There are pages and pages of discussion and opinions on cash flow markets (midwest) vs. appreciation markets (coasts). What I haven't read so far is a simple analysis of the numbers. Since I actually own properties in both markets, here is how I see the numbers stack up. Now remember, this is only the numbers, not counting work, risk, hassle factor etc etc.
Lets consider two hypothetical but typical portfolios. Each is purchases with 25% down and 4% interest rates. The midwest property returns enough cash flow to pay off the mortgage fully in 10 years if all positive cash is reinvested into principle reduction. This is possible and I am doing it on my midwest portfolio.
The coast property lets assume just breaks even even after paying the mortgage on a 30 year basis. Thats common with many coastal expensive markets and probably the lowest return I would accept as I don't want to have negative cash flow ever.
Lets assume we sell both portfolios after 10 years
On the midwest property lets assume 0 appreciation. Your total return over 10 years would be 300%.
If the coastal property would grow at a CAGR of 5% per year, after 10 years your gain would be slightly higher than this at 322%. If it grew at 4% per year it would be slightly less at 265%. So you would need something between 4% to 5% CAGR over 10 years for both these investments to have equal returns.
These are rough numbers, no closing costs etc accounted but I think it makes the point.
So then you look at the risks on either case. Both have risks. Cash flow may not actually be as high as you thought and reduce returns. OTOH, appreciation may also not happen.
On the plus on the cash flow, at least some of it is in my control. The appreciation is a market phenomenon and mostly out of control. And cash flow is independent of value of the asset. It can go down but the cash flow remains. Also equity builds fast and chances of getting upside down is low.
On the plus side of appreciation: Chances are its a lower time commitment and better tenants. Plus it has a better upside. The cash flow is bounded and you can only improve it so much. Appreciation upside is theoretically unlimited. But equity builds slowly and you could end up upside down in a bad market.
So I guess the point is there are pros and cons to both approaches.
