Why The Best Rentals Have Both Appreciation and Cash Flow!

We are often asked by friends considering real estate as an investment, as well as other investors, what is our favorite real estate investing strategy. Over the last 10yrs we have tried almost every REI strategy at least once but by far our largest volume of projects have been developing rental properties and flipping. Most recently, we have been almost exclusively focused on rental properties.

Investing in rental properties is a proven strategy for building wealth, particularly when these properties can provide both appreciation and cash flow. Combining these two financial elements in your rental property portfolio will yield a much more balanced and potent investment than focusing on just one element.

Appreciation refers to the increase in property values over time. Investing in neighborhoods with strong appreciation potential can lead to significant capital gains when it is eventually time to sell. This long-term growth is particularly appealing as it will generally outpace inflation and can contribute to generational wealth accumulation. Real estate can often be a good hedge if you also have more traditional investments like stocks and bonds. However, relying solely on appreciation when holding real estate can be risky, as appreciation can be influenced by market conditions that can fluctuate unpredictably. In addition, holding property with poor cashflow may mean that you have to cover annual expenses (insurance, property taxes, mortgages) out-of-pocket every year which may dilute any benefit you get from appreciation.

Cash flow is the net income generated from the property after all expenses are paid, including mortgage, insurance, taxes, maintenance, and management fees. Properties that generate steady, positive, cash flow provide immediate returns on investment through the net rental income, creating a consistent and reliable source of passive income. This can be especially valuable during times of market volatility or personal financial stress.

By targeting properties that offer both appreciation and positive cash flow, investors benefit from both immediate, steady, income as well as long-term growth. This dual approach not only mitigates short term risks but also enhances long term financial stability. It provides monthly income through regular rental cashflow, which can be reinvested or used to live on, while also ensuring potential for substantial future gains through appreciation.

Therefore, for those seeking to maximize their returns and secure their financial future, investing in rental properties that can deliver both appreciation and cash flow is a great strategy. The combination of appreciation and cash flow is a lot like a high-dividend growth stock, providing regular income even when the stock market may be down. The other benefit of investing in rental properties is that it is a largely passive endeavor requiring limited effort to manage once the properties have been purchased, remodeled (if necessary) and leased.

Flipping houses is a great strategy if you would rather get a few, large paychecks each year. This strategy involves buying properties, renovating them quickly, and selling them for a profit. While this strategy can yield high returns, it also carries significant risks. The flipper must accurately estimate both the renovation costs and the property's resale value post-renovation, which can be highly susceptible to market fluctuations. It is not uncommon to invest hundreds of thousands of dollars and 6mo of your time into a flip project only to ultimately lose money! Additionally, flipping requires a considerable amount of time and effort to manage. If you don’t work, you don’t make money! Ultimately, flipping is considered an active investing activity. We ultimately stopped flipping because to us, flipping was a job, and we did not want another job.

By investing in rentals, investors can benefit from compound growth through appreciation while also enjoying the incremental return from monthly cashflow. This approach also mitigates financial risk by spreading it over much longer periods than flipping. Lastly, rental property investing also has significant tax advantages typically not available with flipping, such as depreciation.

For investors seeking a balanced approach to real estate investing in order to build wealth and to generate income, we strongly recommend rental properties that can deliver both appreciation and cashflow. This class of rentals represent a very sustainable investment strategy compared rental properties that can only deliver one component and is certainly more sustainable, and passive, than flipping houses.