All Forum Posts by: Jamie Nacht

@James W.

Thanks for your comment. Congrats on >25% COC! That's amazing. I looked at the Minneapolis market, but the property taxes seemed really high. Speaking with other investors in that market, that seemed to be their rationale for not seeing prices go up. Is that still correct?

Hi @Robert Herrera, 

I neglected to address the fact that these markets that I like for price appreciation also demonstrate consistent rent appreciations (see FreddieMac Multifamily Outlook Report). I don't need the cash flow for my daily activities, so I structure the investments to reward me with modest but expanding COC returns (3% in yr 1, 4% in yr 2, etc...) but target those areas that have a high chance of appreciation. It is a gamble with an outsized one-directional payoff that I've benefited from considerably, and repeatedly. In a down market (like '08), I'm rewarded for holding the investment with an expanding return the longer I hold it. But when the market moves in my direction, I get an outsized upside benefit. Everyone seems to have balked at my 12% COC being too low, but nobody has mentioned my 6% appreciation. @Dan H. noted in his response above, an investor should do the research on the markets they are going into. If you do the appropriate research, and have a good understanding of what factors may likely lead to continued appreciation, that gamble seems like less of a true coin toss. My personal investing strategy is to set up a property so that it can sustain rent decreases of at least 25%, and vacancies of at least 4 months at the onset, and build even further reserves over time. I am comfortable with the amount of risk this mitigates. But going back to the appreciation, my investments have yielded average appreciation >10% per year in multiple markets. When leverage is used, that amplifies my returns and allows me to take huge wins on the upside, but allows me to clip my expanding return (or dividend) while I wait. The question is, can an investor justify and support the belief that over time, prices will go up and to the right, so to speak. I do agree with multiple people on this discussion that said "ideally you get COC and appreciation", but, so long as I'm not relying on this as my sole source of income, I'd rather position myself for upsides of 300% of my invested capital, and get paid just for making and holding the investment in the meantime.  

@Jeffrey Holst

If I could ask you for clarification, are you saying that your net cash flow in that example is $1,500? In other words, your GROSS RENT minus ALL OWNERSHIP COSTS (mortgage payment, insurance, property taxes, current maintenance, deferred maintenance reserve, vacancy reserve, property management, and HOA's if any) provides you with net 1.5x your mortgage payment?

All, I just wanted to say thank you for the various viewpoints everyone brought to this discussion. I really appreciate hearing from those of you who have investing experience in different parts of the country. It seems to me that if you have spent time investing in a market that is known for high cash flow (15%+), you may look at my assumption of 6% appreciation as outlandish. In a similar vein, I am surprised by the idea of 15%+ cash returns. It's just not an achievable target in my area of the country. I looked at the National FRED database, and was able to confirm my thoughts: housing prices in some of the high cash flow markets BP members have highlighted in the south east (Atlanta, Knoxville, Baltimore, Raleigh) generated average appreciation of 3% or less over the last 30 years. That does contrast with markets like Seattle, Portland, Denver, San Francisco or San Diego that each averaged between 5% and 6% over that same 30 year period. For a $250k house, that extra 2% to 4% of annual appreciation makes a big difference over time, especially as it compounds. 

@Account Closed I'm glad you chimed in. That's been my experience as well. I've had the benefit of investing in areas that have shown considerable appreciation. Those investments have turned $100k increments of invested capital into $500k over several years. I ended up parlaying that into other investments, and I've been targeting areas that (i) have demonstrated strong historical appreciation, and (ii) have the right fundamentals for me to believe that will continue (e.g. more jobs being created than housing being developed, government infrastructure investment, etc...). I also have always set up those investments so that I am both rewarded (at least moderately) for holding the investments  and considerably protected in the event the market undergoes turbulence. I know certain parts of the country are high cash flow, low appreciation, while others are lower cash flow, with high appreciation. My experience has fortunately been in the latter, and has guided my investing behavior. Certainly agree with you that it's easy for me to make that statement on the shoulders of a long bull market though. 

 @Antoine Martel

Thanks for your input. So you think zero appreciation, but 15% cash on cash, is better than using the power of combining leverage and a reasonable expectation of appreciation? To be the devil's advocate, let me play out those 2 scenarios: 

Assumptions: You buy a property for $250k, and you end up spending $100k to get it acquired and up and running.

Situation 1 (detailed above, but for 15% cash on cash): Year 1 you make $15k, Year 2 you make $15k, Year 3 you make $15k. The property doesn't appreciate. At the end of year 3, if you decide to keep the property, you've made $45k all together, if you sell the property, let's conservatively assume 10% of the price ($25k) for transaction costs. Now you've netted $20k over. 

Situation 2: Year 1 you make $3k, Year 2 you make $3k, Year 3 you make $3k. While that's happening, you get modest appreciation... call it 6%. So at the end of Year 1, your property is now worth $265k, at the end of Year 2 your property is worth $281k, and at the end of Year 3 your property is worth $298k. At the end of year 3, if you decide to keep the property you've made $9k of cash flow (realized), and $48k of appreciation (unrealized), for a total return of $57k on your investment. If you decide to sell, (same 10% for transaction), you net $27k, so a little more, and you get the option to benefit from using a 1031 exchange to drive up cash flow with a newer investment. 

Targeting markets with that type of historic appreciation, and fundamentals to drive further appreciation seem to make sense to me. Over the last 5 years, here's the average annual appreciation (CAGR) in the following markets: 

Portland, OR: 9.9% 

Seattle, WA: 14.9%

Denver, CO: 13.5%

Reno, NV: 13.3%

Bellingham, WA: 8.1%

Boulder, CO: 7.9%

I feel like writing this out, makes me think I have a strong preference for markets that show appreciation... So long as I set an investment up to have positive cash flow that protects me from any troughs the market may run through...

What's preferred: (1) High cash flow, but low chance of appreciation, OR (2) modest cash flow, but high chance of appreciation? 

I had a discussion last week with a fellow investor, and we were debating the merits of either of these situations (assuming it is an either, or situation). I'd like to throw it out to the BP community to hear your thoughts. To put a little more color to it, let's assume the following:

Situation 1: Invest in a market where it's likely to get cash on cash returns of 12%, but the market the property is located in hasn't appreciated at all over the last 5 years

-VS-

Situation 2: Invest in a market where it's likely to get a cash on cash return of 3%, but the market the property is located in has appreciated at least 6% per year, during each of the last 5 years. 

Which one do you like more? Why?

@Sean McDonnell

Thanks for your comment! I agree that ideally it's both. If you have to choose, the balancing act is a tough because of how much appreciation on an appropriately leveraged property can yield! I've had properties that are great on a cash flow basis, but my real wins have been in markets that have appreciated well. Just curious if that's been your, or anyone else's experience as well?

If you have to choose between two markets: one that's showing LOTS OF POTENTIAL FOR APPRECIATION but only moderate cash flow opportunities, or a market that has properties with HIGH CASH FLOW POTENTIAL, but limited opportunity for appreciation, which one do you prefer?

@Andrew Johnson Thanks for the comment. That's were I was too. Especially when investing in various markets at once. The other issue I have had is making sure that after I buy, finding service providers in markets outside my local area (GC's, Property Managers, etc.).