The mindset of the Cash Flow investor: LA vs Baltimore

[Account Closed]

So I have to put $1,500,000 in a rental somewhere. The option (for whatever reason) is either LA (appreciation) or Baltimore (cash flow).

Sure, investors never can agree to disagree on which is best, but the numbers seem to suggest its not  necessarily an even contest.

Some facts:

We assume this is an all cash purchase... no leverage or debt (financing). The idea here being that the quality of an investment shouldn't be determined by how it is financed. Sure we can use debt and come up with 100o different scenarios but thats not the point here.

So...

.	Los Angeles	Baltimore
Initial Investment	$1,500,000	$1,500,000
# of Properties	2	12
Monthly Rent / Property	$ 3,500	$ 1,395
Gross Rent / Year	$ 84,112	$207,349
Gross Expense / year 45%	$ 37,850	$ 93,307
Yearly CF	$ 46,262	$114,042
Monthly CF	$ 3,855	$ 9,504
10 Year CF @ 3% rent growth	$530,338	$1,307,365
Cap Rate	3.08%	7.60%

Apparently, $1.5 mil can (if you are lucky) get you 2 average SFRs in LA; same amount can also get you about 12 average SFRs in Baltimore. 

Monthly rent in LA = $3500 and in Baltimore = $1395.

Gross rental income per year for LA =$84,112 and Baltimore =$207,349.

Total Expense @ 45% for LA=$37,850 and Baltimore's=$93,307.

CF Per Year for LA = $46,262 and Baltimore's=$114,042

So approximately the LA properties generate a monthly CF of $3855 and Baltimore $9504

If we assume rent increases at 3% per year to keep pace with inflation, total CF in 10 years would equal: $530,338 for LA and $1,307,365 for Baltimore.

From a CF perspective it appears Baltimore wins.

But you say, LA appreciates faster in the long run -- true. Last 40 years for instance LA grew at an average of 7.3% per year and Baltimore at 4.8% per year. 

What does this mean?

,	Los Angeles	Baltimore
Invest. Value 10 Years	$3,034,509	$2,397,199
Appreciation	$1,534,509	$897,199
10 Year CF	$530,338	$1,307,365
CF + Appreciation	$2,064,848	$2,204,564

The initial $1.5 mil in both cities in 10 years (the holding period) would be worth $3.03 mil in LA and Baltimore $2.4 mil. So LA wins the appreciation game.

But what is the net effect of things? 

Adding cumulative monthly/yearly cash flow to appreciation, Baltimore's total = $2.204 mil and LA =$2.064 mil.

So is it always best to wait for appreciation? Apparently not. The cumulative effect of cash flow from some markets can be just as effective as appreciation.

Sure you can always access equity and try to reinvest -- the same is true for both markets though. 

To some investors, even if the long run appreciation exceeds cumulative CFs, the CF route may still be the best option (for them) if their primary objective is/was positive income/CF.