Cashflow or Appreciation? Can you have both? The Truth.

Cashflow or Appreciation? Can you have both? 

The Truth is, yes. But not at the same time and not with the same amount of work.

I've had the privilege of talking to hundreds, maybe over a thousand investors during my time working as an investor focused Realtor over the past 6 years. At the same time I've also purchased over 50 units in multiple markets over those past 6 years. I also invest passively in apartment syndications. When I ask most newer investors what their goals are, "cashflow or appreciation?", the answer I get most commonly is "both!". Most people I talk to that have few or no rental properties want to build enough passive income so they can be financially free and alleviate some sort of pain, usually a W2. Real Estate Investing absolutely provides this opportunity but you need to have a solid plan.

The truth is that markets that have massive appreciation don't provide great cashflow in almost all cases. At the same time markets and assets that cashflow very well typically don't appreciate well and also take a lot of work and expense for upkeep.

So what do you do? Just invest for cashflow in lower cost markets? You can but you miss out on an enormous amount of gain if you do that.

As a quick example let's look at a market with $100,000 houses and one with $500,000 houses. We'll assume they both appreciate at the national average of 3% a year and both make $200 a month. I know these assumptions cannot be, but we need a constant for the initial comparison. We'll assume either are sold or 1031 exchanged in 5 years.

• $100,000 house in 5 years is worth $116,000 = gain of $28,000 including cashflow
• $500,000 house in 5 years is worth $580,000 = Gain of $92,000 including cashflow

We'll assume both houses make $12,000 in cashflow over 5 years.

Now we know these assumptions aren't true but this is how people like to look at things. Typically the markets with higher appreciation also have good rent growth which means over time your cashflow goes up. Also growth markets have higher appreciation rates. So you'll most likely see much higher gains in the growth market.

The problem is our initial question and what to do.

If you want to replace your income with passive income there are a two ways to do it that I've seen work very dependably.

• Buy in cashflow markets with lower income properties, but you've essentially bought yourself a tough job. I would argue that lots of real estate investors aren't passive at all. Even when you get a property manager you're highly involved if you want your investment to run well.
• Invest passively in others deals, syndications, private lending, debt funds etc. But you need lots of capital for this to work well because you don't have as much leverage as active investing.

To build true wealth and massive passive income that's actually passive you end up needing a lot of capital. You're either going to get this through earned income or large amounts of equity from some other source. If you end up buying lots of lower dollar properties in cashflow markets you'll get the cashflow but not without a lot of headaches and work, yes even if you don't manage them. I've not met someone who's stress free and excited about all of their cheap, cashflow properties.

I prefer to build equity through active real estate investing and repurpose it through sales or 1031 exchanges. If what you're truly looking for is passive income make sure you have an understanding of what real estate investing strategies will work for you and what your long term goals are. Do you want to be truly passive and just get mailbox money? You'll need to build capital and invest in truly passive options like REITS, syndications or debt funds. Alternatively you could get into NNN (triple net) investing where the tenant is responsible for the building and you can also get a property manager.

There is nothing wrong with any type of investing, just know what the job description looks like. Make sure to have a plan of where you're going and what it will take to get there. Active investing is a great way to use massive leverage to grow your net worth, but maybe the long term plan is to take all of that equity and go completely passive!