Which one is more important ? Cashflow vs Location.

[Mohammad Nur]

I am planning to buy my 2nd investment property. Mostly looking for multifamily (2-4 units) but the one's at good locations are way overpriced. I have been looking around for last 3-4 months and now I have two properties on my sight now.

1. 1. Single family (3 bed 2 bath). Price around 240-245 K. Would easily rent for $1800/month. In an established and old A class neighborhood where the median price of house is usually around 275K. As you can see this would generate very low (around $150-200 /month) if I manage the property. Low COC return but probably less headache. There is some good potential for appreciation. This one can also be used as a short term rental if I want.

1. 2. Multifamily (3 units).  Price around 160K. Would generate $1950/month when fully rented. However, this is probably a C/C- area. Like it's not in the worst area but few blocks down the road there is greyhound bus terminal and some unwarranted foot traffic. I have visited the area at different times of the day and it felt safe-ish to me. This would generate substantial cashflow even if I use a property manage.

I have a full time job which I like very much and investing is my side hustle, but I also want to be wise and plan to be in the game for long. Both these properties are within 3 miles of my current residence. 

So what would should I go for ? Go for the cash flow and high return ( along with potentially more headache) or go with the property with better location and low cash flow?

[Ben Zimmerman]

Originally posted by @Timothy Hero:

I'd rather have a property with a 7% cap rate in a 4% growth market than to have a property that's 4% cap and 7% growth. At any point, the market growth can slow down. Typically, rental rates don't turn around/decrease unless the city because a bankrupt-like city.

 To each their own, but I would 100x rather have the 7% growth and a 4 cap.  Over the long run, rent rates will increase with the growth rate.  Which means that at 7% growth my 1000/month rental might rent for 1070 the next year, and 1149 the year after.  It won't take long before my cashflow is far superior to your 7% cap rate property.  And on top of that, my property will be worth more too.

Real estate is a long term play, so if all you are looking at is what does it cashflow on day 1, then you are missing the big picture.  Unless you are close to retirement age, and are looking for stability and a steady income stream, then the immediate cashflow a property throws off is highly overrated.  It obviously needs to generate enough to survive a downturn, but other then that the real money is made in appreciation and equity paydown.  Cashflow is king is a short sighted approach, one that often has limited room for growth potential.  

You can throw a dart at a map of the midwest and hit a cashflowing property.  But that doesn't mean I would want to own that property.  California and other desirable locations have produced an awful lot of accidental millionaires, people who just happened to buy a house to live in and now that house is worth a small fortune.  So imagine what happens when someone is tactical in purchasing properties in those locations.

Some people claim that relying on appreciation is speculative in nature.  This is simply false.  Inflation rates mean that over the long run, home prices will increase.  There may be pocket years where prices go down, but as mentioned, real estate is a long term play.  Some areas will appreciate faster than others.  It should be no surprise that properties in Hawaii will increase faster than something in Wyoming.  Some areas in the nation are dying, and may actually experience negative appreciation, these areas should be avoided regardless if you are trying to buy for cashflow or appreciation.  You can't cashflow on a property in a dying town when there are more empty houses than people wanting to rent.  

A casino doesn't gamble, the individual player is gambling but the House isn't gambling.  The house is using time, and math, to consistently generate income.  Sure on any individual blackjack hand the House might lose some money, but over the course of the night, the House makes millions.

All of my single family properties have increased my net worth by well over 1k/month.  If I was generating 1k/month in cashflow per house people would call me an investing guru, but if instead I generate 1k/month per house in appreciation then those same people call me foolish. Either way I'm generating 1k/month in net worth and am "retired" and spend most of my time at the beach.

But the thing is, due to rent increases my appreciating homes are now cashflowing significantly higher than some of the homes that my peers bought because they thought it cashflowed well.  Their houses did cashflow well on day 1, but because there was no growth, or limited growth, they are still cashflowing close to the same amount many years later while my rent rates have skyrocketed.