Originally posted by "crpell":
I am looking at a multi-family in my area. I was told by a mortgage broker that the certain city I am looking in a is a "depreciating market". Is it not wise to buy here or is it ok as long as the house has a positive cash flow?
You must choose the path that is right for you (should I add "grasshopper" here?)
Appreciation or Cash Flow. BTW, it is certainly possible to get both. Which kind of means you travel down both paths (so much for the Robert Frost’s "road less traveled" theory).
Let us use the cash flow model, since that is your question. Further, let us be absurd about it. We will say that in 20 years the property will depreciate to 1/3 of its current value. If it is a 2 unit multi-family cash flowing $100 per unit per month after all expenses, should you buy? We are assuming you factored in all expenses, repairs, rehab, ad costs, etc. Further, we are assuming you have no down payment (if any of these things are not true, let me know and we will work them in during a future post).
In 20 years you will have taken cash profits:
$200 per month = $2,400 per year = $48,000
you will have paid off the mortgage and now own the property free and clear
Who cares what it is worth? OK. Let us say you paid $30,000. It is now worth $10,000. So when you sell at 20 years you only make a total of $58,000 (in this example you do so with no money down, which means an infinite return on your investment).
