciation than the other. Cashflow is king and if there is any growth in the future this is just a bonus.

Thanks for reading

I could have sold you a Blockbuster franchise 5 years ago based on the numbers. Where would you be today? Successful investors don't make wild predictions. If I have a stable 40 year+ appreciation rate of 10% how am I not doing the CURRENT numbers in my decision when you are only looking at TODAYS numbers and "predicting" they will stay about the same and yet you are the one that is ignoring historic NUMBERS such as rent growth and appreciation?

AND again it is the cash flow over the holding period. Seems the cash flow now demanders keep ignoring the TOTAL cash flow.

Thanks for your post Bob.

I don't contribute to the forum to get into any "argy bargy" discussions so this will be my last post on this thread.

I appreciate and respect your investment strategy and I am sure I still have quite a few years to go before I reach your level of experience.

Historic numbers are always glanced over but a decision to BUY isn't made based on them. There is too much unknown predicting the future and is much safer to look at the market and the numbers in the deal as they stand today IMO.

Also, no matter how good the future potential for growth is or even the current numbers if the team you surround yourself with are not genuine and are shady, it is obvious that the investment won't be a success.

Those are the 2 main things that I look for when investing.

1) The team

2) The current numbers

Thanks for reading and all the best moving forward.

[Karen Margrave]

and everyone ignores "common sense" Southern California and other similar areas (Honolulu, New York etc. will always be powerhouses that draw people, and since land is limited, prices WILL go up, and it doesn't take a crystal ball to know that.

[Account Closed]

Originally posted by @Engelo Rumora:

Originally posted by @Account Closed:

Originally posted by @Engelo Rumora:

This thread sure is heating up lol
Loving the passion.
I believe that investing should be based on the numbers in the deal and not predictions of capital growth. Hoping a property will go up in value is not a strategy. If the numbers in the deal make sense today and suit your end goal the investment might be worth pursuing further. Too many investors get caught up on predictions that one particular area will see more appreciation than the other. Cashflow is king and if there is any growth in the future this is just a bonus.

Thanks for reading

I could have sold you a Blockbuster franchise 5 years ago based on the numbers. Where would you be today? Successful investors don't make wild predictions. If I have a stable 40 year+ appreciation rate of 10% how am I not doing the CURRENT numbers in my decision when you are only looking at TODAYS numbers and "predicting" they will stay about the same and yet you are the one that is ignoring historic NUMBERS such as rent growth and appreciation?

AND again it is the cash flow over the holding period. Seems the cash flow now demanders keep ignoring the TOTAL cash flow.

Thanks for your post Bob.

I don't contribute to the forum to get into any "argy bargy" discussions so this will be my last post on this thread.

I appreciate and respect your investment strategy and I am sure I still have quite a few years to go before I reach your level of experience.

Historic numbers are always glanced over but a decision to BUY isn't made based on them. There is too much unknown predicting the future and is much safer to look at the market and the numbers in the deal as they stand today IMO.

Also, no matter how good the future potential for growth is or even the current numbers if the team you surround yourself with are not genuine and are shady, it is obvious that the investment won't be a success.

Those are the 2 main things that I look for when investing.

1) The team

2) The current numbers

Thanks for reading and all the best moving forward.

Well, you made me Google...Q From Peter J Lusby: A question arose recently during a discussion here in California about the origin of the expression argy-bargy (also written argey-bargey), meaning a relatively amicable, if somewhat heated, argument.

I hope I haven't scared you off or seem confrontational. I am truly interested in the investor psychology and feel there is much to be learned from a true exchange of ideas. Your investing seems very fear based. I'm trying to show you that your fears MAY be leading you into wrong investing decisions. Now I have friends that won't invest at all because of fear. When I bought in the 70's and my value more than doubled in two years I was told I was lucky to buy then. Then when I bought in the 80's and my value doubled in two years I again was told I was lucky. Same in the 90's and 2000's. I still like my friends and appreciate that their inaction is based on fear and they recognize it.

I am amazed at how some investors like yourself think there is no future. I deal with professional investors that invest in $100,000,000 + office buildings. While they do look at todays numbers and the current cap rates to determine what the other market investors are buying at they are very much looking at the "upside"! Say a property has a lot of above market leases that will expire in a few years. They would have to make a "prediction" (business decision) on where they think the market rents will be when they expire. Professional investors will look out to the FUTURE to determine when large blocks of space will be coming up and make "predictions" on where they think market rents will be at that time. They look at historic business cycles, election cycles, the FUTURE, etc. They do not make a buy decision on a cap rate except to ensure they are not paying over market at that time.

So yeah, I'm interested why smaller investors do not act like professional investors. I'm interested on why some smaller investors say they look at the "numbers" but don't understand the numbers or completely ignore them.

Everyone has to act on their own comfort level. I've passed on great deals just because I could be caught overleveraged if things took the 5% chance of not working out on my time line. I recognize that I am conservative when it comes to my use of leverage.

Anyway good luck with however you invest and I hope you don't always shy away from argy bargy. Real estate investing is not for sissies. LOL

[Chang Maeng]

I think they are not valuing future appreciation as much as you do, which is understandable.

i think its all depend on how much capital you currently have and up to how much can you accept loss. 1m to Bill Gates is nothing compare to an ordinary person.

LOL, I think you don't have to be that aggressive though.

[Engelo Rumora]

Originally posted by @Account Closed:

Originally posted by @Engelo Rumora:

Originally posted by @Account Closed:

Originally posted by @Engelo Rumora:

This thread sure is heating up lol
Loving the passion.
I believe that investing should be based on the numbers in the deal and not predictions of capital growth. Hoping a property will go up in value is not a strategy. If the numbers in the deal make sense today and suit your end goal the investment might be worth pursuing further. Too many investors get caught up on predictions that one particular area will see more appreciation than the other. Cashflow is king and if there is any growth in the future this is just a bonus.

Thanks for reading

I could have sold you a Blockbuster franchise 5 years ago based on the numbers. Where would you be today? Successful investors don't make wild predictions. If I have a stable 40 year+ appreciation rate of 10% how am I not doing the CURRENT numbers in my decision when you are only looking at TODAYS numbers and "predicting" they will stay about the same and yet you are the one that is ignoring historic NUMBERS such as rent growth and appreciation?

AND again it is the cash flow over the holding period. Seems the cash flow now demanders keep ignoring the TOTAL cash flow.

Thanks for your post Bob.

I don't contribute to the forum to get into any "argy bargy" discussions so this will be my last post on this thread.

I appreciate and respect your investment strategy and I am sure I still have quite a few years to go before I reach your level of experience.

Historic numbers are always glanced over but a decision to BUY isn't made based on them. There is too much unknown predicting the future and is much safer to look at the market and the numbers in the deal as they stand today IMO.

Also, no matter how good the future potential for growth is or even the current numbers if the team you surround yourself with are not genuine and are shady, it is obvious that the investment won't be a success.

Those are the 2 main things that I look for when investing.

1) The team

2) The current numbers

Thanks for reading and all the best moving forward.

Well, you made me Google...Q From Peter J Lusby: A question arose recently during a discussion here in California about the origin of the expression argy-bargy (also written argey-bargey), meaning a relatively amicable, if somewhat heated, argument.

I hope I haven't scared you off or seem confrontational. I am truly interested in the investor psychology and feel there is much to be learned from a true exchange of ideas. Your investing seems very fear based. I'm trying to show you that your fears MAY be leading you into wrong investing decisions. Now I have friends that won't invest at all because of fear. When I bought in the 70's and my value more than doubled in two years I was told I was lucky to buy then. Then when I bought in the 80's and my value doubled in two years I again was told I was lucky. Same in the 90's and 2000's. I still like my friends and appreciate that their inaction is based on fear and they recognize it.

I am amazed at how some investors like yourself think there is no future. I deal with professional investors that invest in $100,000,000 + office buildings. While they do look at todays numbers and the current cap rates to determine what the other market investors are buying at they are very much looking at the "upside"! Say a property has a lot of above market leases that will expire in a few years. They would have to make a "prediction" (business decision) on where they think the market rents will be when they expire. Professional investors will look out to the FUTURE to determine when large blocks of space will be coming up and make "predictions" on where they think market rents will be at that time. They look at historic business cycles, election cycles, the FUTURE, etc. They do not make a buy decision on a cap rate except to ensure they are not paying over market at that time.

So yeah, I'm interested why smaller investors do not act like professional investors. I'm interested on why some smaller investors say they look at the "numbers" but don't understand the numbers or completely ignore them.

Everyone has to act on their own comfort level. I've passed on great deals just because I could be caught overleveraged if things took the 5% chance of not working out on my time line. I recognize that I am conservative when it comes to my use of leverage.

Anyway good luck with however you invest and I hope you don't always shy away from argy bargy. Real estate investing is not for sissies. LOL

Hey Bob,

Thanks for your post

You had me at "hello" and I just had to respond again haha

I picked up "Argy Bargy" from Australia (Where I am from) lol

Its a pretty cool saying haha

No fear on my behalf. I have lost "fear" a long time ago. Health is the most important thing in life and the only fear I have is for the health of my loved ones.

Personally I have lost hundreds of thousands of $$$ investing based on speculation that a property will go up in value. It was my mistake and I have since learned on that mistake and proceeded moving forward with a strategy not involving much debt and based on a high net cash return.

It has proved to be very successful thus far and I don't intend to change a winning formula.

No luck needed but thank you.

My PA is out of office and I am a 2 finger typer so it takes too long lollol so maybe we can continue the "argy bargy" tomorrow.

Thanks for your time and have a great day.

[Amit M.]

what Bob, Karen and I are talking about is appreciation in highly growth restricted and established markets, aka blue chip real estate. Hawaii, SF/Bay, costal SoCal, manhattan, etc., etc. We are not talking about boom/bust places like Vegas, Phoenix, and many parts of Florida. That's were a lot of noob investors got burned, and where equity and cashflow can go to hell in a handbasket when a *****torm hits. The challenge in buying in low cap markets is that you normally need to put a couple hundred grand down, passively absorb a large neg cash flow, or find an innovative way to reposition, rent and manage the property.

Because I'm an active investor, I always look at option 3. Yes I know many Asian investors in SF that collate cash with friends and family in China and just plunk it down on a high rise condo in downtown SF, and yes that more passive approach has some risk if the market flattens or tanks. Those guys will usually get 4-6% back on their money, they believe the investment is stable/blue chip, and will just ride out the appreciation for the mid-long term. Wealthy buyers frequently do this in global gateway markets inc. Manhattan, London, etc. Personally I've got mixed feeling about it, as they can pump up a restrictive market, and if too many are in, they can bolt out and hurt the long term and local owners. Fortunately they are not overwhelming in SF, so I'm cool with it.

What I prefer is finding a property where I put some brains and renovations into, and reposition it. Now I'm in the midst of picking up a duplex+inlaw in an up and coming neighborhood in SF. I've watched and studied it carefully. I think it got over hyped in the mid 2000's, took a big hit (for SF) during the recession, and is now back on the upswing. Prices have risen 12-15% from a year ago but are still good. And some long term redevelopment plans, after years and years of delay are finally seeing the light of day. Tenants are paying below market rent (a common occurance in rent controlled SF) which effects the price of the purchase price. Today I just met the upstairs tenants, and understand that they are willing to move out at a reasonable buy out. That alone is probably worth $20-30 grand in discovery. I think the other tenants will vacate too. The 3rd unit is not legal, but SF just passed a law allowing legalization, with lesser restrictions (an extreme housing dearth has caused the politicians to want to officially "count" inlaws, so they have to let them be legal.). Bingo! That will add at least $200k value to this property. I'll be negative on this for several months, but will be able to more than double the rents once the units are nicely renovated. I'll need to keep the inlaw vacany until I can legalize it, and that will probably take at least a year dealing with this bureaucratic-clusterf*ck of a city government that we have here. But once that baby is rented out I'll be banking at least $1500 positive per month soup to nuts. Oh, and the whole thing is 100% financed- I pulled $350k from an existing investment for the down payment, tenant buy outs and renovations, and a sweet 30 yr fixed loan for the purchase. At the end of the day I end up with a nice, renovated property, with professional tenants, throwing out cash, and well positioned to go up in value as it's in a prime-to-be neighborhood. What more could I ask for?

[Kathryn M.]

Hi Amit,

Thought you, @Account Closed and other thread contributors might be interested in this article. I support the intent but IMHO the lack of % returns and time period chosen, slant it a bit too heavily towards appreciation :

http://www.marketwatch.com/story/where-you-can-cle...

I love this quote from @Amit M. :

What I prefer is finding a property where I put some brains and renovations into, and reposition it. 

I too, try to follow this strategy... just need a brain the size of Amit's !!!

[Mark Whittlesey]

@CK Hwang 

I would agree with most of your post. I would only say a couple of things.

Even out here, appreciation is NOT guaranteed over the short term.

Cash flow is immediately spendable. Appreciation is not. So it depends on what your goals and strategies are.

I still don't know that I would put a 400K condo in Boston in with what you seem to be buying. A lot of people in Miami took baths doing that.

[Amit M.]

thanks for the arti @Kathryn M. .  Interesting to see zillow #'s for this purpose, as their "zestimates" are usually as good as monkeys throwing darts at housing markets. But on a comparative basis, I think they nailed the cash flow now vs longer term appreciation and cash flow dynamic nicely.  Not sure about San Jose being top dog, and Hawaii at #10 though. 

[Account Closed]

Originally posted by @Kathryn M.:

I love this quote from @Amit M. :

What I prefer is finding a property where I put some brains and renovations into, and reposition it. 

I too, try to follow this strategy... just need a brain the size of Amit's !!!

 Let me translate it for you Amit. What @Kathryn M. was trying to say is that .......you have a big head. 

JK. I couldn't resist. 

[Manch Hon]

Originally posted by @Amit M.:

 Not sure about San Jose being top dog, and Hawaii at #10 though. 

We are the top dog alright. :) No if no but. 

[Amit M.]

ha! Ha!  I knew @Account Closed  would be feisty as well...

[Manch Hon]

Originally posted by @Amit M.:

ha! Ha!  I knew @Account Closed  would be feisty as well...

Haha. I am daydreaming nowadays how I would pull cash out of stock account to implement my "East of 101" strategy. Well, maybe next year. I will leave all of SF to you Amit. I don't have the nerve to tackle SF rent control. :) 

[Manch Hon]

But seriously I am happy to see you guys @Amit M. @Account Closed pushing back on the cash flow religion. I used to belong to that cult when I first got started. But as my experience grew that math doesn't look that hot no more. Now I am a complete appreciation junkie, saving my down payments to buy rentals in the RBA. 

There is so much myth in the cash flowing investing religion, and BP is responsible to some degree. Every week in their podcast the hosts talk as if appreciation is some black magic. In fact that's how those old dudes in SF Chinatown came to own whole city blocks, and more. 

[Amit M.]

^ yes, I agree with your sentiments wholeheartedly. That's why at first I was iffy about bothering to join biggerpockets, as that out of state/cash flow approach has zero interest to me.  And to be frank, almost all the podcasts and articles I find a waste of time. 

But the big beni is meeting like minded people, the local meet ups, helping others, and the online camaraderie. 

[Mike Hurney]

@Chang Maeng  I was thinking Retail buyers like Chet said but it can also be Investors counting on Appreciation. Have you studied the Market in Brookline for that price range (SOLDS, DOM)?