Cashflow vs. Appreciation

[Delbert Standifer]

What is the difference in the monthly net profit of a property bought for cashflow/appreciation? I hope the question is understood.

[Account Closed]

@Delbert Standifer

Monthly profit shouldn’t be your concern. Long winded discussion below on 3 profit centres of buy & hold real estate.

Cash flow: 

Essential. Especially when starting out. This allows you to hold for the long term. And cash flow projection needs to include worst case scenario possibilities. If for some reason you had say $400 monthly negative cashflow and bought 5 properties like this you would be required to input $2,000 monthly into the properties to cover costs. It doesn’t take a genius to see that this is going to eventually make you go bankrupt. 

Additionally, you will never get wealthy off cashflow. Why? Because it comes in drips monthly that’s why. Even if you bought 10 properties at $500 monthly cash flow you’ve made a whopping $60,000 at the end of year one. That’s great money, but it isn’t wealth creation any more than your day job is.

Mortgage paydown:

This is where wealth generation happens. It happens while you’re sleeping. While you’re on vacation. While your at your day job. But it happens slowly, in drips monthly. You will never get wealthy quickly with mortgage paydown. However, if you hold long term, it’s pretty dang guaranteed that you will get wealthy. Example: 

Buy a $300,000 house. Assume it does not go up in value (appreciation) at all. Hold it for 30 years. What are you left with? A $300,000 house that someone else (tenants) paid off for you. You’ve built a $300,000 asset with time and a downpayment (in this case, $60,000 down payment). So over 30 years you turned $60,000 into $300,000 which is a 5x multiple. Using simple interest (non-compounding) that’s about 17% per year return. Using compounding interest it is a little less.  

Appreciation:

This is like the cherry on top. And it needs to be treated like it. Some sundays come with cherries, some don’t. Appreciation is NOT guaranteed. NEVER buy a property based off appreciation only. That is called speculation. Many rookie investors have gone absolutely broke buying as speculators. Many experienced investors too! 

Appreciation can build massive wealth. Why? Because you’re using leverage to get it. If a $100,000 property appreciates 3% it is worth $103,000. But your return on investment is NOT 3%. You only invested $20,000 to buy that property. So your return is $3,000/$20,000 which is 15%. 

Always set yourself up for appreciation. How? You pay attention to local economic fundamentals. GDP. Jobs. Local policies such as densification programs. Which areas of town are improving. Which areas of town are declining. Which areas have increasing vacancies. Which areas have decreasing vacancies. Which areas have high rent to price ratios. Which areas are high maintenance. Which areas are a dog on your time compared to return. And dozens of other metrics that an experienced investor looks for when choosing where to invest. 

Quick recap.

Cash flow: you need it to hold long term or you’ll be feeding the property monthly and you can only do that for so long before you’re broke.

Mortgage paydown: Slowly but surely you’ll build generational wealth here.

Appreciation: if you’re adept enough to invest where this is a strong possibility you can drastically increase your roi. If you’ve got this, it’s like hitting the afterburners, you’re gonna get wealthy a lot faster.